IN THE SUPREME COURT OF NOVA SCOTIA
Citation: Bank of Montreal v. Courtney 2004 NSSC 182
Date: 20041018
Docket: SH 173983
Registry: Halifax
Between:
Bank of Montreal
Plaintiff
v.
Raymond Courtney and Holly Courtney
Defendant
Judge: The Honourable Justice Glen G. McDougall
Heard: June 8, 9 and 10, 2004, in Halifax, Nova Scotia
Counsel: William J. Chisholm, for the plaintiff
Tim Hill, for the defendant
McDougall, J.:
[1] This is an action by the Bank of Montreal (“BoM”) to enforce repayment of two loans granted to the defendants, Raymond and Holly Courtney.
[2] Subsequent to the commencement of this action, Raymond Courtney made a proposal under Part III, Division I of the Bankruptcy & Insolvency Act, R.S.C. 1985, c. B-3, as amended. This proposal was accepted by the creditors. As a result, this action is proceeding against Holly Courtney (“Mrs. Courtney”) only.
[3] Prior to the commencement of trial, counsel for Mrs. Courtney indicated that the defence of non est factum was being withdrawn. On further motion of defence counsel the Court allowed an amendment to the pleadings to include alleged misrepresentation and negligent misrepresentation by the BoM either directly or indirectly through its alleged agent, Mr. Raymond Courtney.
[4] The claim of the BoM against Mrs. Courtney really boils down to whether or not Mrs. Courtney adequately understood the ramifications of joining with her husband in taking out these loans and whether or not the BoM was under any legal obligation to advise Mrs. Courtney to seek independent legal advice prior to having her sign the loan documents.
Background and Discussion
[5] Raymond and Holly Courtney are married to one another. When the loans which are the subject of this action were arranged, Mrs. Courtney was an unemployed housewife. She had previously worked outside the home, both before and after her marriage to Raymond Courtney.
[6] After completing Grade XII, Mrs. Courtney spent one year in the foundation year program at King’s University in Halifax. She then entered the work force for a time and eventually returned to Mount St. Vincent University where she was successful in obtaining a Certificate in Secretarial Studies. She worked for a short time at a local law firm then moved to Calgary where she worked for three-and-a-half to four years as a secretary. After returning to Nova Scotia she worked for short periods of time at Dalhousie University, Corporate Communications Limited and Continuing Legal Education before becoming secretary to the president of Halifax Shipyards. She remained in this position for about ten years. After leaving Halifax Shipyards she remained unemployed for a while and then went to work at Nautel. She remained there until May of 1997. Since then she has been unemployed. It is during this latter period that the BoM loans were arranged.
[7] Mrs. Courtney has never been directly involved in any of her husband’s business ventures. Raymond Courtney, along with a partner, Calvin Wadden, had previously jointly owned a business named MicroNet Information Systems Limited (“MicroNet”). MicroNet, by all accounts, was a successful, growing business. Sometime in 1999, Raymond Courtney and Calvin Wadden were persuaded to sell their shares in MicroNet to Knowledge House Inc. (“KHI”). In return for their MicroNet shares they each received 1,100,000 common shares in KHI plus warrants to acquire a further 250,000 common shares. Raymond Courtney was made a vice-president and director of KHI.
[8] Mrs. Courtney was not involved in any discussions regarding the sale of Raymond Courtney’s interest in MicroNet. Based on her evidence, she only became aware of the transaction after it had been negotiated. She recalls asking her husband whether he had received any cash as part of the deal and was surprised to hear that he had not. She felt he should have received some money considering how successful MicroNet had become. According to her, this was the total extent of her involvement in Mr. Courtney’s business affairs until he asked her to join him in taking out the series of loans at the BoM.
[9] In total, the Courtneys negotiated three separate loans with the BoM. The first was for $120,000.00. The purpose of the loan was to provide funds so Raymond Courtney could invest in a limited partnership in KHI. Raymond and Holly Courtney signed the loan documents as co-borrowers. The total cost of the limited partnership was $150,000.00. The additional $30,000.00 was provided by Mr. Courtney from his margin account at Financial Concepts Group (FCG).
[10] Mr. Courtney’s financial advisor at FCG was Mr. Eric Richards. Mr. Richards had been a personal friend of Mr. Courtney’s since attending elementary school together in Glace Bay. It was Mr. Richards who suggested contacting Mr. Gary Cooper at the BoM to discuss the loan. Mr. Courtney instructed Mr. Richards to contact Mr. Cooper on his behalf. This he did by telephone. Subsequent to this Mr. Courtney provided, by facsimile, some additional information that Mr. Cooper had requested.
[11] According to the evidence of Mr. Cooper, two loan options were presented to Mr. Courtney. He was given the choice of either borrowing the $120,000.00 on the strength of his signature alone backed by 2 to 1 security or, if he and Mrs. Courtney both co-signed for the loan, then the BoM would drop the requirement for the additional security. It was left for Mr. Courtney to decide. I accept the testimony of Mr. Cooper with regards to this initial loan and where it differs from Mr. Courtney’s recollection of events I accept Mr. Cooper’s version over Mr. Courtney’s.
[12] Based on the evidence of both Mr. and Mrs. Courtney, she initially refused to sign for the loan. After all, why she should have to sign for a loan designed to provide tax advantages for Mr. Courtney? Eventually, Mrs. Courtney acceded to her husband’s wishes. She stated that “...in the end I had to trust his judgment...” because “until then I had no reason not to.” It should be noted that Mrs. Courtney never once asked any questions nor did she raise any concerns with anyone at the BoM about the alleged pressure exerted upon her by her husband or the bank documents she was asked to sign.
[13] Mr. Cooper and Mrs. Barbara MacDonnell-Covey, another BoM representative who had met with Mr. and Mrs. Courtney when the second and third loans were processed, explained the loan documents to both parties before asking them to sign. Not once during any of these three separate meetings at the BoM office in Burnside did Mrs. Courtney ask any questions or raise any concerns about any of the three loans. Neither Mr. Cooper nor Mrs. MacDonnell-Covey who are both experienced lenders noted anything about Mrs. Courtney’s behaviour or demeanor that caused either of them to be concerned about her understanding of the loan documents or her willingness to sign them.
[14] Mrs. Courtney also admitted receiving telephone messages at home from Mr. Cooper regarding the loans. Instead of calling him back herself, she simply referred the message to Mr. Courtney so he could return the call. She did nothing to alert the bank of her alleged predicament nor did she make any inquiries or express any concerns that she might have had regarding the repayment of these loans.
[15] Mr. Courtney opted to proceed, with Mrs. Courtney’s agreement, to negotiate the first loan in both names. Although I accept that Mrs. Courtney was reluctant at least at first to act as a co-borrower, I do not accept that she was the victim of undue influence by her husband. There might have been some tension between them but it was not enough to constitute undue influence. I find that she knew what she was doing and she did it willingly without undue influence from her husband.
[16] I also do not accept that Mr. Courtney was acting as an agent of the BoM in convincing Mrs. Courtney to co-sign the loan documents. The BoM provided Mr. Courtney with an option. There were certain advantages to having the loan signed by both parties. By proceeding as they did, both Mr. and Mrs. Courtney benefited from these advantages. Even though the limited partnership was put in Mr. Courtney’s name only, Mrs. Courtney also stood to benefit if it helped to reduce her husband’s income tax liability. This would increase the couple’s after-tax household income. What is more, the loan was not intended to secure existing business indebtedness of Mr. Courtney nor to bail out a failing business. It was an investment. The value of KHI shares was increasing at the time. Mrs. Courtney stood to benefit from these investments along with her husband.
[17] The second loan from the BoM differed from the first loan in that Mrs. Courtney signed as principal borrower while Mr. Courtney signed as guarantor. The second loan was for $300,000.00. It was used to purchase additional shares in KHI. These additional shares were purchased and placed in separate accounts at FCG some in the name of Raymond Courtney and some in Holly Courtney’s name. FCG’s Richards acted on their behalf. Mrs. Courtney knew Mr. Richards because of his long association with her husband. She had also previously sought his financial advice with respect to some of her other investments.
[18] Like the first loan, the funds from the second loan were used for investment purposes. And since Mr. and Mrs. Courtney did not have a marriage contract that would preclude her from making a claim to a share of these investments in the event of a separation or divorce she stood to potentially benefit. Likewise if they remained together as husband and wife then they would both potentially benefit from the investment.
[19] Unlike the first loan, the second loan required the Courtneys to provide additional security in the form of an hypothecation of shares. They were, however, given a better rate of interest than the one charged for the first loan.
[20] The third loan was for $500,000.00 but it included only $200,000.00 in new funding. The first $300,000.00 went to pay out the second loan. Like the second loan, the purpose of the additional funding was to purchase more shares in KHI. There was a further hypothecation of shares. The interest rate remained the same as for the second loan. Like the second loan, Mrs. Courtney signed as principal borrower and Mr. Courtney as guarantor.
[21] The BoM cheque for $200,000.00 was made payable to Mr. Courtney. He deposited the money to an account which was only in his name. The money deposited to this account was used to pay for the new shares and to reimburse Mr. Courtney for some of the money he had already advanced to purchase the shares. All of the new shares were issued to Mr. Courtney. None of the new shares were put in Mrs. Courtney’s name but, for the reasons previously stated, it is my opinion that she again stood to benefit from this transaction.
[22] This series of loans, totalling $620,000.00, was made over a relatively short period of time beginning on October 27, 1999 and concluding on March 28, 2000. During this period, KHI shares were being publicly traded. Their value was increasing. Mr. and Mrs. Courtney’s net worth was also increasing. At the time of the third loan an internal BoM e-mail message to Mr. Cooper from his supervisor did express some concern with the high concentration of KHI shares in the Courtneys’ portfolio but despite this the loan was approved. Mrs. Courtney’s counsel argued that the BoM was negligent in not discussing this concern with her. I reject this argument. Although a concern of the bank, it was not something that they necessarily had to raise with the borrowers. The Courtneys were investing in a company that Mr. Courtney was directly involved in. He certainly knew the potential of this business better than the BoM. He followed his own advice. Mrs. Courtney followed suit.
[23] Mrs. Courtney, based on her education and experience, was well aware of her legal obligations regarding these loans. If she had had any reservations she did nothing to raise them with either of the two bank representatives with whom she had met prior to signing the loan documents.
[24] I accept the evidence of Mr. Cooper and Mrs. MacDonnell-Covey when they say they were not aware of any pressure exerted upon Mrs. Courtney by her husband. I also find that whatever influence was exerted upon her by her husband, it was not sufficient to constitute undue influence. Nor was it exerted by Mr. Courtney as an agent of the bank. He was not their agent.
[25] Counsel for Mrs. Courtney urged me to apply the decision of the House of Lords in Royal Bank of Scotland plc v. Etridge (No. 2) (HL (E)), [2002] 2 AC 773. This House of Lords decision makes it clear that their earlier decision in Barclays Bank Plc v. O’Brien, [1993] 1 All E.R. 417; [1993] 3 W.L.R. 786; [1994] 1 A.C. 180 (U.K.H.C.) is still good law. There are also a number of Supreme Court of Canada decisions that consider the O’Brien authority and which were decided prior to Etridge. Etridge does not overturn the decision in O’Brien; rather, it only serves to better explain it. I am not persuaded that the law has changed substantially if at all. Even if it had, I am not bound by a decision of the House of Lords.
Decision
[26] In the final analysis, I do not find that there has been undue influence exerted upon Mrs. Courtney. Furthermore, I do not find that there was anything that should have put the BoM on notice to make inquiries before allowing Mrs. Courtney to sign the loan documents. The loans were for the purpose of investing and not to secure the existing indebtedness of Mr. Courtney’s business or to prop up a faltering business. Mrs. Courtney stood to benefit from these investments. She received consideration. By co-signing the first loan the requirement for providing additional security was waived. Although the second and third loans required further security, the Courtneys were given a lower interest rate. Mrs. Courtney, along with her husband, benefited from this.
[27] It might have been more prudent for the BoM to recommend independent legal advice for Mrs. Courtney but, in the circumstances of this case, I do not think it was mandatory. Indeed, given the fact that Mr. Courtney guaranteed the second and third loans, one could have argued that he should have been the one to receive independent legal advice and not Mrs. Courtney. I make this comment not intending to suggest that it would have resulted in any different outcome.
[28] Mrs. Courtney’s defence also included a pleading that the loan agreements should be rescinded on the basis that the transactions were substantially and sufficiently divergent from ordinary standards of commercial morality to justify rescission. Suffice it to say, the evidence does not support this claim and I, therefore, reject it as a defence to this action. (See Woods v. Hubley (1995), 146 N.S.R. (2d) 97; Canadian Imperial Bank of Commerce v. Finlan (1999), 78 O.T.C. 241).
[29] Counsel for Mrs. Courtney indicated at trial that the amount claimed by the BoM had been properly calculated. The plaintiff shall therefore have judgment for this amount along with pre-judgment interest. I will leave it to counsel to prepare the order.
[30] The plaintiff is also entitled to its costs. If the parties cannot agree on an amount, I would invite counsel to contact me so they can be further heard on this issue.
J.