Cymax Stores Inc. v. Coleco Investments Inc.

2019 BCSC 492 Cymax Stores Inc. v. Coleco Investments Inc.

IN THE SUPREME COURT OF BRITISH COLUMBIA Citation: Cymax Stores Inc. v. Coleco Investments Inc., 2019 BCSC 492 Date: 20190403 Docket: S187957 Registry: Vancouver Between: Cymax Stores Inc. Petitioner And Coleco Investments Inc. and LSORG-BC Holdings Ltd. Respondents Before: The Honourable Madam Justice Fitzpatrick Reasons for Judgment Counsel for Petitioner: P. L. Rubin J. A. Hutchinson Counsel for Respondents: T. M. Tomchak N. M. Vaartnou Place and Date of Hearing: Vancouver, B.C. January 28, 2019 Place and Date of Judgment: Vancouver, B.C. April 03, 2019

INTRODUCTION [1] This proceeding has been brought for the sole purpose of determining whether a prepayment penalty was payable under a loan agreement between the parties when the loan was repaid in April 2018. [2] The facts are not in dispute. However, the parties significantly disagree as to the interpretation of the loan agreement.

BACKGROUND FACTS [3] The petitioner Cymax Stores Inc. ("Cymax") is an online retailer who sells home and office furniture and fixtures. The respondents Coleco Investments Inc. ("Coleco") and LSORG-BC Holdings Ltd. ("LSORG-BC") are in the business of providing debt financing to other companies. [4] The parties refer to the following further facts leading up to this dispute. The Loan Agreement [5] On March 10, 2017, Cymax, as the "Borrower", and Coleco and LSORG-BC, as the "Lenders", entered into a loan agreement (the "Loan Agreement"). The Loan Agreement also defines LSORG-BC as "LenderCo". Section 2.1 provided that the Lenders would respectively lend the total amount of US$6.9 million (the "Loan") to Cymax. [6] The Loan Agreement contains the following additional provisions: a) Definitions "Payment Date" means the date of the monthly payments made by the Borrower to each of the Lenders pursuant to Section 2.4 and 2.5, on a monthly basis starting on April 1, 2017 and continuing to and including the Maturity Date. 2.2 Maturity Date The outstanding balance of the Loan and accrued and unpaid interest thereon shall become immediately due and payable upon the earlier of: (a) thirty-six (36) months after the execution date of this Agreement (the "Maturity Date"); (b) 10 Business Days after notice of an Event of Default is issued by the Lenders to the Borrower, unless that default is

cured by the Borrower; or (c) the closing of a sale of all or substantially all of the Borrower's assets or shares, unless otherwise extended or waived, as applicable, by approval of LenderCo, on behalf of the Lenders. 2.3 Interest Rates The Borrower agrees to pay to the Lenders interest payable and calculated monthly and in arrears on the outstanding principal balance of the Loan, accruing from the date of the advance of the respective Loan Amount from each Lender to the Borrower at the following simple interest rates: (a) If no Event of Default has occurred, on an interest only basis at an annual rate equal to seventeen percent (17%) per annum from the date of the advance of the Loan to and including the Maturity Date; and (b) If an Event of Default, on an interest only basis at an annual rate equal to twenty and one-half percent (20.5%) per annum for any period during which an Event of Default has occurred and continues to and including the Maturity Date. Section 2.4 Interest Only Payments The Borrower agrees to pay interest to the Lenders at the applicable rates determined above, on each Payment Date following the Closing Date and until September 1, 2018, subject to Section 2.7. Section 2.5 Amortized Payments On each Payment Date after September 1, 2018 and continuing until the Maturity Date or full repayment of the outstanding principal balance of the Loan, accrued and

unpaid interest thereon and any fees and expenses owing to [the] Lenders pursuant to this Agreement pursuant to Section 2.7, the Borrower agrees to pay interest to the Lenders and a portion of the outstanding principal amount of the Loan, in accordance with the amortization table hereto as Exhibit 2.5, as updated from time to time as a result of any Accelerated Principal Payment (as defined below), payable pursuant to Section 2.6. 2.7 Prepayment Subject to Section 7.6 [Key Man Insurance Policy], prepayment of the outstanding principal balance of the Loan by the Borrower in whole or part may be made only: (a) if made at any time prior to and including the date that is eighteen (18) months from the Closing Date, upon repayment of (i) all unpaid fees and expenses and unpaid interest then owing to the Lenders, together with (ii) all unpaid accrued interest on the amount of outstanding principal being prepaid that would be payable from the Closing Date until and including the date that is eighteen (18) months from the date of Closing and (iii) the amount of outstanding principal being prepaid; and (b) if made any time after the date that is eighteen (18) months from the Closing Date, upon repayment of: (i) all unpaid fees and expenses and unpaid interest then owing to Lenders, together with (ii) all unpaid accrued interest through the repayment date on the amount of outstanding

principal being prepaid and (iii) the amount of outstanding principal being prepaid. 6.1 Events of Default The occurrence of any of the following events is an event of default 6.2 Remedies for Events of Default Upon the occurrence of an Event of Default not remedied within ten (10) Business Days of receipt by the Borrower of written notice from LenderCo (provided that such written notice shall not be required with respect to any Event of Default described in Section 6.1(a) [payment default] with respect to any payment of principal, interest or both due hereunder), the Lenders may: (a) accelerate and forthwith declare due and payable the Loan Amounts and any and all accrued interest, and without demand, protest or other notices of any kind, all of which are hereby expressly waived; and (b) exercise any and all rights, powers, remedies and recourses available to the Lenders under this Agreement, or any of the Security Agreements, at law, in equity or otherwise. 6.3 Waiver of Default The Lenders may by written instrument at any time and from time to time waive any breach by the Borrower of any Event of Default. [Emphasis added.] [7] A schedule to the Loan Agreement was entitled Principal Payment Amortization (tied to Section 2.5 above) and set out the monthly interest payments due from March 2017 to August 2018, and then the principal and interest payments due from September 2018

to the end of the 36-month term, being February 2020. [8] Section 10.6 of the Loan Agreement (Entire Agreement and Paramountcy) provided that the "Transaction Documents", which principally included the Loan Agreement, constituted the full and entire understanding between the parties. [9] In December 2017, the parties entered into an agreement amending the Loan Agreement (the "Amending Agreement"). The Amending Agreement did two things: a) It added an additional Event of Default as Section 6.1(l) of the Loan Agreement by which a minimum cumulative monthly cash EBITDA was required for Cymax and its subsidiaries (the "Cash EBITDA"); and b) It replaced the Principal Payment Amortization schedule with a new schedule that indicated further delay to the start of principal payments (from September 2018 to March 2019) and reduced the amount of principal payments after that later date. The same interest only payments remained payable to February 2019. The Default and Demand [10] On March 19, 2018, LSORG-BC, on behalf of the Lenders, delivered a notice to Cymax that there was an "Event of Default" in respect of the Cash EBITDA ("the "Default Notice"). The balance outstanding at the time was US$6,982,245.97. The Default Notice further stated that: LenderCo, on behalf of the Lenders, expressly reserves all rights, remedies, actions and powers to which they may be entitled under the

Transaction Documents and applicable law based upon the occurrence of the Existing Event of Default and delivery of this notice of the Existing Event of Default. [11] At the same time, LSORG-BC also delivered to Cymax a notice of intention to enforce security ("NOI") pursuant to s. 244(1) of the Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3, which indicated an intention to enforce the security held under the Loan Agreement after the 10-day notice period (i.e., after March 29, 2018). [12] On April 3, 2018, LSORG-BC's counsel wrote to Cymax and confirmed that, in accordance with Section 2.2(b) of the Loan Agreement, the Loan had become due and payable 10 days after March 19, 2018. LSORG-BC demanded repayment by April 13, 2018 (the "Acceleration/Repayment Demand"). The Acceleration/Repayment Demand also attached a second NOI in respect of security held against Cymax's assets. [13] The Acceleration/Repayment Demand stated in part: Under Section 2.2 (b) of the Loan Agreement the outstanding balance of the Loan and accrued and unpaid interest thereon shall become immediately due and payable 10 Business Days after notice of an Event of Default is issued by the Lenders to the Borrower. On March 19, 2018, LenderCo delivered a notice of Event of Default to the Borrower in accordance with the Loan Agreement. As of the date of this letter, 10 Business Days had elapsed without cure of

the current Event of Default. Accordingly, on behalf of LenderCo, we hereby demand repayment of the Loan to the Lenders. As of today's date, the aggregate principal and accrued interest owing by the Borrower to the Lenders under the Loan Agreement is $7,049,662.50 as follows: · Principal of $6,900,000; · Accrued interest of $129,662.50; and · Approximate legal costs and expenses to date of $20,000, plus accruing interest (currently accruing at the rate of $3,929.17 per diem) as well as costs and expenses, including legal fees and disbursements, to the date of payment (altogether, the "Indebtedness"). If the Indebtedness is not paid in full by April 13, 2018 LenderCo on behalf of the Lenders reserves the right to take any steps to realize on its security or otherwise recover the Indebtedness. Please contact our office to confirm the full amount of the Indebtedness (inclusive of costs and expenses) as of the proposed payout date. As the Borrower may be insolvent, we enclose a Notice of Intention to Enforce Security pursuant to section 244(1) of the Bankruptcy and Insolvency Act. [Emphasis added.] [14] Cymax emphasizes that there was no mention of a prepayment amount in the Default Notice; nor did the Acceleration/Repayment Demand claim a prepayment penalty or any other amount pursuant to Section 2.7 of the Loan Agreement (the "Prepayment Provision"). [15] Also on April 3, 2018,

LSORG-BC demanded payment from Cymax's subsidiaries (the "Guarantors") under the guarantees they had given pursuant to the Loan Agreement (the "Guarantor Demands"). The Guarantor Demands each enclosed a copy of the Acceleration/Repayment Demand and NOIs in respect of security held against the Guarantors' assets. [16] Cymax also emphasizes that none of the Guarantor Demands claimed a prepayment penalty or any other amount pursuant to the Prepayment Provision. [17] On April 12, 2018, in order to allow the parties to negotiate a resolution of their dispute concerning the Lenders' demands, Cymax and the Lenders entered into a monitoring agreement (the "Monitoring Agreement"). The Monitoring Agreement tolled the 10-day notice periods under the NOIs until April 20, 2018. On April 18, 2018, the parties further extended the tolling under the Monitoring Agreement to April 24, 2018. The Demand for a Prepayment Amount [18] This dispute began when, on April 19, 2018, for the first time, LSORG-BC demanded that Cymax pay a prepayment penalty pursuant to the Prepayment Provision. It demanded payment of US$628,666.67 by including this amount in the Lenders' calculation of the amount required to pay out the Loan the next day. This sum was described in the calculation as: Accrued interest to the end of 18 months from the Closing Date less interest paid. [19] Cymax denied that the Lenders were

entitled to a prepayment amount. Despite later efforts, the parties were not able to resolve the dispute. In order to allow Cymax to pay off the Loan and avoid enforcement of the Lenders' security, the parties entered into an agreement to achieve that result, yet preserve the Lenders' claim to the prepayment amount. [20] On April 20, 2018, Cymax and the Lenders entered into a payoff letter agreement that allowed Cymax to pay the principal and interest that Cymax acknowledged as owing under the Loan. Cymax paid all such amounts to the Lenders. In addition, Cymax paid US$550,083.33 (the "Prepayment Amount") into the trust account of Fasken Martineau DuMoulin LLP ("Fasken"), to be held pending a resolution of the issue. Finally, the parties agreed that, on payment of the above amounts, the Loan Agreement and the Monitoring Agreement, other than the terms intended to survive termination, would terminate without prejudice to the parties' positions concerning the dispute. [21] The parties remain unable to resolve the dispute and Fasken continues to hold the Prepayment Amount subject to the Court's direction. THE PARTIES' POSITIONS [22] The Prepayment Provision is the focus of the issue between the parties. [23] Cymax takes the position that it did not voluntarily "prepay" its obligations under the Loan Agreement. Cymax says that it paid the amounts under the Loan Agreement arising

from the delivery of the Default Notice, the Acceleration/Repayment Demand, the Guarantor Demands and the various NOIs. Cymax further says that those circumstances led to the Monitoring Agreement and the final payoff letter agreement by which Cymax agreed to pay all principal, interest and cost amounts acknowledged by it as owing under the Loan Agreement. [24] In that event, Cymax denies that its payment of the Loan in April 2018 was a "prepayment" under Section 2.7 of the Loan Agreement in the sense of it arising from a voluntary action on Cymax's part. Cymax says that it was forced to make that payment under the Loan Agreement by its terms and in the face of the Lenders' demands. [25] The Lenders take the position that the Prepayment Amount was required to be paid in respect of interest until September 2018 (i.e., 18 months after the Closing), regardless of any prior default. The Lenders' say that the interest in question was a minimum amount that was always payable, regardless of when the principal was paid. Finally, the Lenders say that Cymax's default under the Loan Agreement simply had the effect of accelerating all amounts owing pursuant to the Loan Agreement. [26] The Lenders demanded and were paid the Loan approximately 13 months after the "Closing" in April 2018, such that they rely on Prepayment Provision (specifically Section 2.7(a)(ii)) in respect of their claim to the Prepayment Amount. I am advised that the calculation of the Prepayment Amount is based on the amount of the interest that would have been earned by the Lenders to September 2018 (i.e., at 18 months), using the default interest rate of 20.5%, had Cymax not made the payment earlier in April 2018, as demanded by the Lenders.

INTERPRETATION FRAMEWORK 1) Contract Interpretation Generally [27] Any discussion of contract interpretation begins with the decision in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53. [28] In Sattva, the Court discusses that the modern approach to contractual interpretation directs courts to have regard for the surrounding circumstances of the contract, i.e. the factual matrix, when interpreting a written contract (para. 46). The aim in considering surrounding circumstances is to better ascertain the objective contractual intentions of the parties beyond a plain reading of the contract itself. As the Court stated: 47. Regarding the first development, the interpretation of contracts has evolved towards a practical, common-sense approach not dominated by technical rules of construction. The overriding concern is to determine "the intent of the parties and the scope of their understanding" (Jesuit Fathers of Upper Canada v. Guardian Insurance Co. of Canada, 2006 SCC 21, [2006] 1 S.C.R. 744, at para. 27, per LeBel J.; see also Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4, [2010] 1 S.C.R. 69, at paras. 64-65, per Cromwell J.). To do so, a decision-maker must read the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of

formation of the contract. Consideration of the surrounding circumstances recognizes that ascertaining contractual intention can be difficult when looking at words on their own, because words alone do not have an immutable or absolute meaning: No contracts are made in a vacuum: there is always a setting in which they have to be placed.... In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating. (Reardon Smith Line, at p. 574, per Lord Wilberforce) 48. The meaning of words is often derived from a number of contextual factors, including the purpose of the agreement and the nature of the relationship created by the agreement (see Moore Realty Inc. v. Manitoba Motor League, 2003 MBCA 71, 173 Man. R. (2d) 300, at para. 15, per Hamilton J.A.; see also Hall, at p. 22; and McCamus, at pp. 749-50). As stated by Lord Hoffmann in Investors Compensation Scheme Ltd. v. West Bromwich Building Society, [1998] 1 All E.R. 98 (H.L.): The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those

words against the relevant background would reasonably have been understood to mean. [p. 115] [Emphasis added.] [29] The consideration of the surrounding circumstances in this case is a matter of dispute between the parties, particularly with respect to the evidence of Christopher Morris, a representative of the Lenders. [30] Accordingly, the comments of the Court in Sattva as to the role of surrounding circumstances is instructive here: 57. While the surrounding circumstances will be considered in interpreting the terms of a contract, they must never be allowed to overwhelm the words of that agreement (Hayes Forest Services, at para. 14; and Hall, at p. 30). The goal of examining such evidence is to deepen a decision-maker's understanding of the mutual and objective intentions of the parties as expressed in the words of the contract. The interpretation of a written contractual provision must always be grounded in the text and read in light of the entire contract (Hall, at pp. 15 and 30-32). While the surrounding circumstances are relied upon in the interpretive process, courts cannot use them to deviate from the text such that the court effectively creates a new agreement (Glaswegian Enterprises Inc. v. B.C. Tel Mobility Cellular Inc. (1997), 101 B.C.A.C. 62).

58. The nature of the evidence that can be relied upon under the rubric of "surrounding circumstances" will necessarily vary from case to case. It does, however, have its limits. It should consist only of objective evidence of the background facts at the time of the execution of the contract (King, at paras. 66 and 70), that is, knowledge that was or reasonably ought to have been within the knowledge of both parties at or before the date of contracting. Subject to these requirements and the parol evidence rule discussed below, this includes, in the words of Lord Hoffmann, "absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man" (Investors Compensation Scheme, at p. 114). Whether something was or reasonably ought to have been within the common knowledge of the parties at the time of execution of the contract is a question of fact. [Emphasis added.] [31] The parties have also referred to various pre-Sattva British Columbia Court of Appeal authorities on the subject of contract interpretation: Water Street Pictures Ltd. v. Forefront Releasing Inc., 2006 BCCA 459; Athwal v. Black Top Cabs Ltd., 2012 BCCA 107. [32] In Water Street Pictures, the court discusses the general approach of contract interpretation: 24. Thus, the court looks first to the words of the agreement, read as a whole, aided, if

necessary, by evidence of the circumstances or what is referred to as the factual matrix existing when the agreement was made. Such evidence is generally restricted to circumstances known to both parties that illuminate the meaning a reasonable person would give to the words employed: Glaswegian Enterprises Inc. v. BC Tel Mobility Cellular Inc. (1997), 49 B.C.L.R. (3d) 317 (C.A.) at paras. 18 to 20. See also Lord Hoffman's discussion of the principles of interpretation in Investors Compensation Scheme Ltd. v. West Bromwich Building Society (1997), [1998] 1 W.L.R. 896 (H.L.). The wording of the agreement must not, however, be overwhelmed by a contextual analysis: Black Swan Gold Mines Ltd. v. Goldbelt Resources Ltd. (1996), 25 B.C.L.R. (3d) 285 (C.A.) at para. 19. [33] I do not see Water Street Pictures as being at odds with what was later stated in Sattva, save perhaps for Sattva's emphasis that surrounding circumstances should always be considered (even without ambiguity), although the degree of surrounding circumstances will change from case to case. The remaining comments of Justice Lowry in Water Street Pictures relate to when extrinsic evidence may be considered in aid of interpreting the contract (paras. 23, 25-28); however, the extrinsic evidence discussed in that case concerned the conduct of the parties in making their agreement and in performing their agreement. These comments are not relevant here since no such extrinsic evidence is before the Court. [34] In Athwal, the court confirmed the general principles of contract interpretation at para.

42. The court discussed surrounding circumstances at para. 46, again consistent with Sattva in confirming that ambiguity is not a pre-condition to admission of such evidence, provided that the scope of the evidence does not overwhelm the inquiry into the parties' objective contractual intention. [35] On a final note, the Lenders refer to Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4. At paras. 64-65, Justice Cromwell emphasized that a contract must be considered as a whole and in light of "its purposes and commercial context" (cited approvingly in Sattva at para. 47). [36] Certainly, I accept that the Loan Agreement is a commercial contract and a lending agreement in particular. The purpose or context of such contracts is well-known: to provide monies to a borrower for its business purposes and to provide a return to the lenders, while also providing for a means of recovery by the lenders in the event of default by the borrower. As with most, if not all, commercial contracts, loan documents are meant to achieve certainty and predictability as to the respective obligations and rights of both borrowers and lenders in lending relationships.

2) Ordinary Meaning of "Prepayment" [37] Sattva at para. 47 instructs us that the court must give words in a contract "their ordinary and grammatical meaning, consistent with the surrounding circumstances". [38] The word "prepayment" is not a defined term in the Loan Agreement, or specifically Section 2.7. [39] Cymax refers to Black's Law Dictionary (10th ed., 2014) and the Canadian Oxford Dictionary (2nd ed., 2004) as supporting an interpretation that "prepayment" is a voluntary action taken by a borrower to pay a loan before it is due. [40] At pages 1314 and 1372, Black's Law Dictionary defines "prepayment clause" and "prepayment penalty" as: "prepayment clause" A loan-document provision that permits a borrower to satisfy a debt before its due date. Although any interest not yet due is waived, the lender may impose a penalty for prepayment. "prepayment penalty" A charge assessed against a borrower who elects to pay off a loan before it is due. [41] Similarly, at page 1224, the Canadian Oxford Dictionary defines "prepay" as meaning to "pay (a charge) in advance" or to "pay for (goods or a service) in advance." [42] Accordingly, I agree with Cymax that the word "prepayment" itself, in the context of a loan agreement, connotes a voluntary payment by a borrower made prior to the due date of the loan or some part of the loan.

3) American Prepayment Authorities [43] Cymax points to various American authorities in support of its interpretation. [44] In Re LHD Realty Corp., 726 F.2d 327 (7th Cir. 1984), the court was considering whether a lender had the right to receive a premium in exchange for accepting a borrower's repayment of the loan before maturity. The lender's mortgage provided for a "prepayment premium" of additional interest in the event a prepayment. After the borrower entered bankruptcy proceedings, the lender, who had accelerated the loan, claimed a prepayment penalty. [45] In LHD Realty, the United States Court of Appeals for the Seventh Circuit upheld the District Court in rejecting the claim. The court stated at 329-330: The parties agree that prepayment premiums serve a valid purpose in compensating at least in part for the anticipated interest a lender will not receive if a loan is paid off prematurely. Among other things, a prepayment premium insures the lender against loss of his bargain if interest rates decline. Accordingly, reasonable prepayment premiums are enforceable. See generally Annot., 86 A.L.R.3d 599 (1978); Annot., 75 A.L.R.2d 1265 (1961). There are, however, some limitations upon the right to receive a prepayment premium. For one, the lender loses its right to a premium when it elects to accelerate the debt. Slevin Container Corp. v. Provident Federal Savings & Loan

Ass'n, 98 Ill. App. 3d 646, 424 N.E.2d 939, 54 Ill. Dec. 189 (1981). This is so because acceleration, by definition, advances the maturity date of the debt so that payment thereafter is not prepayment but instead is payment made after maturity. We think that the case before us falls within the acceleration exception. The contract between National and LHD authorized National, "without notice, [to] declare the remainder of the debt at once due and payable." When a lender has the option to accelerate, "it is only necessary that the mortgagee show an unmistakable intention to exercise the option, and this may be done by taking steps for foreclosure" The point is, we think, that a lender may abandon or waive its claim to interest payable over a period of years and to what amounts to insurance against a decline in interest rates. Thus, the lender, by its acts, may establish that it prefers accelerated payment to the opportunity to earn interest over a period of years. It is not appropriate, under these circumstances, for the lender to receive a prepayment premium in lieu of the interest foregone since it has voluntarily waived the unpaid interest in the expectation of accelerated payment of the remaining principal. [Emphasis added in underline.] [46] The court in LHD Realty at 330 identified that there may be instances where a borrower intentionally default and invites acceleration

and steps to realize on the security, all with the intention of avoiding any prepayment obligation arising. The court stated that it would have no difficulty refusing to allow such acceleration without the prepayment penalty in those circumstances. However, there is no evidence here that Cymax was employing such a strategy so as to invite consideration of that approach here. [47] In Baybank Middlesex v. 1200 Beacon Properties, Inc., 760 F. Supp. 957 (D. Mass. 1991), a trustee accelerated certain bonds and demanded that all amounts due to be paid. The outstanding principal and interest was then paid. An action was then brought against the borrowers for contractual damages in the form of interest that would have been paid had the loan continued through to term (i.e., had the defendants not defaulted and subsequently paid off the loan). [48] The United States District Court for the District of Massachusetts characterized the dispute as one of contractual interpretation. At 966, the District Court followed LHD Realty in holding: It is well-settled, however, that there are some limitations upon the right of a lender to receive unearned interest or a prepayment premium on a fixed debt obligation. See, e.g., In Re LHD Realty Corp., 726 F.2d 327, 329-30 (7th Cir.

1984) One such limitation is that a lender loses its right to receive unearned or future interest when it elects to accelerate the maturity of a debt. [citations omitted]. This is so because, absent some express agreement to the contrary, acceleration, by definition, advances the maturity date of the debt so that payment thereafter is not prepayment, but instead it is payment made after maturity. ... Upon acceleration, the borrower is not choosing to pay early; he is forced to pay because the debt has become due. Thus, when lenders accelerate the maturity of the debt, they waive their opportunity to earn, and their claim to, interest payable over a period of years in exchange for the immediate payment of the outstanding principle and accrued interest. See L.H.D. Realty, 726 F. 2d at 331. [Emphasis added.] [49] In Baybank Middlesex at 967, the court granted summary judgment dismissing the claim, finding that the terms of the contract clearly indicated that upon acceleration of the maturity date by demand, no prepayment amount was owed. However, citing Grozier v. Post Publishing, 342 Mass. 97 at 105, 107 (Sup. Jud. Ct. 1961), the court accepted that an "'acceleration clause can be phrased in terms so specific that it should be construed literally' as to compel acceleration upon default". On this latter point, the court at 970 noted that the lender could have avoided the result in

a number of ways. Again, one way was stated to be the inclusion of an express contract term to that effect: the parties could have expressly provided for such a contingency in their agreement. For example, the plaintiffs could have included a provision in the agreement that provides if the notes are accelerated upon default, the tender by the borrower of an amount to satisfy the indebtedness shall be considered a voluntary prepayment and in order to satisfy the amount due, the tender must also include the difference between the interest on the contract note and interest in a comparable loan over the remaining contract term, reduced to present value. [50] The final American authority is Ferreira v. Yared, 32 Mass. App. Ct. 328 (1992), a decision of the Appeals Court of Massachusetts. There, the borrowers paid a twenty-year mortgage in full after the lenders accelerated payment arising from defaults. Upon foreclosure proceedings and a later redemption of the mortgage, the lenders claimed a "prepayment penalty", being the balance of the interest that would otherwise be payable to three years after the advance. [51] In Ferreira, the court upheld the lower court's decision in rejecting the lenders claim to any "prepayment penalty". At 330-331, also citing LHD Realty, the court stated: ... by accelerating the note, the Yareds, as payees, lost the right to collect a prepayment

penalty. A prepayment premium does not attach when a loan is accelerated because the act of acceleration advances the maturity of the debt: the debt becomes immediately due and payable. Matter of LHD Realty Corp., 726 F.2d 327, 330 (7th Cir. 1984). Tan v. California Fed. Sav. & Loan Assn., 140 Cal.App. 3d 800, 809 (1983). Slevin Container Corp. v. Provident Fed. Sav. & Loan Assn., 98 Ill. App. 3d 646, 648 (1981). Kilpatrick v. Germania Life Ins. Co., 183 N.Y. 163, 168 (1905). George H. Nutman, Inc. v Aetna Bus. Credit, Inc., 115 Misc. 2d 168, 169 (N.Y. Sup. Ct. 1982). Compare Pacific Trust Co. v. Fidelity Fed. Sav. & Loan Assn., 184 Cal. App. 3d 817, 824 (1986), in which, however, the prepayment provision, by its terms, provided, "whether said prepayment is voluntary or involuntary, including any prepayment effected by the holders' exercise of the Acceleration Clause." ... It is not lost on us that a borrower may evade a lawfully agreed to prepayment penalty by embarking on a course of conduct which provokes acceleration of the note. Indeed, that may have occurred here. There are, however, often risk and costs attendant upon default in a mortgage note and, on balance, it strikes us as the better course to adopt the majority view that, unless the note otherwise provides, the holder of a note cannot simultaneously accelerate the note and collect a prepayment penalty. [Emphasis

added.] [52] The Lenders argue that the above American authorities are distinguishable given the different prepayment provisions that were in issue there. I accept that is the case. I also accept that these authorities are not binding upon me. [53] However, the American authorities are persuasive in terms of the general understanding as to what circumstances are required to constitute a "prepayment" of a debt. More particularly, it is generally understood that a "prepayment" or voluntary payment before a due date is not what occurs when the payment takes place in the face of an acceleration of the debt (which establishes a new maturity date) and often, in the face of imminent enforcement proceedings against a borrower's assets. All of these cases are consistent with the Black's Law Dictionary and Oxford Dictionary definitions in emphasizing that a "prepayment" is generally considered a voluntary action to pay prior to the due date and not a payment responding to potential enforcement proceedings where the maturity date has been accelerated by the lender. [54] As noted in Baybank Middlesex, that general principle may be overtaken by a clear provision in the parties' agreement to the contrary.

4) B.C. Prepayment Authority [55] Cymax also points to one British Columbia authority in support of its interpretation of the Loan Agreement and specifically, the Prepayment Provision: Maxam Opportunities Fund Limited Partnership v. Greenscape Capital Group Inc., 2013 BCCA 460. I am advised that Maxam is the sole Canadian authority that has considered the issue. [56] In Maxam, the borrower entered into a loan agreement with the lenders (Maxam) for up to $7 million for a five-year term. The loan agreement contained terms relating to "Voluntary Prepayments and Reductions" which provided for a "Prepayment Fee", which was a defined term (see paras. 5-6). [57] Approximately two years into the loan, Maxam notified the borrowers that it had failed to maintain the debt-service coverage ratio specified in the loan agreement and that this constituted an event of default (similar to the non-payment default alleged with respect to Cymax). Maxam accelerated the loan and demanded the full amount owing, including the Prepayment Fee (para. 7). Maxam then commenced enforcement proceedings in this Court. The borrowers sought to stay the enforcement of Maxam's security in order to refinance the debt, while denying that the Prepayment Fee was owed. [58] The chambers judge found that there were conflicting interpretations as to whether the loan agreement required a prepayment fee to be paid. She

referred to the principles of contract interpretation, specifically citing Water Street Pictures at paras. 24-25. She ultimately held that she was unable to determine which was the correct interpretation and ordered the matter be tried by summary trial (paras. 10-16). [59] At para. 18, the Court of Appeal accepted both parties' submissions that the issue of whether the Prepayment Fee was payable could be decided in chambers based on ordinary contract interpretation principles, rather than by summary trial. The court in Maxam was considering the specific terms of the loan agreement, particularly those said by Maxam to give rise to the Prepayment Fee. However, after considering the agreement and applying the well-known contractual interpretation principles, the court dismissed the lenders' claim. [60] Cymax argues that the discussion and reasoning in Maxam are highly relevant here as to how this Court should approach the issue. As is the case here, Justice Newbury noted at para. 34 that Maxam had not cited any authority for the proposition that the word "prepayment" (not a defined term in the loan agreement) ordinarily included a payment made after a loan had become due and owing in its entirety upon an acceleration of the debt. [61] Further, consistent with the dictionary and American authorities cited above, Newbury J.A. then went on to consider and determine the ordinary and

grammatical meaning of the word "prepayment" in the loan agreement. She agreed that, in general, prepayment means a voluntary payment and not one arising from an acceleration of the debt: 45. Equally important is the difficulty that arises from the phrase "from the date of such prepayment" in the definition. I remain of the view that in its ordinary meaning, no "prepayment" has been made or can now be made under the Agreement, since the loan has been accelerated and all obligations of the borrower are now due. In other words, construing the word in its ordinary and grammatical sense, "prepayment" refers in my view to a payment made voluntarily prior to the due date of a loan. Since the due date of the loan in this case has been accelerated to March 4, 2013, the amount computed under clause (i) is nil. Thus the lesser of the two amounts referred to in the definition is nil.

46. Neither party referred us to any Canadian authority which attempts to define "prepayment", nor have I located any. However, there are American authorities that confirm the view I have suggested. In Corpus Juris Secundum (Vol.10, "Bills and Notes"), the authors state: Absent some express agreement to the contrary, payment after acceleration is not prepayment, so that unearned interest cannot be recovered even if such unearned interest could be recovered upon voluntary prepayment. Acceleration generally does not trigger a prepayment penalty clause, but does so where the clause by its terms specifically applies even to involuntary prepayment. Payment upon acceleration does not entitle the maker to a prepayment discount Further at [s]261 they observe that " unless a note otherwise provides, a holder of a note cannot simultaneously accelerate the note and collect prepayment penalty." [Emphasis in original.] [62] At paras. 47-48, the court in Maxam accepted the reasoning and decisions in Ferreira and Baybank Middlesex. Having determined the ordinary and grammatical meaning of "prepayment", Newbury J.A. then considered what circumstances might allow the court to depart from that meaning: 48. The Court noted [in Baybank Middlesex] on the other hand that provided the terms are clear and unambiguous, an "acceleration clause can be phrased in terms so specific that it should be

construed literally" as to compel acceleration upon default. (On this point, see also Texas Airfinance Corp. v. Lesikar, 777 S.W. 2d 559 (1989), a decision of the Court of Appeals of Texas, at 563 and Re LHD Realty Corp., 726 F.2d 327 (7th Cir. C.A.,1984) at 330-1.) 49. In the case at bar, however, there is no "clear and unambiguous" language in the definition of Prepayment Fee that would indicate that anything other than the ordinary meaning of "prepayment" is to be adopted in construing that term. (In this regard, the language used may be contrasted with that used in O'Shanter Dev. Co. v. Gentra Canada Investments Inc. (1995) 25 O.R. (3d) 188 (Ont. Ct., Gen Div.).) Thus it seems to me that the only commercially reasonable meaning, and the ordinary and natural meaning, of "prepayment" in the definition is that it does not refer to a payment made or to be made once the loan has been accelerated or is otherwise due [63] Maxam is binding upon this Court, unlike the American authorities. Accordingly, the Lenders acknowledge that the case is a significant impediment to their cause unless they can distinguish it. [64] I accept that the court in Maxam was considering loan agreement provisions that are different that those found in the Loan Agreement. In particular, the court in Maxam was grappling with the difficulty in understanding the formula for calculating the "Prepayment Fee"

(paras. 38-44). In that respect then, I also accept that the provisions of each loan agreement must be viewed individually and with regard to the words used and the surrounding circumstances or factual matrix which are unique in each case. I do not see that Maxam suggests otherwise. [65] The Lenders also argue that the court's finding in Maxam are "questionable" as to its approach to the contractual interpretation exercise. [66] Firstly, the Lenders argue that the court in Maxam (para. 18) accepted that the matter of contract interpretation was a matter of law, which is contrary to Sattva (para. 50) which held that contractual interpretation is a matter of mixed fact and law. It may be the case that these comments in Maxam have now been overtaken by Sattva; however, even in that event, I fail to see how that point detracts from the reasoning of Newbury J.A. as to the interpretation of pre-payment provisions, which is the issue at hand. [67] Secondly, the Lenders argue that Maxam did not give due regard to the surrounding circumstances. [68] The court in Maxam referred to Water Street Pictures at para. 24-25 (cited above) which the Lenders argue is at odds with Sattva. I do not agree. Lowry J.A. in fact referred to the agreement itself and the "factual matrix" as the "first step in the analysis". His later reference to considering extrinsic evidence, if there is an ambiguity,

remains the law. As noted in British Columbia (Minister of Technology Innovation and Citizens' Services) v. Columbus Real Estate Inc., 2016 BCCA 283 at para. 42, Sattva simply confirmed that ambiguity is not necessary before considering surrounding circumstances. As Justice Bennett stated in Columbus Real Estate at para. 43, consideration of surrounding circumstances in contractual interpretation "represents the longstanding law in British Columbia". That "longstanding law" includes the court's comments in Water Street Pictures and of course, Athwal, also decided before Sattva. [69] Ultimately, the Lenders' criticism of Maxam principally related to the court's rejection of evidence from the lenders in that case as to the return that they expected on the loan. I will discuss this issue separately below as it arises in relation to Mr. Morris' evidence. In any event, this factor does not detract from the fundamental reasoning of the court in Maxam as to prepayment provisions in general. [70] In summary, I accept that Maxam, supported by the American authorities referred to in that decision, remains binding authority on this Court. The decisions stands for the general proposition that prepayment penalties or amounts are not payable if that payment arises from a demand and acceleration of a debt that establishes a new due date. However, the court may, through an interpretation of the loan agreement, including consideration of the words used supported by surrounding circumstances, discern "clear and unambiguous" language to reflect the parties' common intention that such amount must be paid in those circumstances.

THE EVIDENTIARY ISSUE [71] There is, of course, no quarrel with the proposition that contract interpretation involves a consideration of the words used in the documents themselves. The parties here disagree, however, as to what "surrounding circumstances" may be admissible in the contract interpretation exercise. [72] The Lenders rely on Mr. Morris' affidavit as "surrounding circumstances". He states that he is the president of LSORG-BC and that he is authorized to swear the affidavit for both LSORG-BC and Coleco. He is also the president of R.C. Morris & Company S.O. GP Ltd., the general partner of R.C. Morris & Company Special Opportunities Fund III Limited Partnership ("RC Morris"). LSORG-BC was specifically created as the corporate vehicle by which RC Morris advanced the loan in question. [73] Mr. Morris states: 3. RC Morris is a private, special opportunity debt fund. We specialize in providing financing for companies that have cash flow or valuable underlying assets but which are unable to access traditional funding. Put another way, we fund businesses that may not fit traditional risk profiles. Our lending practices and the return required are commensurate with the risk. The structure makes it unsuitable for revolving lines of credit typically available at a traditional bank, as the expected returns cannot reasonably be achieved unless funds committed are deployed in loans for the terms of the investment.

4. We source capital from investors for a fixed term and in turn lend those funds to borrowers for a fixed term. As a result, we require that interest payable under a loan agreement be payable for the entire term, or at least some minimum term, regardless of whether there has been a prepayment. If the amount is prepaid early, the funds cannot be easily redeployed in order to satisfy our expected return to the investors. Cymax, at all times, knew and understood this commercial purpose.

5. A minimum return is important to RC Morris as its investors invest on the expectation of a return over the period for which their funds are committed. Early repayment, either by way of a prepayment or upon default and acceleration, would erode this expected return unless the terms of the deal included a minimum interest period. That is why the commercial terms for this type of lending include a minimum interest provision. RC Morris is investing in risky ventures, and is deploying capital that could be used productively elsewhere. That certainty is an essential part of the bargain.

8. Cymax approached RC Morris in early 2017 to attempt to obtain a loan. We were aware that Cymax was in a distress position. Cymax was aware that it was losing money but it was confident that it had a business plan that would enable it to turn the business around and reach positive cash flow by a date agreed to in the Loan Agreement, and that failure to do so would constitute a default under that agreement. Cymax was seeking financing to bridge cash flow losses for the first three quarters of 2017 that it estimated it would take to effect the business plan.

9. Cymax was a particularly risky borrower. It has very little in the way of hard assets as it acts as a conduit between buyers and sellers, meaning that it has little inventory or exigible assets other than receivables. At any point, if its working capital falls below the level necessary to sustain operations, it is unlikely to be able to continue to generate cash flow and will lose enterprise value, leaving little for creditors, even secured creditors.

12. The fundamental economic purpose of the Loan Agreement was to provide a minimum return to the Lenders. That return was measured against the risk that we identified during the due diligence process. Part of that return included interest for a minimum term of 18 months regardless of any early repayment, whether by way of a prepayment or by way of payment upon default and acceleration, which was important given that the funds loaned to Cymax were sourced from investors for a fixed terms and return. [74] Mr. Morris' statements found in paragraphs 4-5 of his affidavit bear a striking resemblance to the evidence of Mr. Ciampi, Maxam's representative, as considered by the Court of Appeal in Maxam (para. 10). There, the court rejected the admissibility of such evidence to the extent that it was intended to convey a subjective intention on Maxam's part to receive the maximum return possible: 26. In Maxam's submission, the most sensible commercial result in this case is also the result that is consistent with the plain meaning of the words used in the Agreement and with the surrounding factual matrix, as amplified by Mr. Ciampi's second affidavit. That evidence begs the question, of course, of what an "adequate whole-dollar return" might be in ordinary commercial parlance. Whatever is meant by the term, the second affidavit of Mr. Ciampi is in my view inadmissible to the extent that it is intended effectively to convey a subjective intention on Maxam's part to receive the maximum return possible. It is trite law that such evidence is not generally accepted to illuminate questions of contractual interpretation: see Eli Lilly at para. 55; Prenn v. Simmonds [1971] 3 All. E.R. 237 (H.L.) at 240-41; Kingsway General Insurance Co. v. Lougheed Enterprises Ltd. 2004 BCCA 421 at para.

8. Nor would this evidence be of any material assistance in interpreting the Agreement: any lender can be assumed to intend that it would receive as much as possible under a loan contract, just as any borrower would intend to pay the least amount possible. [Emphasis added.] [75] The Lenders suggest that the court's conclusion in Maxam as to the non-admissibility of much of Mr. Ciampi's evidence has been overtaken by the "current approach" to contractual interpretation found in Sattva, such that this Court should accept Mr. Morris' evidence under the rubric of surrounding circumstances. [76] In my view, this argument misapprehends Justice Rothstein's comments in Sattva. [77] The court's findings in Maxam regarding statements of subjective intentions are grounded in the parol evidence rule. That rule precludes oral evidence by a party in the interpretation exercise which would add to, subtract from, vary or contradict a written contract. As the Court stated in Eli Lilly & Co. v. Novopharm Ltd., [1998] 2 S.C.R. 129, at paras. 54-59, subjective intentions have "no independent place in contractual interpretation" (see para. 54). [78] The parol evidence rule is no stranger to British Columbia courts. [79] In Kingsway General Insurance Co. v. Lougheed Enterprises Ltd., 2004 BCCA 421, the court at para. 8 described the rule as "non-controversial". [80] Athwal also contains relevant

comments concerning the type of extrinsic evidence under consideration in that case and in particular, the court's view as to evidence of a parties' subjective intentions as to the meaning of the contract: 43. Extrinsic evidence to explain the meaning of an unambiguous contractual provision is not admissible. Evidence of a party's subjective intention in executing the contract, or of their understanding of the meaning of the words used in the contract, is not admissible to vary, modify, add to or contradict the express words of the written contract. This is particularly so where a contract contains an "entire agreement" clause. As was noted by the authors of Cheshire, Fifoot and Furmston's Law of Contract, 13th ed. (London, UK: Butterworths, 1996) at p. 127, "the court is usually concerned not with the parties' actual intentions but with their manifested intention." [Emphasis added.] [81] Sattva did not consign the parol evidence rule to the dustbin of history in favour of admission of such evidence as "surrounding circumstances". In fact, Rothstein J. clarified that surrounding circumstances can and should be considered but with "limits". One of those limits was and remains the parol evidence rule. The Court stated: 58. Subject to these requirements and the parol evidence rule discussed below, this includes, in the words of Lord Hoffmann, "absolutely anything which would have

affected the way in which the language of the document would have been understood by a reasonable man" 59. It is necessary to say a word about consideration of the surrounding circumstances and the parol evidence rule. The parol evidence rule precludes admission of evidence outside the words of the written contract that would add to, subtract from, vary, or contradict a contract that has been wholly reduced to writing (King, at para. 35; and Hall, at p. 53). To this end, the rule precludes, among other things, evidence of the subjective intentions of the parties (Hall, at pp. 64-65; and Eli Lilly & Co. v. Novopharm Ltd., [1998] 2 S.C.R. 129, at paras. 54-59, per Iacobucci J.). The purpose of the parol evidence rule is primarily to achieve finality and certainty in contractual obligations, and secondarily to hamper a party's ability to use fabricated or unreliable evidence to attack a written contract (United Brotherhood of Carpenters and Joiners of America, Local 579 v. Bradco Construction Ltd., [1993] 2 S.C.R. 316, at pp. 341-42, per Sopinka J.).

60. The parol evidence rule does not apply to preclude evidence of the surrounding circumstances. Such evidence is consistent with the objectives of finality and certainty because it is used as an interpretive aid for determining the meaning of the written words chosen by the parties, not to change or overrule the meaning of those words. The surrounding circumstances are facts known or facts that reasonably ought to have been known to both parties at or before the date of contracting; therefore, the concern of unreliability does not arise.

61. Some authorities and commentators suggest that the parol evidence rule is an anachronism, or, at the very least, of limited application in view of the myriad of exceptions to it (see for example Gutierrez v. Tropic International Ltd. (2002), 63 O.R. (3d) 63 (C.A.), at paras. 19-20; and Hall, at pp. 53-64). For the purposes of this appeal, it is sufficient to say that the parol evidence rule does not apply to preclude evidence of surrounding circumstances when interpreting the words of a written contract. [Emphasis added.] [82] As such, the court's comments and decision in Maxam as to Mr. Ciampi's subjective intentions are not at odds with Sattva. The simple reason is that such individual subjective intentions could never be described as "facts known or facts that reasonably ought to have been known to both parties at or before the date of contracting" in relation to the words chosen by the parties and not to "change or overrule the meaning of those words" (Sattva at para. 60; emphasis added). [83] Further, the Courts' comments in Sattva at para. 59, echoed in Athwal at para. 43, emphasize that such evidence is inherently unreliable and self-serving when a dispute arises between the parties. [84] In Athwal at para. 45, the court cited Prenn v. Simmonds, [1971] 3 All E.R. 237 at 240-241, which describes such evidence as "unhelpful". In Prenn, the court made the following

sensible observation: The words used may, and often do, represent a formula which means different things to each side, yet may be accepted because that is the only way to get 'agreement' and in the hope that disputes will not arise. The only course then can be to try to ascertain the 'natural' meaning. Far more, and indeed totally, dangerous is to admit evidence of one party's objective -even if this is known to the other party. However strongly pursued this may be, the other party may only be willing to give it partial recognition, and in world of give and taken, men often have to be satisfied with less than they want. So, again, it would be a matter of speculation how far the common intention was that the particular objective should be realised. [85] In other words, even though a party may express certain intentions to another party, when the agreement is reduced to writing to reflect their mutual and "manifest" intentions, the other party may be entirely satisfied that the document achieves their intentions, and also the objectives of the first party. This is particularly apt where there is an "entire agreement" clause as in Section 10.6 of the Loan Agreement. As stated in Maxam, the words chosen by the parties in the Loan Agreement are presumed to have been the means by which the Lenders intended to maximize their return, and the means by which Cymax intended to minimize

the cost of the financing. [86] I find that Mr. Morris' evidence found in paragraphs 4, 5 and 12 of his affidavit as to his subjective intentions and ex post facto interpretation of the Loan Agreement are inadmissible for the very same reasons as expressed in Maxam. In addition, his statements that Cymax was "aware of and understood" RC Morris' internal lending practices does not advance the interpretation exercise as "surrounding circumstances", particularly if, as Cymax argues, the Loan Agreement does not contain the right to the Prepayment Amount in the event of an acceleration of the due date of the Loan. Accordingly, such statements are, at best, unhelpful. [87] There is another more practical difficulty with Mr. Morris' evidence as to RC Morris' lending practices. Coleco is a co-lender and its principals have not advanced any similar evidence. Mr. Morris simply states that Coleco participated in the transaction on the same terms as LSORG-BC, which is evident on the face of the Loan Agreement. He does not suggest that Coleco had any similar lending circumstances or intentions concerning minimum rates of return and prepayments. [88] In that event, there is no basis upon which to conclude that the Lenders, in the Loan Agreement, collectively had such background lending practices, rather than just LSORG-BC on behalf of RC Morris. [89] I accept that the remainder of Mr. Morris' affidavit can be considered as surrounding circumstances to the extent that they are objective facts known to the parties.

DISCUSSION [90] The Lenders argue that the terms of the Loan Agreement clearly establish that Cymax agreed to pay a minimum of 18 months interest on the Loan, citing Sections 2.2, 2.4, 2.7 and 6.2 as "key provisions" (reproduced above). [91] It is important to state at the outset that the Prepayment Amount is claimed by the Lenders pursuant to Section 2.7(a)(ii) of the Loan Agreement. On a plain reading of the Prepayment Provision, if Cymax wished to make a prepayment of the outstanding principal balance of the Loan in whole or in part before 18 months from the Closing Date had passed, Cymax could do so only upon also paying the amounts stipulated under section 2.7(a). These included: (i) the unpaid fees, expenses, and interest then owing, (ii) the interest that would have been payable on the amount of principal being prepaid up to 18 months from the Closing Date (i.e., the Prepayment Amount) and (iii) the outstanding principal being repaid. [92] Similarly, Section 2.7(b) addressed what payment was required to be made if Cymax wished to make a prepayment of the outstanding principal balance of the Loan in whole or in part after 18 months from the Closing Date. In that event, Cymax had to pay interest only to the "repayment date". There is no mention in that event that Cymax was required to pay interest "that would be payable from the Closing Date until 18 months from the date

of Closing", similar to Section 2.7(a). [93] I agree that, in either event, the reference to "prepayment" in Section 2.7 and the reference that this "prepayment" "may be made" by Cymax indicates that it was Cymax's choice or voluntary decision as to whether such payment of principal before the due date would be made. [94] It makes eminent sense that the parties would include such a provision. The non-default interest rate was relatively high at 17%. As Mr. Morris states, Cymax was in a distress position and was trying to turn the business around with a business plan. Mr. Morris refers to Cymax needing to obtain financing to "bridge cash flow losses in 2017". Accordingly, there is every indication by the inclusion of this right to prepay that Cymax thought that it could reverse its downward course over an interim period and that, if it succeeded, it might obtain other financing at a more reasonable interest rate. [95] I accept that the Lenders wished to protect their interests in the event that Cymax was able to and chose this option to make a prepayment during the first 18 months of the Loan, by requiring receipt of the Prepayment Amount under Section 2.7(a). There is nothing unusual in that respect, in that many lenders employ such terms in their lending agreements. [96] Accordingly, Section 2.7 of the Loan Agreement and the use of the word "prepayment" in that Section invites

an interpretation consistent with its plain and ordinary meaning; namely, that it arises from a voluntary action by Cymax in prepaying the Loan before February 2020. [97] Section 2.7 cannot be viewed in isolation, but within the Loan Agreement as a whole and with regard to the surrounding circumstances. [98] That said, the Prepayment Provision is unconnected at all to the default provisions in the Loan Agreement. Section 6 (Events of Default) includes typical provisions that are common in lending agreements. There are defined Events of Default (Section 6.1) and Remedies for Events of Default (Section 6.2). If the Lenders identify any Events of Default, they have options. They can waive the breach (Section 6.3); alternatively, they have the option (i.e., they "may" under Section 6.2) to give notice to Cymax of the acceleration of the Loan and to declare it due and payable. Under Section 2.2(b), the new "Maturity Date" in that event is advanced to 10 days from the delivery of notice of an Event of Default. [99] These default provisions stand in stark contrast to the Prepayment Provision. The default provisions can be invoked by the Lenders, not Cymax, and require Cymax to repay the Loan by the new Maturity Date; they do not confer any discretion of Cymax in respect of payment of the Loan. That is exactly what occurred here in April 2018 when the Lenders accelerated the Loan and

demanded full repayment. There is no evidence to suggest that Cymax manufactured these circumstances to create an Event of Default to cause the Lenders to accelerate the Loan, all for the purpose and with the aim of avoiding payment of the Prepayment Amount. [100] Accordingly, the plain and ordinary meanings of these respective provisions (prepayment versus default/acceleration) in the Loan Agreement are that they are entirely separate and arise in different circumstances. In addition, these provisions are entirely consistent with those before the courts in the American authorities cited above and in Maxam. Accordingly, my preliminary conclusion is that the general rule should apply to disentitle the Lenders to the Prepayment Amount where the Lenders have accelerated the due date of the Loan and demanded payment. [101] The question them becomes whether the Lenders can point to other "clear and unambiguous" language in the Loan Agreement to support their argument. [102] Cymax makes various points as to what the Loan Agreement does not say, as relevant to whether such language can be found in the Loan Agreement: a) Section 1.1 (Definitions) of the Loan Agreement does not include any definition of "prepayment", as that word is used in Section 2.7, that would suggest a meaning different than its ordinary meaning; b) Section 2.7(a) does not contain any language that the Prepayment

Amount was payable in the event of a default or notice of an Event of Default; nor in the event of an acceleration of the Loan by the Lenders; nor even if the prepayment was "involuntary". Again, its terms are entirely silent as to its applicability if payment is required as a result of a default, acceleration and demand; c) Section 2.7 can be contrasted with Section 2.3(b) (Interest Rates) where the Loan Agreement, in clear and unambiguous language says that "In an Event of Default", the interest rate increases to 20.5% per annum; d) Section 2.2(b) of the Loan Agreement (Maturity Date) does not reference any prepayment penalty being due and owing after the Lenders deliver a notice of an Event of Default. It just refers to "unpaid interest" becoming due and payable; and e) Section 6.2 of the Loan Agreement (Remedies for Events of Default) does not reference any prepayment penalty being due and owing. It only refers to "any and all accrued interest". [103] The Lenders place great emphasis on Section 2.4 of the Loan Agreement in support of their argument that this provision established their right to be paid all interest to September 2018 notwithstanding the circumstances by which payment of principal was made after the Closing Date. The Lenders argue that: a harmonious reading of Sections 2.4 and 2.7 makes clear that the parties contracted for a minimum payment of 18 months

interest. The only qualification to that payment was when, not if, it was to be paid. [104] For the sake of convenience, I will reproduce Section 2.4: Section 2.4 Interest Only Payments The Borrower agrees to pay interest to the Lenders at the applicable rates determined above, on each Payment Date following the Closing Date and until September 1, 2018, subject to Section 2.7. [105] Accordingly, the Lenders argue that Cymax was to pay interest on a monthly basis until September 1, 2018 (being 18 months from the date of closing of the Loan Agreement), subject to Section 2.7. Section 2.7 states that, upon prepayment of the loan before 18 months, Cymax must pay "all unpaid accrued interest" payable on the prepaid amount until September 1, 2018. [106] In my view, the interpretation of these two sections advanced by the Lenders is not apparent on their face. Section 2.4 simply refers to the fact that during the first 18 months of the Loan, Cymax was only obliged to pay interest, and not principal, on a monthly basis. The reference to Section 2.7 simply confirmed Cymax's right to prepay the Loan voluntarily before September 2018 and therefore, pre-empt the monthly payments of interest referred to in Section 2.4. Section 2.4 does not contain any language to suggest that, as of the Closing Date, the anticipated monthly interest was considered to have "accrued" until September 2018; nor

does Section 2.4 refer to the Lenders being entitled to that "accrued interest" or Prepayment Amount in the event of default and acceleration of the Loan by the Lenders. [107] I do not agree with the Lenders that Section 2.4 is rendered meaningless if a minimum payment is not required by its terms. Section 2.4 is the companion provision to Section 2.5 that required the payment of principal (and interest) after September 2018 (later changed to March 2019 by the Amending Agreement). In other words, by these two Sections, this was originally an interest only loan to September 2018 after which time principal and interest payments were to be made. The Amending Agreement had the effect of extending the date when principal amounts were to begin. [108] The Lenders argue that it is significant that Section 2.4 was not amended by the Amending Agreement to reflect interest only payments until February 2019. I agree that this created a slight anomaly; however, when read in conjunction with Section 2.3 (which set out the rates for the required monthly interest payments) and the new schedule for Section 2.5 in the Amending Agreement (which confirmed ongoing payments of monthly interest to February 2019) this was likely an oversight. The lack of any amendment to Section 2.4 does not elevate its ordinary meaning in the significant manner suggested by the Lenders. [109] At best, one could

describe the reasoning of the Lenders, with particular emphasis on the interaction between Sections 2.4 and 2.7, as ambiguous and the antithesis of any "clear and unambiguous" language that is required. [110] At bottom, when read as a whole, the Loan Agreement does not contain any language indicating that "prepayment" should be given something other than its plain and ordinary meaning, let alone contain "clear and unambiguous" language to the effect that the Prepayment Amount was owed if the Lenders accelerated the Loan. [111] In addition to the words of the Loan Agreement, as discussed above, I have considered the surrounding circumstances set out in Mr. Morris' affidavit beyond his subjective intentions and his own self-interested interpretation of the Loan Agreement. I have also considered the affidavit of Arash Fasihi, president and chief executive officer of Cymax. [112] I accept that this was a high-risk loan and that Cymax had minimal tangible assets. I accept that the Lenders wished to maximize their return and protect their downside in the event of default. However, these were sophisticated commercial parties no doubt aided by significant professional legal input in preparing the documentation to set out the Lenders' return and set out the Lenders' protections. In fact, the Loan Agreement evidences such provisions: there was a significant interest rate, including a

bump in that interest rate upon default; there was a transaction fee paid upon the start of the Loan; substantial security was granted by Cymax in respect of its assets; and, guarantees were provided by Cymax's subsidiaries, who also granted security on their assets in favour of the Lenders. [113] At the end of the day, these surrounding circumstances cannot overwhelm the actual words used by the Lenders and Cymax in the Loan Agreement, particularly where it states that it was the entirety of their agreement. Mr. Morris' now stated intentions as to a minimum rate of return could easily have been outlined in the Loan Agreement with "clear and unambiguous" language to the effect. It was not. [114] I disagree with the Lenders that failing to interpret the Loan Agreement as they now wish would have a "profound effect" on the private equity and secondary lending markets such that their interpretation should be upheld. To the contrary, a bedrock foundational principle of commercial law and documents is to provide certainty, which is exactly what could have been done here in that respect in crafting the Loan Agreement. The fact that the Loan Agreement does not contain the necessary clear and unambiguous language can only be laid at the feet of the Lenders. [115] There is another relevant but more minor part of the surrounding circumstance raised by Cymax. Contrary to the Lenders'

current position that the Prepayment Amount was "always payable" until September 2018, it is inexplicable that none of the earlier demands forwarded by the Lenders made any mention of such amount being owed. This includes the Default Notice (dated March 19, 2018), the Acceleration/Repayment Demand (dated April 3, 2018), the Guarantor Demands and the various NOIs, all of which made specific reference to the details of the principal and interest owing. [116] The Lenders have not explained why there is no reference to the Prepayment Amount in these demands. Mr. Morris makes no mention of the matter. It was only first mentioned in the Lenders' email of April 19, 2018 in responding to Cymax's request for a payout amount for the following day.

CONCLUSION AND RELIEF [117] In summary, after a consideration of the Loan Agreement and the surrounding circumstances that are admissible here, I find that the Loan Agreement cannot be interpreted as requiring that Cymax pay the Prepayment Amount in the circumstances by which the Loan was repaid. [118] The following orders, as sought by Cymax, are granted: a) I declare that LSORG-BC and Coleco are not entitled to receive, and that Cymax is not required to pay, the Prepayment Amount pursuant to Section 2.7(a) of the Loan Agreement. Any legal fees or other costs and expenses associated with the Lenders seeking the Prepayment Amount are also disallowed; b) I declare that LSORG-BC and Coleco are not entitled to payment of US$550,083.33 plus interest held in trust by Fasken pursuant to the payoff letter agreement between Cymax and the Lenders dated April 20, 2018 (defined in that agreement as the "Additional Interest Amount"); and c) I direct that Fasken pay to Cymax's secured creditor, Frind Properties Ltd., the entirety of the Additional Interest Amount and all interest having accrued thereon. [119] Cymax is awarded its costs of this proceeding on the usual scale, subject to assessment in the usual fashion. "Fitzpatrick J."