September 28, 2017
A recent decision of the Alberta Court of Queen’s Bench has confirmed that a contract of guarantee is an independent contract between creditor and guarantor separate and apart from a borrower, and any duties that a creditor or guarantor may have in relation to that contract will depend on their contractual obligations. As such, any claims of a guarantor in respect of any improvident realization of the borrower’s assets are to be assessed or determined in accordance with the express terms of the guarantee.
The decision in Luthra involved an application for summary judgment by a lender (the “Lender”) against three individual guarantors (the “Guarantors”) for payment under their guarantees. In a very common scenario, the Lender had made loans to Trimove Inc. (the “Borrower”) to buy out leased equipment and to provide working capital (the “Loan”).As security for the Loan, the Lender obtained a promissory note and a security agreement on all present and after-acquired property from the Borrower. The Loan was further supported by guarantees given by each of the Guarantors (the “Guarantees”).
The Guarantees contained all of the typical provisions, including a waiver of the Guarantor’s right to rely on any legislation limiting liability, and provided that no exercise of discretion or any neglect, omission, error or default by the Lender relating to any of the foregoing would affect, limit or terminate his or her obligations.
After the Borrower defaulted on its loans to another creditor, the court appointed receiver (the “Receiver”) sought approval to sell the serial numbered assets (the “Assets”) of the Borrower at auction and one asset via private sale. The Receiver was of the opinion that the auction would provide an option to realize on the Assets which would minimize preservation costs to the estate, the private sale and the sale of the Assets “by public auction, by way of straight commission auction proposal” was approved. After the completion of the auctions, the net recovery to the Receiver from the Assets was considerably lower than the gross sales proceeds, after having taken into account the various sales costs. The Lender then claimed the recovery shortfall from the Guarantors.
In defending the action, the Guarantors attempted to rely on s. 66(1) of the Personal Property Security Act (the “PPSA”) which states that rights, duties and obligations arising under a security agreement, the PPSA or any applicable law shall be exercised or discharged in a good faith and commercially reasonable manner. In the court’s view, the Guarantors failed however to provide any explanation of how they relied on this section as the Guarantees did not give them any property or security interest in the Assets which were security for the Loan which they guaranteed. In concluding that Section 66(1) did not apply, Justice Veit noted that the characterization of the nature of a guarantee is important because the duties owed to a guarantor were likely to be different from those owed to the owner of secured property.
In Luthra, the court focused on the four corners of the Guarantees, and emphasized that the Lender’s legal claims depended on their contract with the Guarantors and, similarly, the Guarantor’s claims depended on their contractual obligations. Nevertheless, Justice Veit acknowledged that, even in a contract case based on a written guarantee which contained no term for equitable relief, the court could relieve a guarantor from obligations if evidence established that the plaintiff had acted recklessly in disposing of pledged property. The Guarantors had not however provided any evidence that the sale was not conducted in a commercially reasonable manner.
Justice Veit held that the mere fact that the auction sale achieved proceeds of sale far less than anticipated was not, by itself, proof that the Receiver acted negligently. The Receiver’s consideration of the type of asset it had to sell, its determination that auction sales were the most effective way of dealing with that type of asset, and its receipt of 5 auction proposals were all expressly cited by the court as evidence to the contrary. Further, the Guarantors had notice of the Receiver’s proposal relating to the auction and had the opportunity to challenge the proposal but failed to do so.
In granting the Lender’s application for summary judgment, the court concluded that the contractual obligations of the Guarantors and their failure to meet such obligations were clear. Justice Veit cited authority for the principle that where a guarantor signs a guarantee which includes a clear provision that releases a secured party, as against a guarantor, from the duty to realize on security held in a commercially reasonable manner pursuant to the PPSA, then a guarantor will be deemed to have given up its right thereafter to hold the secured party to that standard.
Luthra confirms that the Guarantees established a clear divide between the Lender’s obligations to the Borrower and their obligations to the Guarantor under the Guarantees, and therefore the Guarantors could not rely on any perceived lack of fairness in relation to the Borrower to relieve them of their obligations.
 Agricultural Financial Services Corporation v. Luthra, 2017 ABQB 403 [“Luthra”]
 Personal Property Security Act, RSA 2000, c P-7.
 Supra note 1, at para 42.
 Ibid at paras 54 and 55.
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