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Guarantors must exercise care when paying out a guaranteed debt where there is a co-guarantor

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The Ontario Court of Appeal recently considered the situation of a guarantor (otherwise known as a surety) paying out a guaranteed debt where there was a co-guarantor and the right of the guarantor to then claim contribution from the co-guarantor.  In Can-Win Leasing (Toronto) Ltd. v. Moncayo, [2014] O.J. No. 4790 , Can-Win Truck was owned by Irwin and Moncayo.  Irwin, Moncayo and Can-Win Leasing, of which Irwin was the sole shareholder, guaranteed repayment of Can-Win Truck's debt to RBC.  Irwin unilaterally took over Can-Win Truck's business from Moncayo since he was concerned about the state of Can-Win Truck's business.

 

Thereafter, Irwin arranged for Can-Win Leasing to pay down RBC's loan to Can-Win Truck.  Irwin explained at trial that he was getting a lot of pressure from RBC, which was threatening him, and he was worried that RBC was going to foreclose on the property pledged as security for the Can-Win Leasing guarantee.  However, there was no evidence led at trial to suggest that Can-Win Truck was at any time in default under the loan agreement with RBC or that RBC made a demand on Can-Win Truck or any of the guarantors.  RBC ultimately assigned the debt and the security to Can-Win Leasing.  The payment of the debt by Can-Win Leasing and the assignment of the debt to it all took place without notice to Moncayo.  Can-Win Leasing made a demand on Moncayo for his share of the payment made and Moncayo refused to pay. As a result, Can-Win Leasing sued Moncayo for his contribution.

The Court of Appeal held that Can-Win Leasing had an equitable right to recover contribution from its co-guarantors.  However, the Court then stated that "...to give rise to a right of contribution, payment must have been made by the surety in a situation where the surety was legally obliged to pay." A guarantor will only be legally obliged to pay where the borrower has defaulted in payment.  In this case, the guarantees were payable on demand and RBC had not made a demand.  However, that did not end the analysis.  The Court went on to consider whether the borrower's default was so imminent that the guarantor (Can-Win Leasing) could take unilateral action.  If default was imminent, the payment did not prejudice the co-guarantor (Moncayo).  If default was not imminent, then the payment was voluntary and the co-guarantor (Moncayo) would not be obliged to contribute.

The trial judge found that Irwin had not acted in good faith in dealing with Can-Win's financial affairs.  In addition, the trial judge found that the payment to RBC was done in Irwin's own interest and not in Can-Win Truck's interest and that Can-Win Truck's business was salvageable.  In light of the trial judge's findings and the fact that no demand was made on the guarantee, the Court of Appeal upheld the trial judge's decision that Can-Win Leasing could not seek contribution from Moncayo.

The moral of the story:  if you are a guarantor with someone else and you intend to pay out the guarantee, ensure that there has been a written demand by the lender before you pay.  If there has not been a written demand, look to see if there has been a verbal demand or if the borrower's business is doomed to fail.  In those circumstances, it is possible that a court will find that you acted properly.  Finally, in all cases, give notice of your intention in writing to your co-guarantors that you intend to try to settle the debt.  This way, co-guarantors can raise any objections that they have early on in the process and you can try to resolve any disputes outside of the court process.  For more information, please contact Robert De Toni at 613-563-6696 or by email at rob@mpottawa.com.

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