• Post category:Court Cases

Royal Bank of Canada v. Everest Group Inc., 2018 ONSC 4973

Can a franchisee use franchise law to hold off a lender’s enforcement of its security?

In December 2015, Everest Group Inc. (“Everest”) signed a franchise agreement with Paramount Fine Foods to operate a restaurant at Yorkdale Mall in Toronto, Ontario. To finance the opening of the restaurant and the operation of the franchise, Everest signed loan and security agreements with the Royal Bank of Canada (“RBC”). The president and vice-presidents of Everest (the “Guarantors”) signed guarantees and postponements of claim in respect of the indebtedness owed by Everest to RBC (the “Guarantees”). The Guarantees provided, inter alia, the Guarantors were liable to make payment upon receiving a demand for repayment.

Everest operated the restaurant from September 2016 until October 2017. The franchise was unprofitable. In September 2017, RBC transferred Everest’s accounts to its Special Loans Group due to poor financial performance, and wrote to Everest to request specified financial information by October 11, 2017. On October 10, 2017, Everest exercised its right of rescission under the Arthur Wishart Act (click HERE for a primer on this concept) claiming the franchisor failed to deliver a proper disclosure document. Days after, the franchisor took back the franchise and Everest ceased to operate the restaurant.

Following notice that Everest had surrendered the business operations to the franchisor, RBC wrote to Everest, stating that such actions constituted a default under the lending and security arrangements between RBC and Everest. In addition, RBC made written demand on the Guarantees for payment of Everest’s indebtedness. RBC refused to hold repayment in abeyance pending the resolution of Everest’s claim against the franchisor.

RBC brought a motion for summary judgment of its claim against Everest and the Guarantors. It argued that Everest was in default of the lending agreements and RBC was entitled to judgment for the indebtedness from both Everest and the Guarantors. Everest and the Guarantors argued that since RBC’s action and their third party proceeding against the franchisor arose from the same factual matrix, the most just, expeditious and cost-effective course of action was to adjourn the motion for summary judgment until such time as it could be heard alongside a hearing of the merits of the third party proceeding. Further, the defendants argued that the terms of the loan agreements and Guarantees should be interpreted in light of RBC’s knowledge that it was financing a start-up franchise, which had a two-year right of rescission under the Arthur Wishart Act. Specifically, “cease to carry on business” clauses should not be interpreted so as to penalize the franchisee and prevent it from exercising its statutory rights in the event that it did not receive a proper disclosure document.

The Court granted RBC’s motion for summary judgment. It found that, in the fall of 2017, there were several events of default under the various loan agreements and under the Guarantees. Namely, Everest ceased to carry on business; the cessation of business operations was a material adverse change in operations; Everest did not provide financial information to RBC as it was required to do; and Everest had insufficient funds to make the loan payments to RBC. Thus, the Court concluded that Everest’s loans and Guarantees were in default and RBC was entitled to enforce its loan instruments. While the Court admired the originality of Everest’s argument, there was no basis for reading into the standard terms of the loan instruments a provision that would require RBC to forbear exercising its rights. A borrower cannot expect its lender to forbear enforcing its security in anticipation that the borrower will be successful in exercising its rights under the Arthur Wishart Act.

CounselRachel Moses of Minden Gross LLP for the Plaintiff and Adrienne Boudreau and Daniel Hamson of Sotos LLP for the Defendants