A postponement agreement was held not to supersede a guarantee of a mortgage. The case of Sicotte v. 2399153 Ontario Ltd., 2021 ONCA 912, illustrates how guarantees and postponements are separate and distinct contractual obligations.
In the Sicotte case, a lender loaned $800,000 to a borrower in 2014 in exchange for a mortgage over the borrower’s property pursuant to the terms of a loan agreement. Three individuals who were officers, directors and shareholders of the borrower guaranteed the mortgage pursuant to a separate guarantee agreement in which they agreed to guarantee the borrower’s debts and liabilities “at any time owing” by the borrower to the lender. The lender maintained that the borrower was obligated to make monthly mortgage payments, had failed to do so, and was therefore in default under the loan agreement. The lender looked to enforce the guarantee against the three guarantors.
However, enforcing the guarantee was complicated by a loan to the borrower made by a second lender in 2018 for $3.9 million in exchange for a mortgage over the same property. As part of the loan with the second lender, a postponement agreement was signed by the first lender, the borrower and the second lender which provided that the loan to the second lender was to take precedence over and be fully paid in priority to the loan to the first lender, and the first lender would not, so long as the borrower was indebted to the second lender, demand payment, either in whole or in part, of the first lender’s loan. In reliance upon the postponement agreement, the second lender advised the first lender not to demand payment from the borrower or enforce the mortgage against the property until such time as the second lender was paid in full, the ultimate due date being in August 2043 or, possibly by extension, even later.
Considering the postponement agreement, the first lender commenced an action in Ontario Superior Court on the guarantee and brought a motion for summary judgment against the guarantors. The motion judge dismissed the motion, and in its place, granted an order dismissing the entire action because there were no liabilities to the first lender under the mortgage presently “owing”, the mortgage was not in default, and the guarantors’ obligations were not triggered. The motion judge’s decision therefore prevented the first lender from enforcing the guarantee until the second lender’s mortgage was paid out, a payout that might not occur until 2043, or even later if the second lender granted an extension.
The first lender appealed to the Ontario Court of Appeal. In allowing the appeal and granting summary judgment in favour of the first lender, the Court of Appeal held that the motion judge erred by failing to distinguish between a debt being “owed” and a debt being subordinated and temporarily unenforceable against the borrower, and by failing to distinguish between the obligations of the primary debtor/borrower to the first lender as a lender and those of the guarantors.
The Court of Appeal explained [at para. 16 and 17] as follows:
In my view, the motion judge’s central error is that she confused the [first lender] appellant’s rights as they relate to the underlying debt with her rights as they relate to the guarantee. The two are separate and distinct contractual obligations, and that distinction must be respected. The result arrived at by the motion judge improperly conflates the two. … The guarantors were not parties to the Postponement Agreement. Nothing in the Postponement Agreement purports to, or does, involve, much less alter, the relationship between the appellant and the guarantors. Simply put, there is nothing in the Postponement Agreement that purports to address or affect the appellant’s rights vis-à-vis the guarantors.
The Court of Appeal specifically ruled [at para. 18] that the obligation of the first lender to postpone any right in any security for the loan in favour of the second lender did not apply to the guarantee, as follows:
I do not accept that the reference in the Postponement Agreement that “the [appellant] at the request of the [second lender] [BDC] shall postpone in favour of the [BDC], all its or his right, title and interest in any security in respect of the Debt postponed by these presents” refers to the guarantee. First, the guarantee is not a security “postponed by these presents”. Second, if the BDC had intended to impact on the rights and obligations of the guarantors, it presumably would have sought their concurrence to that impact, either by making them parties to the Postponement Agreement or through the execution of a separate agreement.
The question of whether a debt is due and owing is different from a question of whether a lender can enforce payment of a debt that is due and owing. The Court of Appeal [at para. 21] discusses the difference:
The former addresses liability and the latter addresses enforcement. As this case demonstrates, just because a debt is due and owing does not necessarily mean that a lender can take steps to enforce payment of the debt. In this case, the appellant disentitled herself to enforce payment of the debt by the Borrower because of the contractual arrangements she entered into with the BDC, so as to permit the BDC to advance other monies to the Borrower. Understandably, the BDC insisted on being first in priority in terms of any enforcement rights against the Borrower (and its assets). The appellant contractually agreed to give the BDC that priority by postponing her enforcement rights as against the Borrower.
But while the first lender postponed her rights against the borrower, she did not postpone or otherwise alter her rights of enforcement against the guarantors. Contrary to the finding of the motion judge, the postponement agreement did not do so; the guarantors were not parties to it.
The Court of Appeal concluded [at para. 36] that the motion judge’s interpretation of the applicable agreements could lead to an absurd result, as follows:
In the end result, as I have already observed, the conclusion of the motion judge has the effect of precluding the appellant, not only from being repaid the monies that were borrowed from her for the next twenty-two years, but also from receiving any interest payments to her on those same funds. Indeed, the time for repayment could go beyond that point since the BDC has the right to extend its financing. It means that the appellant must wait more than two decades, not only to be repaid the monies that she lent, but even to receive any return on those monies. That is a result that drives the interpretation of the security arrangements between the appellant and the guarantors to an absurd result.
In allowing the appeal, the Court of Appeal granted summary judgment against the guarantors, each as to one-third of the outstanding debt, in accordance with the terms of the guarantee.
In light of the foregoing, the Sicotte case illustrates what makes a debt due, in contrast to what makes a debt enforceable. A guarantee and a postponement are separate and distinct contractual obligations. The Sicotte case also illustrates that a guarantor may still be liable regardless of what a borrower does. The fact that a borrower enters into a new agreement with a bank or other lender may not change the guarantor’s obligations.
Private Company Law 