COURT OF APPEAL SUMMARIES (July 13 – 17, 2020)JGB Collateral v. Rochon, 2020 ONCA 464 (CanLII)
[Rouleau, Hoy and Hourigan JJ.A.]
Melanie Ouanounou and Kirby Cohen, for the appellant
Jonathan P.M. Collings, for the respondent DR
Taayo Simmonds, for the respondent JR
Keywords: Contracts, Debtor-Creditor, Guarantees, Defences, Undue Influence, Evidence, Presumption of Undue Influence, Geffen v. Goodman Estate,  2 S.C.R. 353, Bank of Montreal v. Duguid (2000), 185 D.L.R. (4th) 458 (Ont. C.A.), leave to appeal allowed,  S.C.C.A. No 298, CIBC Mortgage Corp. v. Rowatt (2002), 220 D.L.R. (4th) 139 (Ont. C.A.), leave to appeal refused,  S.C.C.A. No. 526, Royal Bank of Scotland v. Etridge (No. 2),  4 All E.R. 449 (H.L), Barclays Bank plc v. O’Brien,  4 All E.R. 417 (H.L.)
The respondents, DR and her husband, JR, guaranteed the indebtedness of JRjr33, Inc. (the “Corporation”), a publicly traded Florida corporation, to the appellant, JGB Collateral, LLC. DR granted a mortgage over a property she owns in Lanark, Ontario to the appellant as collateral security for the Corporation’s indebtedness to the appellant. More than 50% of the Corporation’s outstanding shares were owned by entities controlled by JR, and DR was the Corporation’s Chairman and Chief Executive Officer.
The Corporation defaulted under the loan and filed for bankruptcy relief in the United States Bankruptcy Court. The guarantee was governed by New York law, and the New York Supreme Court found that the respondents’ guarantee was valid and enforceable. The respondents do not appear to have argued before the New York court that DR’s guarantee was the product of undue influence. The appellant, who had commenced an action in Ontario seeking possession and the subsequent sale of the Ontario property, brought a motion for summary judgment.
On a motion for summary judgment, the motion judge concluded that the mortgage on the Ontario property was not enforceable because it was the product of presumed undue influence on DR by JR, the appellant had constructive notice thereof, and it did not adequately ensure that DR received independent legal advice before she agreed to the mortgage. He dismissed the appellant’s action for enforcement of the mortgage.
Did the motion judge err in granting summary judgment dismissing the appellant’s action on the guarantee and collateral mortgage?
Yes. The motion judge erred in his articulation and application of the doctrine of presumption of undue influence. Applying the correct legal test, DR’s allegation of undue influence failed.
The presumption of undue influence is a rebuttable evidential presumption. It arises if the nature of the relationship between the debtor and the surety coupled with the nature of the transaction between them justifies, without any other evidence, an inference that the transaction was the result of the undue influence of one party over the other. When the presumption arises, there are two results. First, a lender is put on notice and inquiry. In order to protect itself from a claim that the guarantee provided to it was obtained by undue influence by the benefitting spouse or party, the lender must take reasonable steps to try to ensure that the proposed guarantor understands the transaction and is entering into it voluntarily by encouraging the guarantor to seek and obtain independent legal advice and a full explanation of the transaction. Second, if the lender has not taken the reasonable steps and the guarantor seeks to avoid liability on the guarantee or security by claiming that it was obtained by undue influence, the evidential onus is on the lender to adduce sufficient evidence to rebut the presumption.
The motion judge’s analysis was tainted by several errors. First, in determining whether the presumption arose, the motion judge considered only the nature of the relationship between DR and her husband. He failed to consider the nature of the transaction between them. While the respondents swore in their affidavits before the motion judge that DR had no financial interest in the Corporation, they acknowledged in their factums on appeal that DR had a financial interest in the Corporation. However, they argued that it was not significant, and, therefore, the motion judge’s failure to explicitly consider it was of no moment. The Court disagreed. DR had a significant interest in the Corporation (7%). Moreover, the Corporation was, in many respects, a family business. This was not a transaction which, from a business point of view, was of no benefit to DR.
In addition, while the Ontario property was a farm that had been in DR’s family for generations, JR had purchased the property from DR’s family and gifted it to DR. The property was presumably acquired with the fruits of JR’s business activities.
The relationship between JR and DR in which, DR “unquestioningly complied with any and all requests by her husband to sign documents” – when coupled with the nature of the transaction between them, did not justify an inference that the mortgage was procured by the undue influence
Even if a presumption of undue influence did arise such that the appellant was put on notice to ensure DR was entering into the transaction freely, the appellant did so. The motion judge incorrectly elevated what Rowatt and Bank of Montreal say a lender must do to protect itself from an assertion of presumed undue influence (namely, take reasonable steps to try to ensure that the proposed guarantor understands the transaction and is entering into it freely by suggesting that the guarantor seek and obtain independent legal advice and a full explanation of the transaction) to a requirement that a lender obtain a written certificate from a lawyer that the lawyer has provided independent legal advice to the guarantor.
The evidence of the appellant was that its representative inquired of both attorneys representing both JR and DR whether everything that was stated in the guarantee had been explained to them, including the statement in the guarantee that it was explained to them by an independent solicitor, and both counsel confirmed that this was the case for both JR and DR. On these facts, this inquiry was sufficient to protect the appellant from DR’s assertion of presumed undue influence.
Having found that the presumption arose, and that the appellant was not protected from DR’s allegation of undue influence by the steps it had taken, the motion judge did not go on to consider whether, on the totality of the evidence, the allegation of undue influence was proved. Essentially, he treated his finding that the appellant had not taken sufficient steps as dispositive of the question of undue influence. But the presumption of undue influence can be rebutted in the absence of independent legal advice. While DR swore in her affidavit that she believed that she did not have any alternative but to sign the loan documents, as the motion judge noted, in her cross-examination she admitted that she signed the loan documents of her own free will and that her husband did not threaten or force her to sign any of the documents. She said in cross-examination “I have a choice, yes, I do”. When pressed on the inconsistency, she said “I had no choice but to sign the document because my choice was to ignore it and just sign the thing”. She also admitted that she swore and signed her affidavit because her husband asked her to. DR’s own evidence rebutted the presumption of undue influence. The motion judge’s comment that “the assertion that [DR] was wilfully blind has merit” was not proof of undue influence.
The motion judge’s judgment was set aside, and judgment on the mortgage and guarantee was granted in favour of the appellant.