The Ontario Superior Court of Justice has decided in Bank of Montreal v. 9310088 Canada Inc., 2024 ONSC 2191 that there is no requirement for a secured creditor to realize on a debtor's assets before suing for the debt or pursuing guarantors, in the absence of contractual provisions imposing such requirement.
Background
Roncesvalles BQM ("BQM") used all its assets as security to obtained a loan from BMO to fund the acquisition of a business. The security agreement permitted BMO to take possession and realize on all BQM's assets in event of any default by BQM. In addition, the directors and owners of BQM guaranteed the loan in their personal capacity (the "Guarantors"). BQM subsequently defaulted on repayment, following which BMO issued a notice of intention to enforce the security. BMO, however, determined that the cost of taking possession and selling all BQM's assets would exceed the value of the assets. Consequently, BMO decided not to realize on the assets. Instead, BMO went after the Guarantors and sued for the debt by applying for summary judgment against BQM and the Guarantors (collectively the "Defendants").
Decision of the Court
The Ontario Superior Court found that the terms of the loan and the guarantee did not require BMO to take over and sell BQM's assets before suing on the debt or calling the guarantee.
The Defendants had contended that BMO was contractually required to sell BQM's assets before making a demand on the Guarantors. According to the Defendants, BMO's failure to realize on BQM's assets constituted negligence and a breach of the contractual duty of good faith. In rejecting this contention, Justice Papageorgiou ruled that the "authorization" to sell assets, as contained in the terms of the loan, was not an "obligation", and could therefore not be interpreted as a prerequisite for BMO to sue for the debt or move on the Guarantors. The Court considered the Defendants' argument an attempt to seek recognition of a new duty of care requiring a secured creditor to realize on assets before suing on a debt or pursing guarantors. The Court could not find any basis to recognize this new duty of care. The Court held that BMO's failure to realize on BQM's assets did not breach the duty of good faith, since the duty of good faith does not require parties to give up their contractual entitlement, i.e. BMO's contractual right to sue for the debt and pursue the Guarantors without first realizing on BQM's assets.
The Defendants had also argued that they defaulted on the loan because BMO failed to withdraw the monthly pre-authorized payments or failed to inform BQM that there were insufficient funds. The Court ruled that BMO was not under any obligation to "chase the Company [BQM] around" as it was BQM's obligation to ensure that they had sufficient funds to make payments as and when due.
The Court granted summary judgment in favour of BMO.
Takeaways
- For Lenders: Since the basis of this decision was the terms of the loan and guarantee, this decision is unlikely to assist a lender in avoiding an actual contractual obligation to realize on security before calling a guarantee or suing on the debt. It is therefore important for lenders, who wish to bring an action on a debt or pursue a guarantor without first realizing on the borrower's assets, to expressly reserve this right in the terms of the loan and the guarantee.
- It is also important to note that the Court's ruling that it is not the lenders' obligation to "chase the borrower around" does not relieve the lender of any legal or contractual obligation to issue a formal demand or notice on the debt.
- For Guarantors and Borrowers: Guarantors and lenders, who do not wish to be sued on a debt until a lender takes possession and sells the debtor's assets, should insist on inclusion of provisions in the terms of the loan and guarantee requiring a lender to realize on the debtor's assets as a precondition to calling the guarantee and suing on the debt. Borrowers must also note that a lender's failure to inform a borrower that the latter's account is not in good standing will not relieve a borrower of the obligation to pay a debt. Borrowers must ensure that their accounts are in good standing and payments are made as and when due.
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