A Lesson in Surety Cooperation: Can-Win (Toronto) Limited v Moncayo

Introduction

The recent Ontario Court of Appeal (“ONCA”) split decision in Can-Win Leasing (Toronto) Limited v Moncayo, 2014 ONCA 689, barred Can-Win Leasing’s claim for equitable contribution against Mr. Moncayo. In doing so, the ONCA clarified when a surety, after voluntarily repaying a guarantee they shared with other parties, can demand contribution from a co-surety. Together, this case sends a message to sureties that share guarantees: work together.

Facts

The debtor in this case is Can-Win Truck (“Truck”). Truck was equally owned by Mr. Irwin and Mr. Moncayo. Together with Can-Win Leasing (“Leasing”), Irwin and Moncayo guaranteed the debt of Truck to the Royal Bank of Canada (“RBC”). Irwin was the sole shareholder of Leasing.

In March of 2008, after Irwin and Moncayo had a falling out, Irwin took unilateral control of Truck’s operations and “shut out” Moncayo (para 5). In August of the same year, Irwin began to pay down Truck’s outstanding debt through Leasing. In 2009, RBC assigned the remainder of the debt to Leasing. The payments, and assignment, occurred without notice to Moncayo.

Leasing subsequently claimed contribution against Moncayo for his share of the payments to RBC.

Trial Decision

The trial judge made several factual findings that dictated his application of the law:

  • “It [was] common ground that RBC made no formal demand for payment,” and that Truck was never in a state of default (para 14);
  • The payment of the debt was made for Irwin’s own interest and not for the benefit of Truck (para 15);
  • Neither the assignment nor the payments were necessary for Truck’s survival (paras 17 and 21);
  • Truck was salvageable as a business (para 20).

Based on these facts, the trial judge held that Leasing could not enforce Moncayo’s guarantee (para 28). The absence of notice removed Moncayo’s ability to re-negotiate the debt, and the payments were not actually necessary since RBC had made no demand (paras 21-28). As a result, paying the debt changed the risk to Moncayo, and thus prejudiced his interests (para 27).

The ONCA agreed with the trial judge and, importantly, accepted the lower court’s factual findings.

Majority Decision

General Principles

At law, if a surety pays “more than its rateable share” of the guaranteed debt they have “an equitable right, independent of contract, to recover contribution from its co-sureties” (para 33). Quoting Kevin McGuinnes’ The Law of Guarantee, the ONCA held that a right to contribution exists if the surety claiming such relief was “legally obligated” to make the payment (para 33).

In general, there are two circumstances that give rise to such an obligation (para 39):

  1. The creditor demands payment from the surety; or
  2. The debtor guaranteed by the sureties faces imminent default.

In the face of a claim for contribution, a co-surety can argue that the payment was “impudent or unnecessary,” thereby avoiding liability since the payor was not actually obliged to make the payment (para 33).

Leasing paid more than its rateable portion of Truck’s debt. Thus, Moncayo would owe contribution if Leasing was under an obligation when it made the payments.

Was there a demand?

The ONCA accepted that RBC did not make any repayment request (para 39). Thus, there was no argument under this operation.

It is worth noting that while a “surety is entitled to pay as soon as his or her liability arises under the terms of the guarantee,” doing so without notice to the co-surety can still give rise to the “impudent or unnecessary” defense (para 33). This is because a payment without notice robs the co-surety of his right to participate in settlement negotiations (para 34).

Was Truck’s default imminent?

If a surety learns that “the primary obligor’s default is … imminent,” they are “entitled to take unilateral action” to settle the debt (para 39). The notion is that if default is in fact imminent, then “payment did not prejudice” the co-surety (para 46).

This argument was also barred by the trial judge’s findings. The determination that Truck was a salvageable business led to the conclusion “that the discharge of the loan by [Leasing] was premature and prejudicial to Mr. Moncayo” (para 51). In other words, the state of the business did not rationalize Irwin’s unilateral settling of the debt. As a result, Irwin “was not acting under legal obligation, [and] was simply a volunteer,” meaning that “no right to contribution arose” (para 52).

Policy Discussion

While the ONCA recognized that the “imminent default” exception is intended to permit a surety to take swift and decisive action, the Court noted that it can also be stretched to rationalize abusive behavior (para 53). This may be the main reason for the decision, since the ONCA felt that abuse had occurred in this instance (para 54).

The Court felt that Irwin decided to exit the business, and did so by taking control of it, excluding Moncayo, and paying Truck’s debt without notification (para 54). While this may seem harmless, these actions “[deprived] Moncayo of the opportunity to work the debt down in an orderly way or to liquidate the company so as to maximize its contribution to the debt. It also deprived Mr. Moncayo of the ability to look to [Truck] for the discharge of its primary obligation” (ibid). This “was clearly prejudicial” to Moncayo (ibid).

Further, there is good reason to require a “surety to give notice of his intentions to [his] co-sureties” (para 55). Such acts promote “the efficient winding up of the business and the equitable allocation of its outstanding liabilities” (ibid). The ONCA even went so far as to say that “[a]bsent evidence of an imminent default, courts should promote [such cooperation] and not the unilateral action that occurred here” (ibid).

As a result, the majority of the ONCA felt that Irwin’s conduct, and the absence of any obligation to pay, prohibited Leasing from enforcing Moncayo’s guarantee. No equitable contribution was ordered.

Lawuer’s Dissent

The significance of this case cannot be truly appreciated without reading Justice Lawuer’s dissent. While the dissent characterizes the facts quite differently, its discussion of the law is more pertinent.

Lawuer J.A. implies that a co-surety must satisfy a more stringent test than the one used by the majority. The dissent holds that “[i]n the absence of a formal demand from the creditor, it remains open to the co-surety to establish that there should be no right of contribution on the basis that the payment to the creditor was premature and was prejudicial to the co-surety’s interests” (para 82; emphasis added).

In this sense, more is required than evidence that the payment

[i]n question was “officious”. A surety seeking to avoid contribution must establish prejudice. If there is no prejudice, then the surety seeking to avoid contribution will have been enriched by the impugned payment, and the objective of contribution – being the prevention of unjust enrichment in the context of a common obligation – will be defeated (para 83).

In the opinion of Lawuer J.A., Moncayo “[had] not established that he suffered prejudice as a result of the payments made by [Leasing] to RBC, apart from the obligation to pay his share” (para 88). Instead, Irwin had every right to reduce Truck’s debt, since he was the primary financer and wanted out of the business: Irwin provided, either personally or through Leasing, more than $4.1 million in security for Truck’s loans while Moncayo had only guaranteed $900,000 (para 65). This caused Lawuer J.A. to concluded that once Irwin had decided to stop financing the company, “default was imminent and inevitable” (para 80). Absent his support, and in light of the fact that Moncayo was either incapable or unwilling to provide further financing, no other result was possible (paras 87-88 and 91). Irwin’s actions merely forced Moncayo to pay his share earlier rather than later.

Thus, according to Lawuer J.A., the trial judge erred in relieving Moncayo of his guarantee. Since the business was eventually doomed, there was no inequity in forcing Moncayo to honor his obligations.

Conclusion

Together, the majority and dissent show a different preference for Irwin’s behavior. The majority seemed to feel that it was the exclusion of Moncayo that created the prejudice that vitiated his obligations. Had Irwin included Moncayo, or at least given him notice, Leasing would probably have been less vulnerable to Moncayo’s argument. The dissent, on the other hand, felt that “[w]hile [Irwin's] approach may appear aggressive, in view of [Moncayo's] apparent impecuniosity, that is not a factor that is relevant to the appellant’s rightful remedy” (para 97). It is enlightening to realize that the prejudice the majority refers to is merely a loss of opportunity. The abstract nature of this prejudice is probably why the majority emphasized the legal obligation aspect of the contribution test, as opposed to the harder prejudice requirement relied upon by the dissent. Without such a focus, their decision would have been even more susceptible to the dissent’s critique.

That said, the majority’s decision is the law. Thus, a key lesson to take from this case is that Irwin’s larger stake does not justify his exclusion of Moncayo. Given this formulation of the contribution doctrine, it is advisable for sureties to cooperate throughout their relationship. Through the provision of notice, and the maintenance of an open dialogue, parties can decrease their vulnerability to the defense used by Moncayo. Notice gives all parties the ability to decide their course of action, and circumvents the notion of prejudice that the majority used in this decision.

[filed: Commercial Law Restitution and Unjust Enrichment]

Threats of Violence, Serious Personal Injury Offences, and Dangerous Offender Applications in R v Steele

Introduction

In R v Steele, 2014 SCC 61 [Steele SCC], the Supreme Court of Canada (“SCC”) grappled with the issue of whether the mere threat of violence is enough to satisfy the legal criteria of a Serious Personal Injury Offence (“SPIO”), which is a pre-condition for the Crown to pursue a dangerous offender application.

One of the most serious criminal consequences one can face in Canada is being entered into the dangerous and long-term offender system. Those that are deemed to pose an ongoing threat to the public can face indeterminate detention and long-term supervision.

Entry into the system requires that two conditions be satisfied. First, the offender must have been convicted of an SPIO as defined in section 752 of the Criminal Code, RSC 1985, c C-46 (the “Code”). Second, there must be reasonable grounds to believe that the offender might be found to be a dangerous offender under section 753 of the Code or a long-term offender pursuant to section 753.1. The SPIO requirement, therefore, plays an important gatekeeper role. Read the rest of this entry »

[filed: Criminal Law]

Freedom of Association and Collective Bargaining Rights Face Legislative Challenge: British Columbia Teachers’ Federation v British Columbia

The government of British Columbia (BC) recently filed an appeal challenging the decision by the Supreme Court of British Columbia (“BCSC”) in British Columbia Teachers’ Federation v British Columbia, 2014 BCSC 121 (“BCTF”) which found in favour of the provincial teachers’ union. The leader of the governing BC Liberal Party, Christy Clarke, has signalled the province’s readiness to fight the teachers up to the Supreme Court of Canada (“SCC”), so this appeal will likely not resolve the legal and political issues in question between the teachers and the government anytime soon. BC governments have historically had a conflictual relationship with BC teachers, resulting in several instances of failed legislation, court cases, and teacher strikes—sometimes, at the same time. In addition, the neoliberal economic context has presented the opportunity for governments to pass legislation challenging the collective bargaining regime in regions across Canada.

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[filed: Charter Constitutional Law Labour and Employment]

Carter v Canada: Highlights from the Supreme Court of Canada Hearing

Early on a rainy morning, I arrived to the Supreme Court of Canada and was lucky enough to be able to watch the Carter v Canada (Attorney General) [Carter] appeal. In this case, several plaintiffs challenged the Criminal Code provisions prohibiting physician assisted suicide and voluntary euthanasia under sections 7 and 15 of the Charter. This case is notable, as in Rodriguez v British Columbia (Attorney General), [1993] 3 SCR 519 [Rodriguez], a case with almost the same circumstances as this one, the Court upheld the impugned legislative provisions in a split decision. Justice Sopinka, writing for five members of the Court, held that the laws infringed Ms. Rodriguez’s right to security of the person, but that the infringements did not contravene the principles of fundamental justice.

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[filed: Charter Criminal Law]

Minority Language Education for Majority Students: CS Francophone du Yukon v Yukon Territory

On  26 June 2014, the Supreme Court of Canada (“SCC”) agreed to hear an appeal of Commission Scolaire Francophone du Yukon v Attorney General of the Yukon Territory, 2014 YKCA 4 [CS Francophone]. The case concerns a dispute over the control and management of the Territory’s French language education system and is the first time in over a decade that the SCC will render a decision on the scope of minority language education rights in English Canada.

The issue in the appeal is whether sections 2, 5, and 9 of the French Language Instruction Regulation, YOIC 1996/099, infringes section 23 of the Charter by limiting admission to minority language school boards to students whose parents are members of the linguistic minority community.

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[filed: Constitutional Law]

Torture and the Limits of Sovereign Immunity: Kazemi Estate v Islamic Republic of Iran

In Kazemi Estate v Islamic Republic of Iran, 2014 SCC 62, the Supreme Court of Canada (SCC) looks at whether Canadians have the right to sue foreign governments for damages resulting from acts of torture. The SCC ultimately denied the victims’ claim for a civil action, finding that acts of torture are not exceptions to the general rule of sovereign immunity, as codified in the State Immunity Act, RSC 1985, c S-18 [SIA]. The SCC also entertained — but ultimately set aside — arguments challenging the constitutionality of certain provisions of the SIA, clearly stating that efforts to restrict sovereign immunity should be decided on by Parliament, not the courts.

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[filed: Charter Constitutional Law International Law]

Martin v Alberta, Federal Employees, and Workplace Injuries: Just Like the Rest of Us

Introduction

In Martin v Alberta (Workers’ Compensation Board), 2014 SCC 25, the Supreme Court of Canada (“SCC”) resolved a statutory overlap that had been treated inconsistently by appellate courts across Canada. The SCC held that workplace compensation claims of federal employees, who are subject to the Government Employees Compensation Act, RSC 1985, c G-5 [GECA], are generally governed by the compensation regime of the province wherein they usually work.

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[filed: Labour and Employment]

Banks Forced to Repay Added Charges Plus Punitive Damages: Bank of Montreal v Marcotte

On September 19, 2014, the Supreme Court released its decision in Bank of Montreal v Marcotte, 2014 SCC 55 [BMO v Marcotte], and its two companion cases, Amex Bank of Canada v Adams, 2014 SCC 56, and Marcotte v Fédération des caisses Desjardins du Québec, 2014 SCC 57. The case in BMO v Marcotte was based on major banks charging undisclosed fees for credit card transactions made in foreign currency. The Supreme Court found a group of major banks liable for repayment of those undisclosed charges, plus punitive damages.

In rendering its decision, the Supreme Court addressed many fundamental features of consumer protection laws that apply to Federally regulated businesses in Canada. In particular, BMO v Marcotte (1) establishes new standards for the authorization of class actions in Quebec; (2) emphasizes co-operative federalism as the dominant approach to issues arising from overlapping Federal and Provincial jurisdiction; and (3) affirms the significance of business transparency and accountability to the determination of punitive damages. On the whole, BMO v Marcotte may constitute a game-changer for how Federal firms assess risk and the costs of doing business in Canada.

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[filed: Class proceedings Constitutional Law Consumer Protection]

Aboriginal Status, Mandatory Minimums, and Prosecutorial Discretion: R v Anderson

Introduction

Back in June, the Supreme Court of Canada (SCC) dealt with the issue of whether Crown prosecutors are constitutionally required to consider the Aboriginal status of accused persons when deciding to pursue a mandatory minimum sentence in R v Anderson, 2014 SCC 41.

The respondent, Frederick Anderson, was charged with impaired driving pursuant to section 253 of the Criminal Code of Canada (the Code), which was his fifth driving-related offence. Because of Anderson’s history of driving-related offences, the Crown, exercising its prosecutorial discretion, decided to seek a mandatory minimum sentence of 120 days.

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[filed: Aboriginal Law Criminal Law]

New Test for When an Appellate Court Can Raise a New Issue: R v Mian

In R v Mian, 2014 SCC 54 [Mian, SCC], the Supreme Court of Canada (SCC) attempted to strike a balance between two competing roles for appellate courts – of neutral arbiter and of justice-doer. In the process, the SCC set a new precedent for determining when an appellate court can raise a novel legal issue.

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[filed: Charter Constitutional Law Criminal Law]