D.A.W. Investments Ltd. v. Dion et al.

2005 BCSC 319 D.A.W. Investments Ltd. v. Dion et al

IN THE SUPREME COURT OF BRITISH COLUMBIA Citation: D.A.W. Investments Ltd. v. Dion et al., 2005 BCSC 319 Date: 20050309 Docket: S040261 Registry: Vancouver Between: D.A.W. Investments Ltd. Plaintiff And Louis Dion and Leo Dion Defendants Before: The Honourable Mr. Justice Pitfield Reasons for Judgment Counsel for the Plaintiffs: Dennis K. Fitzpatrick Counsel for Defendants: Gregory G. Dureault Date and Place of Hearing: November 22, 23, 24, 2004 Vancouver, B.C. Written Submissions Received: December 15, 2004 January 6, 13, 2005 Introduction and Facts [1] D.A.W. Investments Ltd. ('DAW') applied for judgment under Rule 18A on a guarantee provided by the defendant, Louis Dion ("Louis"). At the conclusion of the hearing on November 24, 2004, I granted judgment for a portion of the total amount claimed but asked for written submissions in respect of the remainder. The issue with which I was concerned was whether Louis must be absolved of any part of his liability under the guarantee because of transactions involving the guarantee and a portion of the debt to which it pertained. The facts are these. [2] Louis is a principal in, and chief executive officer of, Dion Entertainment Corporation ("DEC"), a company which, along with its subsidiaries, carries on a bingo gaming business. [3] DEC borrowed funds from Len Stuart Consulting Ltd. ("Stuart"). On January 16, 1998, Louis signed an

unconditional and continuing guarantee in favour of Stuart with effect from January 31, 1996. By May 1999, DEC was in default of its obligation to pay Stuart to the extent of $1,455,000 comprised of principal, interest and other charges related to the loan. [4] DAW agreed to take out the Stuart financing. By agreement made June 17, 1999 among DAW, DEC, Louis and others, DAW agreed to lend DEC the sum of $1,375,000 of which $1,350,000 was to be paid to Stuart in full satisfaction of its claim against DEC. The DAW loan was to bear interest both before and after maturity, default and judgment, at the rate of 20% per annum, calculated monthly. In consideration of DAW's agreement to lend funds to DEC, Stuart agreed to absolutely assign and transfer to DAW all of the right, title and interest in and to the security Stuart held in relation to its loan and the benefit of all rights, remedies, covenants and agreements contained therein with the intent that the security would be held and enforceable by DAW as security for DAW's loan to DEC. Louis was a party to the agreement and specifically acknowledged and consented to the absolute transfer and assignment of his guarantee made January 16, 1998 from Stuart to DAW. [5] DAW lent a further sum of $250,000 to DEC on September 18, 2000, such loan to bear interest calculated from the date of advance both before and after maturity, default and

judgment, at the rate of 15% per annum, calculated and compounded monthly. The provision for compound interest differs from that contained in the earlier loan agreement. Louis specifically covenanted and agreed that, without limitation, his guarantee was extended to secure and would be a continuing, valid and subsisting guarantee for the repayment of the loan, interest thereon and all other amounts payable by DEC to DAW. [6] By late 2002, DEC was in financial difficulty and concerned about actions DAW might take in respect of the security it held. On December 23, 2002, DEC applied for and obtained an injunction restraining DAW from dealing with any of the securities it held in relation to DEC. In January 2003, DAW applied to vary the injunction in order to permit it to assign part of the DEC debt to Marquis Consulting Group Inc. so that DAW could realize a loss to be used for income tax purposes. The assignment was made by agreement dated January 28, 2003 and pertained to debt of $2,500,000. The agreement stipulated that DAW assigned and transferred to DAW and Marquis jointly, all security and security interests held by DAW for the debts owing by DEC. Louis was not party to the assignment agreement between DAW and Marquis nor does he appear to have signed any documentation in relation to it. He was aware of the application to the court seeking approval of the assignment. [7] On

July 10, 2003, DAW obtained judgment against DEC in the amount of $3,947,416.20 plus interest in respect of the portion of the debt that had not been assigned to Marquis. [8] The order permitting the assignment from DAW to Marquis prohibited Marquis from commencing any legal proceedings with respect to the assigned debt without leave of the court. On September 9, 2003, Master Tokarek granted Marquis leave to commence legal proceedings with respect to the portion of the debt it had acquired from DAW. On October 27, 2003, Marquis obtained judgment against DEC in the amount of $2,700,293.17 plus costs and disbursements. [9] On November 5, 2003, DAW petitioned DEC into bankruptcy. [10] By agreement in writing made November 20, 2003, Marquis reassigned to DAW the debts, obligations and liabilities that it had acquired from DAW. In so doing, it assigned to DAW all of the security that it had earlier acquired from DAW including the benefit to which it was entitled under Louis' guarantee of January 31, 1996. The judgment Marquis had obtained on October 27, 2003 was not assigned to DAW under the agreement made November 20, 2003. [11] On January 15, 2004, DAW advised Louis it was making two claims in respect of amounts owed to it. The first claimed the sum of $2,701,061.32 confirmed to be due, owing and payable to DAW as at October 27, 2003 by the judgment for that amount entered against

Louis by Marquis. The second claim related to recovery of the sum of $3,947,416.20 confirmed to be due, owing and payable to DAW by DEC pursuant to the judgment obtained by DAW on July 10, 2003. Position of the Parties [12] DAW claims that its assignment of an interest in Louis' guarantee on January 28, 2003 and the reassignment thereof on November 20, 2003 were equitable assignments, neither of which modified Louis' obligation under the guarantee. DAW claims that the fact Marquis obtained judgment against DEC did not absolve Louis of his obligation under the guarantee. [13] Louis claims that the assignment, reassignment and judgment amounted to material variations of the principal contract between DEC and DAW, the effect of which was to absolve Louis of liability in respect of that portion of the underlying debt obligation which was the subject of the assignment, reassignment and judgment. Analysis [14] DEC says that K.P. McGuiness, The Law of Guarantee (2nd ed. 1996) properly states the law at p. 570 in the following terms: Subject to a contrary stipulation by contract, there is no doubt that the benefit of a guarantee may be assigned by the creditor. The principles relating to the assignment of a guarantee are the same as apply in the case of any contract. [15] The statement of law in the McGuiness text conforms to that enunciated in the decided cases: see West v. Shun,

[1915] 24 D.L.R. 617 (Sask. S.C.), 9 W.W.R. 644 (Sask. C.A.), Wheatley v. Bastow (1855), 44 E.R. 102 at 109 (C.A.) and Bradford Old Bank Limited v. Sutcliffe, [1918] 2 K.B. 833, at 841 (C.A.). [16] The loan agreements and guarantee provided by Louis contained no provision that would prevent assignment by DAW. The original loan agreement between DAW and DEC in June 1999 contained a specific provision that the agreement would inure to the benefit of and be binding upon all parties thereto and their respective heirs, personal representatives, successors and assigns, as the case may be. As I have previously remarked, Louis was a party to that agreement and specifically acknowledged the continuing effect of the guarantee he had given to Stuart and that Stuart had assigned to DAW. The loan agreement of September 18, 2000 contained words to similar effect insofar as the right to assign was concerned. [17] Clause 1.02(2) of the guarantee enhances DAW's claim that it should not be prejudiced by any transaction which might have the effect of impugning the guarantee. The clause provides as follows: 1.02(2) Any amount which may not be recoverable from [Louis] by [DAW] on the basis of a guarantee shall be recoverable by [DAW] from [Louis] as principal debtor in respect thereof and shall be paid to DAW forthwith after demand therefor as provided herein. [18] The legal principal that a

guarantee may be the subject of an equitable assignment is subject to a limitation. In that regard, neither the assignor nor the assignee may do anything in respect of the guaranteed obligations or the security pertaining thereto that prejudices the guarantor: see Wheatley v. Bastow and Bradford Old Bank Limited v. Sutcliffe, supra. In that sense prejudice means creating liability under the guarantee where none might otherwise exist. Such would occur, for example, if underlying security were compromised so that secured debt became unsecured debt resulting in the beneficiary of the guarantee pursuing recovery of a greater sum under the guarantee than would have been the case had the creditor realized upon the security originally granted in relation to the transaction. In the present case, DEC and Louis can point to nothing in the conduct of DAW or Marquis which had the effect of compromising any security held in relation to the DEC debt obligations to DAW or Marquis at any point in time. In fact, the documentation which I have described was careful to ensure that the benefit and effect of all security provided by DEC for the loans was preserved, first upon the assignment to Marquis and secondly, upon the reassignment from Marquis to DAW. [19] Louis claims that because DAW is seeking to obtain the court's recognition of two equitable assignments, it is essential that DAW come to

court with clean hands in order to obtain the relief it seeks. Louis says that DAW has failed to disclose the reasons for the reassignment from Marquis to DAW and such failure amounts to non-disclosure leaving DAW with "dirty hands". There is nothing in the commercial transactions between DAW and Marquis which should compel disclosure of any more than that which has been disclosed. DAW sold a portion of the DEC debt to Marquis for $20,000 in order that it could realize a tax loss. It reacquired the debt that it had assigned at a price of $40,000 once it was satisfied its loss had crystallized. Nothing in either transaction affects Louis or in any way prejudices his position. I am satisfied that full disclosure of all necessary, relevant and material facts has been made by DAW in present circumstances. [20] DAW is entitled to judgment on Louis' guarantee in the amount of $2,701,071.32 together with interest before and after judgment as provided in the guarantee just as it was entitled to judgment thereon for the sum of $3,947,416.20. In the event of disagreement regarding the effect of the loan agreements on the calculation of interest before and after judgment, the parties are at liberty to speak to the matter. [21] DAW is entitled to costs at Scale 3. "I.H. Pitfield, J." The Honourable Mr. Justice I.H. Pitfield