Coopers & Lybrand Limited v. National Bank of Canada

Coopers & Lybrand Limited v. National Bank of Canada Collection Decisions of the Court of Appeal Date 1998-09-02 Docket numbers C27109 Judges Brooke, John Watson; Moldaver, Michael James; Borins, Stephen Subject Civil Decision Content DATE: 19980902 DOCKET: C27109 COURT OF APPEAL FOR ONTARIO BROOKE, MOLDAVER AND BORINS JJ.A. RE: IN THE MATTER OF THE BANKRUPTCY OF OLYMPIA & YORK DEVELOPMENTS LIMITED, a corporation incorporated under the laws of the Province of Ontario and having its principal place of business in the City of Toronto, in the Municipality of Metropolitan Toronto BETWEEN: ) ) COOPERS & LYBRAND LIMITED, The ) Lyndon A. Barnes trustee of the estate of Olympia & ) for the appellant York Developments Limited ) Applicants ) (Respondents) ) Benjamin Zarnett and and ) Francy Kussner ) for the respondents NATIONAL BANK OF CANADA ) Respondent ) (Respondent) ) ) Aida Van Wees, and ) for the respondent, ) Coopers and Lybrand Ltd. ) CREDIT LYONNAIS CANADA In its ) capacity as Security Agent for ) the Abitibi and Gulf Lenders ) Respondent ) (Appellant) ) ) Heard: March 30,1998 ) BROOKE J.A.: [1] This is an appeal from the decision of Farley J. with respect to his answer to one of the questions asked of the court by the respondent, the trustee of the estate of the bankrupt Olympia & York Developments Limited (“OYDL”). The question concerned the effect of what is referred to as a “principal debtor clause” in two agreements of guarantee. The issue is whether Farley J. correctly interpreted and applied the judgment of Cory J. in Manulife Bank of Canada v. Conlin (1996), 139 D.L.R. (4th) 426 (S.C.C.). [2] The background is that OYDL required credit and banking facilities. It arranged this by guaranteeing loans to a wholly owned subsidiary company which were also secured by the guarantee of another wholly owned subsidiary company, Olympia & York Resources Corporation (“Resources”), which also pledged the controlling shares of Abitibi-Price Inc. (“Abitibi”) and Gulf Canada Resources Corp. (“Gulf”), which it owned. [3] Briefly, the facts were that the borrower, Olympia & York Resources Credit Corp., borrowed 2.5 billion US dollars from Euro-lenders (the “lenders”), represented in this application by Credit Lyonais (“CL”). The borrower was a company wholly owned by OYDL. OYDL guaranteed the loan, as did Resources, a company wholly owned by the borrower. The Resources guarantee was secured by a pledge of the controlling shares in Abitibi & Gulf. The OYDL guarantee was unsecured. When the borrower defaulted, Resources delivered the shares pledged as security to the lenders. The lenders sold some of the shares and realized about 1.5 billion US dollars. The sum realized was applied to reduce the debt. It was less than one half of the amount then owing. OYDL subsequently went bankrupt. CL, for the lenders, claimed in the estate, relying on OYDL’s guarantee of the debt. [4] The question asked by the Trustee was: in filing their proof of claim in the estate of OYDL, were the lenders required to deduct the sum they had actually received from the sale of the stock pledged to secure the Resources guarantee prior to the proof of claim? The answer to the question affects the recovery of the unsecured creditors of OYDL. We were told that, if the proceeds from the sale of the shares constituted a payment made by a principal debtor, then it must be taken into account for the purpose of the claim and participation in any dividend paid by the estate OYDL. On the other hand, if the proceeds constituted payment by a guarantor, then, for the purpose of the claim, it is not taken into account, which results in the creditor being entitled to a larger participation in any dividend, provided that the creditor’s recovery is limited to the amount of the debt that is outstanding -- one hundred cents on the dollar. See Re Houlder, [1929] 1 Ch. 205. [5] After considering the relevant provisions of the agreements and following the judgment Cory J. in Manulife v. Conlin, supra, Farley J. held that the lenders were obligated to deduct payments received by them from Resources in filing their proof of claim in the estate of OYDL because Resources was a party whom they agreed to treat as a principal debtor. [6] The agreement between Resources, as guarantor, and CL, as agent for the lenders, entitled “Resources Guarantee”, contained the following provision: 2. Guarantees: The Guarantor hereby unconditionally and irrevocably guarantees the due and punctual payment to the Lenders of all present and future obligations now or at any time or from time to time hereafter due or owing to the Lenders by or from the Borrower arising under the Loan Agreement including, without limiting the generality of the foregoing, the principal amount of the Advance from time to time outstanding thereunder, interest thereon and any and all other amounts payable by the Borrower to the Lenders in connection therewith (such obligations being hereinafter collectively referred to as the “Obligations”). Without prejudice to the Agent or any Lenders’ rights against the Borrower as principal debtor, the Guarantor shall, as between the Agent and each of the Lenders on the one hand and the Guarantor on the other, be deemed principal debtor in respect of its obligations hereunder and not merely surety. Accordingly, the Guarantor shall not be discharged nor shall its liability be affected by any act, thing, omission or means whatsoever which would not have discharged it or affected its liability if it had been principal debtor. The Guarantor also agrees to pay all reasonable costs and expenses incurred by the Lenders in enforcing their rights hereunder. The Guarantor hereby expressly waives diligence, presentment, demand of payment on the Borrower, protest or other notice or formalities to the Borrower of any kind whatsoever. [Emphasis added.] [7] The agreement entitled “Guarantee”, between OYDL, as Guarantor, and CL, as agent for the lenders, contained almost identical provisions. [8] The appellant’s position is that where there are co-guarantors for the same principal debt, the creditor is not required in its claim against the estate of one of them to give credit for any amounts paid by the other. It is entitled to claim the full amount of the debt guaranteed, provided that no more than one hundred cents on the dollar is recovered. It concedes that payments made by or on behalf of the principal debtor must be taken into account, but contends that neither Resources, nor OYDL, was intended to be considered a principal debtor for this purpose. The appellant submits that Farley J. erred in concluding that the effect of language used in the Resources Guarantee was to require that Resources and OYDL be regarded for all legal purposes as principal debtors rather than as guarantors or sureties. It contends that the true intention of the parties must be discerned having regard to the use of words of limitation in the agreement and considering the principal debtor clause in the context of the agreement as a whole. The appellant submits that, when viewed in this way, it is clear that the true purpose of the clause was to ensure the lenders’ recovery by precluding the co-guarantor from any defence that might be available to it as a guarantor or mere surety. The appellant’s submission is that there are other words in the agreement that must be considered in determining the relationship between the parties. They contend that these words show that the characterization of Resources as a principal debtor was for a limited purpose, and was not intended to benefit either OYDL or Resources in the circumstances of bankruptcy. [9] The respondent submits that the motions judge construed the clause correctly. Thus, since the lender received payment from a party whom it agreed to treat as a principal debtor, it must give credit for the amount so received in its proof of claim, even though the agreement provides that the lender may appropriate the payment as it sees fit. Similarly, a creditor must deduct what is received from one of two principal debtors from its claim against the other. [10] The respondent relies on the judgment in Manulife v. Conlin, supra. In that case, the issue was whether the guarantors were bound by their guarantee where an extension agreement had been entered into without their knowledge. This court held that they were not so bound and an appeal from that decision failed. The bank made a loan by way of mortgage. The guarantees were contained in, and were a part of, the mortgage document, which had been drawn by the bank. In the guarantee clause, the guarantors covenanted to pay as principal debtors. The relevant portion of the clause provided as follows: … in consideration of the making of the said loan by the mortgagee do hereby Y covenant, promise and agree as principal debtors and not as sureties, that we and each of us shall well and truly pay or cause to be paid to the mortgagee, the principal sum and all other moneys hereby secured, together with interest -- in the manner set forth in this mortgage. [11] Cory J. commented upon the principal debtor clause as follows: In Canadian Imperial Bank of Commerce v. Patel (1990), 72 O.R. (2d) 109 (H.C.), at 119, it was held that a principal debtor clause converts a guarantor into a full-fledged principal debtor. If the guarantor is to be treated as a principal debtor and not as a guarantor, then the failure of the bank to notify the respondent of the renewal agreement and the new terms of the contract must release him from his obligations since he is not a party to the renewal. This conclusion does not require recourse to equitable rules regarding material variation of contracts of surety. It is simply apparent from the contract that a principal debtor must have notice of material changes and consent to them. Of course, a guarantor who, by virtue of a principal debtor clause, has a right to notice of material changes, may, by the terms of the contract, waive these rights. However, in the absence of a clear waiver of these rights, such a guarantor must be given notice of the material changes and, if he is to be bound, consent to them. The appellant contended that the words in clause 34 which provide “the said guarantors Y covenant, promise and agree as principal debtors and not as sureties” indicate that the respondent is bound as a principal debtor yet without any of the usual rights and benefits of a principal debtor such as notice with regard to renewal, and the opportunity to negotiate and consent to its terms. To take this position seems to be unfair and unreasonable. The mortgagor as a principal debtor must be given notice of the renewal agreement. This is evident from the requirement that the mortgagor sign the renewal agreement. The principal debtor clause converts the guarantor into a full-fledged principal debtor with all the duties and obligations which that term implies. If the guarantor is to be responsible to the lending institution as a “full-fledged principal debtor” then he or she is entitled to the same notice of a renewal agreement as the principal debtor mortgagor. That is undoubtedly the reason the standard form of the renewal agreement provides a place for the guarantor to sign. Not just fairness and equity but the designation of the guarantor as a principal debtor leads to the conclusion that the guarantor must have notice of and agree to the renewal before he is bound by its terms. A guarantor reading clause 34 would be led to believe that as a principal debtor he would have the same notice of a renewal agreement as would the principal debtor mortgagor. If a lending institution wishes to have the guarantor obligated as a principal debtor, then the guarantor must be entitled to the same rights as the principal debtor which would include both notice and agreement as a party to renewal. [Emphasis added.] [12] The words of each clause of the agreement must be given their ordinary meaning. However, the meaning and effect of the principal debtor clause must be considered in the context of the agreement and in the context of the intentions of the parties as revealed by the documents; that is, the intention of OYDL to obtain the use of monies and credit, and the intention of the lenders to ensure the liability of, and payment by, OYDL and its companies of the debt. We do not interpret anything said by Cory J. as being to the contrary. [13] The submission of the appellant seems to come down to this. Resources’ agreement is called "Resources Guarantee". Resources is referred to throughout the agreement as "the Guarantor" and signed it as such. Having regard to these facts and the covenants, the substance of the agreement was a guarantee, and the principal debtor clause does not change this, or change the general character of the guarantor. The parties agreed to the limited purpose of the principal debtor clause when they agreed that the clause was without prejudice to the lenders’ rights against others. Furthermore, the principal debtor clause is different than the one found in the case dealt with by Cory J. In that case, the appellants expressly covenanted to pay as principal debtors. In this case, the guarantor is deemed to be a principal debtor, but for a limited purpose -- the performance if its obligations. It is as though there is another or additional character, which is the deemed one. In these circumstances, particularly if there is any ambiguity, the clause should be interpreted so as to be most consistent with the substance of the agreement and the respective characters of the parties. If this approach is followed, then Resources’ characterization as principal debtor -- for the purpose of performance of its obligations -- is merely to ensure performance may be enforced and that Resources would have no defence available to it as guarantor, just as is provided in the sentence following the principal debtor clause. [14] However, in my opinion, the specific wording of the principal debtor clause is unambiguous. In the performance of its obligations, Resources is deemed a principal debtor. The deemed characterization of Resources as principal debtor defined the relationship between the parties for the stated purpose. In the circumstances, performance by Resources of its obligations under the guarantee and the realization on the sale of the shares should be regarded as payment by a principal debtor to the lender and treated accordingly by the lender when claiming against the estate of OYDL. Resources’ liability to the lenders was real and substantial and there is no reason to permit the lender to treat Resources other than as principal debtor as they had agreed to do. Nor should there be any limitation inferred because of the word “accordingly” in the sentence which follows. It simply indicated an important consequence of the characterization and was not exclusive of any other possible consequence. While the words of the clause differ from those in the clause in the case before Cory J., there was no reason to distinguish this case on this issue. In the circumstances, I think Farley J. was right in following and applying the judgment of Cory J. [15] In disposing of the matter, Farley J. said, after referring to the above passage from the judgment of Cory J.: It would seem to me that this treatment of their being a principal debtor means that A&G and OYDL cannot be regarded as a guarantor or surety within the analysis of In Re Houlder, [1929] 1 Ch. 205 and the analysis of Houlden & Morawetz, Bankruptcy and Insolvency Law of Canada (3rd ed. Looseleaf, para. G-29-1). Rather they are to be treated as principal debtors. [16] I think that I should add that, as the case was put to us, this result is fair. It is dictated by the language of the agreement. Moreover, the result that flows will not adversely affect the interests of third parties, the unsecured creditors of OYDL. [17] I would dismiss the appeal. As no submissions were made as to costs, the parties are to make submissions in writing within 15 days of the date of release of these reasons. Released: September 2, 1998