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Century Services Corp. v. LeRoy, 2018 BCCA 279

Can the billing practices of a lender void a loan guarantee?

Ted LeRoy Trucking Ltd. (the “Debtor”) was one of British Columbia’s largest private logging contractors. In 2007, the Debtor was indebted to its banker, the Royal Bank of Canada (“RBC”), in the amount of approximately $18 million. The Debtor stood to be forced into bankruptcy and liquidation if it did not obtain financing to pay out its debt to RBC. In March 2008, the Debtor entered into a loan agreement with Century Services Corp (“Century”)—a high interest rate bridge financing provider—whereby Century would replace RBC as the Debtor’s primary lender. Rebecca LeRoy, the spouse of the Debtor’s principal, provided a limited recourse guarantee in respect of the loan.

Pursuant to the loan agreement, the Debtor was to make minimum monthly payments of $125,000 to Century until the loan was repaid. The intention was for the Debtor to have 12 months to find a conventional lender for its business. Century was entitled to accelerate the due date upon an event of default, which included failing to make payments when due and being assigned into bankruptcy. On May 31, 2008, the Debtor defaulted under the loan agreement by failing to make the first payment. On September 3, 2008, the Debtor applied for and obtained an order in the Companies’ Creditors Arrangement Actproceeding to permit it to assign itself into bankruptcy. The assignment was an event of default under the loan agreement, so Century immediately issued a demand for payment to the Debtor and a demand for payment on the guarantee to Ms. LeRoy.

Ms. LeRoy challenged the enforceability of the guarantee on the ground that it had been obtained by a fraudulent misrepresentation. She argued that the proffering of the loan and guarantee documents constituted an implied representation that Century would adhere to the requirements of the loan agreement. She further argued that this implied representation was false because Century had a practice of posting certain charges—such as capitalized employee time—to the loan account without regard as to whether or not the loan agreement authorized such charges.

The trial judge concluded that Ms. LeRoy had established a fraudulent misrepresentation that vitiated the guarantee. Century’s act of proffering the loan agreement and the guarantee gave rise to a representation, by implication, that Century intended to administer the loan in accordance with the terms of the loan agreement. At the time that Century presented the documents to Ms. LeRoy, it was indifferent about whether it would comply with the terms of the loan agreement and, specifically, that it intended to administer the loan account in accordance with its standard practices irrespective of whether those practices conflicted with the provisions of the loan agreement. The trial judge accepted that Ms. LeRoy would not have agreed to guarantee the Debtor’s indebtedness if she had known of Century’s indifference. Century appealed from this decision.

The Court of Appeal reviewed English and Canadian authorities and extracted the following principles concerning the circumstances when a creditor has a duty to disclose information to a prospective guarantor who has not asked questions of the creditor: 
  1. the information must be material;
  2. materiality is to be assessed on an objective basis—that is, whether the information would be likely to affect the mind of a reasonable guarantor in the position of the prospective guarantor; and
  3. the information must consist of facts connected to the dealings between the creditor and the debtor that the guarantor would expect not to exist.
Limiting the scope of disclosure obligations in this way facilitates efficient credit markets. Prospective guarantors are able to make informed decisions because they are provided sufficient information to assess the risks that they are assuming. Lenders, on the other hand, are not unduly burdened by having to disclose information that a reasonable person would not find material or unexpected.
Hindsight evidence of litigants as to what they would have done if only they had known is inherently self-serving and must be approached with skepticism. In the case of a guarantor seeking to avoid a guarantee by relying on concealment of information, it is not enough for the guarantor to state that she would never have executed the guarantee if she had known of the undisclosed information. The test is an objective one, and asks whether the undisclosed information would be likely to affect the mind of a reasonable guarantor in the position of the prospective guarantor.
 
The Court of Appeal held that a reasonable person in Ms. LeRoy’s position would not have been affected by the knowledge that if the loan went into default, Century might try to post charges that Ms. LeRoy would not be obliged to pay. Century’s standard practice of not checking the loan agreement before posting charges when a loan agreement was in default was not material to the risk being undertaken by Ms. LeRoy when she signed the guarantee. The risk that Ms. LeRoy did undertake when guaranteeing the loan was that if the Debtor defaulted on the loan, she would be responsible for a limited portion of the loan. If Century overcharged on account of following its standard practices instead of the actual terms of the agreement, neither the Debtor nor Ms. LeRoy would be obliged to pay those charges. The terms of the loan agreement and guarantee would govern, regardless of Century’s billing practices.
 

Given the foregoing, the Court allowed the appeal and held that the guarantee was enforceable.

CounselR.J. Robinson and A. Wong for the Appellant and and D.C. Harbottle and A. Lacroix of Harbottle And Co. for the Respondent