Commercial Certainty Requires that Personal Guarantees for Loans be Enforced

Personal relationships and sophisticated business knowledge are factors that a court will consider when looking into the backstory of a legal dispute in the corporate world. Farm Credit Canada v. Chan (2021, ABCA 168) is a recent decision from the Alberta Court of Appeal that provides an example.
In this case, the two sole directors and voting shareholders of a company called Pacific Rockyview Enterprises tried to avoid their legal obligation to pay as personal guarantors of a company loan in default by arguing – unsuccessfully as it turned out – two things:1. They did not understand the personal guarantor documents they had signed; and2. They were victims of fraud, with the lender either being willfully blind or negligent in failing to realize there was a possible fraudulent transaction yet lending money anyway.

The origin of legal troubles for Ken Chan and Raymond Wan date back to 2007. In early March of that year, Pacific Rockyview (a company of which they were directors along with two women named Debbie Wong and Siu Soo) bought 160 acres of land near Chestermere, Alberta. The company paid $6.56 million for the land, buying it from a company named LMV Inc., which had bought the land just two months before for $5.04 million. On the same day that Pacific Rockyview bought the land, a private mortgage was registered on title for $3.6 million . So, based on just two purchase/sale transactions, the land value had increased by more than $1.5 million in just two months.

Pacific Rockyview subsequently applied to Farm Credit Canada for a loan to pay out the private mortgage, requesting $3.7 million. On the first credit risk assessment, the lender conditionally approved a loan of $3.7 million based solely on the purchase price of $6.56 million. However, this was conditional on an appraisal of the land’s market value and an assessment of the net worth of the company’s four directors. The subsequent appraisal set the market value at only $3.7 million. Based on that, Farm Credit Canada approved a loan of $2.65 million. They obtained net worth statements from the four directors of Pacific Rockyview and had them all sign personal guarantees before advancing the money.

The company made scheduled loan payments regularly until April of 2014, when Farm Credit sent a loan renewal notice to the directors. The previous year, Wong and Soo were removed as directors for reasons that were not made known in either the published decision of the Court of Queen’s Bench or that of the Court of Appeal. In any event, Pacific Rockyview stopped making payments, so the lender launched a foreclosure action on the land.

In July of 2017, the Court of Queen’s Bench granted the lender a Redemption Order. However, a huge deficiency was expected. The Affidavit of Value showed the outstanding debt to be $2.5 million but the appraised fair market value of the land at that time was just $890,000. Farm Credit listed the land for sale the next month, but the land failed to sell, even after the price was reduced several times over subsequent months. Farm Credit then initiated an application for a summary judgment to enforce the directors’ personal guarantees. A summary judgment is a discretionary civil judgment that is made by the court when affidavit evidence and facts before it shows no triable issue(s) and there is no prospect for a reasonable defense.

The Master who heard the Farm Credit application declined to issue summary judgment. The gist of the opposition to the application was: 1. Chan and Wan did not understand the significance of the personal guarantees they had signed; Wong and Soo had pressed them to sign as it was their duty as directors; and the lawyer overseeing the signing had not explained what a personal guarantee on a loan meant.2. The transactions regarding the land back in 2007 should have raised a suspicion of fraud in the lender’s eyes and it was willfully blind or negligent in lending the money.Consequently, Farm Credit appealed. The Court of Queen’s Bench granted the summary judgment and that was upheld on appeal to the Court of Appeal.

The presiding Queen’s Bench justice who heard the Farm Credit appeal identified two salient factors in reaching his decision:1. Chan and Wan were sophisticated businesspeople who could be expected to know the significance of what a personal guarantee meant.2. Requiring personal guarantees on loans is customary practice and enforcing them is part of ensuring commercial certainty.

The justice also paid no heed to the assertion that Farm Credit should have suspected fraud because of the transactions in early 2007; i.e., the $1.5 million discrepancy between the purchase price in early January and what Pacific Rockyview paid just two months later. The judge found nothing unusual in the lender offering a loan conditional on doing an independent appraisal to get the fair market value of the land and subsequently requiring personal guarantees from the directors after assessing their net worth.
On appeal to the Court of Queen’s Bench and on further appeal to the Court of Appeal, Chan and Wan tried to argue again that they were the victims of fraudulent misrepresentation by Wong and Soo. However, neither court bought that, not surprisingly since no evidence was led in this regard. In any event, even if Chan and Wan were the victims of fraud, the Court of Appeal ruled, then their remedy should be to pursue an indemnity claim against the two former directors. Whatever dealings took place between the directors back when the loan application was made was deemed irrelevant to the lender’s right to enforce its personal guarantees. Finally, but without further comment, the Court of Appeal noted that Wong and Soo were cousins of Chan’s wife and the parties had known each other for over 40 years.

Brian Seaman, LL.B.

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