COURT OF APPEAL FOR BRITISH COLUMBIA
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Citation: |
Abakhan v. Halpen, |
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2008 BCCA 29 |
Date: 20080123
Docket: CA034664
Between:
George Abakhan
Appellant
(Respondent on Cross Appeal)
(Plaintiff)
And
Michael Halpen and Dwayne Diehl
Respondents
(Appellants on Cross Appeal)
(Defendants)
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Before: |
The Honourable Chief Justice Finch |
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The Honourable Mr. Justice Hall |
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The Honourable Madam Justice Saunders |
| K. Wedel |
Counsel for the Appellant |
| D.J. Barker |
Counsel for the Respondents |
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Place and Date of Hearing: |
Vancouver, British Columbia |
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October 16, 2007 |
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Place and Date of Judgment: |
Vancouver, British Columbia |
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January 23, 2008 |
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Written Reasons by: |
| The Honourable Madam Justice Saunders |
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Concurred in by: |
| The Honourable Chief Justice Finch The Honourable Mr. Justice Hall |
Reasons for Judgment of the Honourable Madam Justice Saunders:
[1] This appeal concerns the obligations of co-guarantors. The appellant Mr. Abakhan commenced this action against his two co-guarantors, the respondents Mr. Halpen and Mr. Diehl, to recover two sums. The first sum is an amount in contribution to monies Mr. Abakhan said he paid on his guarantee to reduce the debt owing to the creditor bank by the principal debtors. The second sum is the amount of the remnant debt he says he is owed as an assignee of the debt and security the bank held relating to the debt.
[2] In his reasons for judgment (2006 BCSC 1979) the learned trial judge ordered each respondent to pay Mr. Abakhan one-half the difference between the total amount paid by Mr. Abakhan to the bank and Mr. Abakhan’s proportionate share of the original debt. By the order, the trial judge declined Mr. Abakhan’s claim on the remnant debt except to the extent of including in his calculation of the total amount paid by Mr. Abakhan to the bank the modest sum he paid as consideration for the assignment.
[3] Mr. Abakhan appeals, saying he is entitled to recover from the respondents the entire amount of the remnant debt, in addition to the amounts ordered by the trial judge as contribution to the monies he paid on the guarantee. The respondents cross appeal, saying that the trial judge erred in finding that Mr. Abakhan had actually paid a sum of $225,000 to the bank on his guarantee.
[4] The claims arise from financial arrangements between three companies and the Bank of Nova Scotia. Mr. Abakhan, Mr. Halpen and Mr. Diehl guaranteed the debts of the companies to the bank by joint and several guarantees.
[5] Monies became owing by the companies to the Bank such that, in 2002, the Bank issued demands upon the companies. This demand was followed in October 2003 by demands upon each of the co-guarantors for principal and interest owing by the companies, then in the amount of $309,568.63.
[6] Mr. Halpen and Mr. Diehl made no payment to the Bank in response to the demands. In June 2004, Mr. Abakhan made an arrangement with the Bank settling its claim against him for $225,000. The Bank reflected a payment of that amount in a spreadsheet showing a credit of that amount to the debts of the three companies. The payment was financed by an agreement between the Bank and Mr. Abakhan that he would pay 11 equal annual payments. Six months after this arrangement was concluded, Mr. Abakhan paid the Bank $8,000 in exchange for an assignment of the debt and the security held by the bank relating to the debt, including the promissory notes and all the guarantees of the three co-guarantors. The amount of the remnant debt owing to the Bank at that time was $82,307.55.
[7] In the action Mr. Abakhan claimed for contribution to the $225,000 he said had been paid on the companies’ debt, as well as the amount of the remnant debt, $82,307.55, plus interest. In defence, the respondents Mr. Halpen and Mr. Diehl denied that Mr. Abakhan had paid $225,000 on account of the debts, saying that because Mr. Abakhan had agreed with the Bank to pay on a schedule of 11 equal annual payments, they were not obliged to contribute to him monies he was not yet out of pocket. Second, they contended that Mr. Abakhan was not able to collect the remnant debt from them because their exposure to Mr. Abakhan was limited by s. 34 of the Law and Equity Act, R.S.B.C., 1996, c. 253 to contribution to amounts that Mr. Abakhan had paid out as a guarantor over and above his proportionate share of the debt.
[8] The trial judge found that Mr. Abakhan had paid $225,000 of the companies’ debt and, joining that payment to the consideration for the assignment, held that the amount paid by Mr. Abakhan on account of the debt was $233,000. Referring to s. 34(3) of the Law and Equity Act, he concluded that the right to contribution related only to the payments over and above Mr. Abakhan’s proportionate share of the debt. Thus he subtracted $103,189.54 (one-third of the amount of debt demanded of them by the Bank), from the amount paid by Mr. Abakhan ($233,000), divided the balance equally and ordered Mr. Halpen and Mr. Diehl to each pay Mr. Abakhan $64,905 in contribution. Further, he held that Mr. Abakhan was not entitled to judgment on the assignment of the remnant debt because s. 34 of the Law and Equity Act denied him recovery based upon an assignment.
[9] In this appeal, Mr. Abakhan challenges the treatment of the remnant debt. He says that the amount of $8,000 that he paid as consideration for the assignment was not payment under the guarantee, and rather should redound to his benefit through a judgment in his favour against Mr. Halpen and Mr. Diehl for the amount of the remnant debt, in addition to the judgment against them for contribution (based upon the amount of $225,000 he paid on the guarantee). If successful, and ignoring interest, Mr. Abakhan will obtain judgment against each of Mr. Halpen and Mr. Diehl for $60,905 as contribution to his payment under the guarantee ($225,000 - $103,189 ÷ 2), and judgment against each of them on the remnant debt for $41,154 ($82,307.55 ÷ 2), for total recovery by him of $204,118. Considering that he paid $233,000, this would put Mr. Abakhan out of pocket approximately $29,000 in respect to the transactions in issue, and Mr. Halpen and Mr. Diehl each out of pocket about $102,000.
[10] By cross-appeal, Mr. Halpen and Mr. Diehl challenge the characterization of the $225,000 transaction, saying the companies’ debts have not been reduced except by such annual payments as have actually been made.
The Appeal
[11] Mr. Abakhan contends that the trial judge erred in his analysis and application of s. 34(3) of the Law and Equity Act, and so erred in failing to recognize the separate and unrelated nature of his claim under the assignment of the remnant debt.
[12] Section 34 of the Law and Equity Act provides:
34(1) Every person who, being surety for the debt or duty of another or being liable with another for any debt or duty, pays the debt or performs the duty is entitled to have assigned to him or her or to a trustee for him or her every judgment, specialty or other security that is held by the creditor in respect of the debt or duty, whether the judgment, specialty or other security is or is not deemed at law to have been satisfied by the payment of the debt or performance of the duty.
(2) The person who has paid the debt or performed the duty is entitled to stand in the place of the creditor and to use all the remedies and, if necessary and on a proper indemnity, to use the name of the creditor in any action or other proceeding at law or in equity, in order to obtain from the principal debtor, or a co-surety, co-contractor or co-debtor indemnification for the advances made and loss sustained by the person, and the payment or performance made by the surety is not pleadable in bar of any action or other proceeding by him or her.
(3) A co-surety, co-contractor or co-debtor is not entitled to recover from any other co-surety, co-contractor or co-debtor, by the means referred to in subsections (1) and (2), more than the just proportion to which, as between those parties themselves, the other co-surety, co-contractor or co-debtor is justly liable.
[Emphasis added.]
[13] In his reasons for judgment the trial judge held that Mr. Abakhan had paid $225,000 on the guarantee and that the two amounts paid by him should be viewed as a global payment:
[21] In my view, it would be an error to regard the plaintiff’s payment towards the principal debt of $225,000 on June 16, 2004, and his payment of $8,000 for an assignment of the Bank of Nova Scotia position as against the principal debtors and the guarantors on December 15, 2004, as separate transactions. On the basis of the evidence before me, I conclude that the plaintiff’s payment of $225,000 on June 16, 2004, represents an actual payment of that sum which had the effect of reducing the principal debt by that amount.
[14] The judge then addressed the effect of the assignment upon Mr. Abakhan’s relationship to his other two co-guarantors:
[24] On the issue of the effect of the assignment, I am not satisfied that by purchasing an assignment of the outstanding principal debt six months after negotiating a settlement of his own liability to the bank for the principal debt takes the plaintiff outside the scope of s. 34. What was at issue in North American v. F.B.D.B. [(1989), 58 D.L.R. (4th) 505 (B.C.C.A.)], the decision relied on by the plaintiff, was whether a creditor of the principal debtor could improve its position by taking an assignment from another creditor which had priority even though the creditor taking the assignment was, as well, a guarantor of some of the principal debtor’s liability. In holding that s. 30 did not apply and the plaintiff was not limited to recovering from Sleeping Giant only what it paid on the principal debt ($60,000), but could recover consistent with the assigned priority agreement between FBDB and BCDC 60 percent of its payment of $205,000 from Sleeping Giant for Sleeping Giant’s assets, the Court of Appeal ruled, in effect, the plaintiff was not pursuing indemnification, but was pursuing recovery of its shareholders loan to Sleeping Giant.
[25] In the present case, the plaintiff’s relationship with the principal debtors was as a guarantor, not a creditor, and his relationship with the defendants was a co-guarantor even after he settled his liability to the bank. At all material times, he retained the right of a co-guarantor to seek contribution from the defendants for any amount he paid in excess of his proportionate share and to recover against the principal debtors. This case, therefore, does not follow the exception identified in the North American Leasing decision in which it was not established the plaintiff entered the transaction as a guarantor because he was entering it as a creditor. Although the plaintiff argues that since he had been released by the bank in June of 2004 and therefore was no longer a “guarantor vis-à-vis the bank,” in my view, that does not alter his status as a co-guarantor within the meaning of s. 34. Section 34 is clearly concerned with protecting a co-guarantor against being liable to pay another co-guarantor “more than the just proportion to which, as between those parties themselves,” the former guarantor “is justly liable.”
[26] In his second amended statement of claim dated October 16, 2006, the plaintiff specifically relied on s. 34(3) of the Law and Equity Act in seeking a contribution from the defendants in relation to his payment of $225,000 against the principal debt. It is not the plaintiff’s position vis-à-vis the creditor which determines his status under s. 34(3). It is his status vis-à-vis his co-guarantors. In the present case, his status brings him squarely within s. 34 which limits his right to a contribution from the defendants in keeping with that section.
[Emphasis added.]
[15] Having rejected the claim for the remnant debt, the judge then addressed the amount of contribution to which Mr. Abakhan was entitled:
[29] The question as I see it is in relation to in what amount are the proportionate shares of the co-guarantors to be determined. Is it the sum of $309,568.63, which was outstanding when the plaintiff reduced the debt by $225,000 on June 16th, 2004, or is it the sum of $233,000, which the plaintiff has paid in total after paying $8,000 on December 15th, 2004, for an assignment of the debt and the security documents including the guarantees? As I have determined that the plaintiff cannot enforce the assigned debt against the co-guarantors beyond the limits imposed by s. 34(3), could the defendants ever be called upon to pay more than their proportionate share of $233,000? If not, then their respective contributions should be based on a one-third share of that amount. If so, then it should be based on a one-half share of the amount by which the plaintiff’s contribution exceeded his proportionate share of the principal debt.
[30] In my view, this is not a case where the debt has been extinguished. What has happened is that the plaintiff has settled his liability by paying $225,000 down on the debt, and has purchased an assignment of the balance of the debt remaining. The fact that s. 34(3) prevents him from pursuing the defendants for the full value of the remaining debt does not mean that the defendants could never be called upon to pay that amount if the plaintiff assigns it to some third party. In my view, therefore, the appropriate disposition is to order that the defendants each pay to the plaintiff $64,905 representing one half of the difference between what the plaintiff paid to reduce the debt ($233,000) and his proportionate share of the original debt, of $309,568.63 ($103,189.54), being the sum of $129,810.46.
[Emphasis added.]
[16] Two questions are entwined in the appeal: the nature of the relationship between Mr. Abakhan and his two co-guarantors, Mr. Halpen and Mr. Diehl, after Mr. Abakhan settled with the Bank and subsequently acquired the assignment; and the potential liability of the co-guarantors to a subsequent assignee of the remnant debt.
[17] For the reasons that follow, I conclude respectfully that the trial judge was correct in concluding that the settlement with the Bank did not alter the nature of the relationship between the then co-guarantors, but incorrect in concluding that Mr. Halpen and Mr. Diehl remain vulnerable to a call on the remnant debt from a third party.
[18] Both of these conclusions derive from the essential character of the original relationship between the parties, a character first laid out in very old authority which has not been altered by recent jurisprudence.
[19] A guarantee establishes a relationship of principal and surety between the original debtor and the guarantor. The terms guarantor and surety may be used interchangeably. The word surety is used in s. 34(3) of the Law and Equity Act replicated above, the reasons for judgment of the trial judge, and the submissions of the parties refer in the main to the parties as co-guarantors. The distinction in terminology makes no difference.
[20] The premise of Mr. Abakhan’s submission is that the temporal sequence by which he first settled the Bank’s claim against him and then took an assignment of the debt instruments made him a creditor of Mr. Halpen and Mr. Diehl. In my view, this submission is contrary to the weight of authority, the analysis of learned authors on the obligations of co-sureties, and the premise of the right of contribution. For example, Henry Anselm de Colyar, in his A Treatise on the Law of Guarantees and of Principal and Surety, 3rd ed. (London: Butterworths, 1897) observes at p. 341-42:
The doctrine of contribution, as has been remarked before, originally was only a doctrine of the courts of equity, and, as an equitable doctrine, it is not founded in contract, but is the result of general equity, on the ground of equality of burden and benefit. This independent equity seems to arise from the co-sureties towards each other, at the inception of the contract, so that, each of them being supposed to be equally benefited by the credit given to the principal debtor, is bound to bear an equal share of the burden which is the consideration for such credit.
[Emphasis in original.]
And, at p. 360, he observes as to the equal sharing of benefit:
[S]ureties are not only entitled to contribution from each other for monies paid in discharge of their joint liabilities for the principal, but they are also entitled to the benefit of all securities which have been taken by any one of them to indemnify himself against such liabilities.
[Emphasis added.]
[21] More recently David G.M. Marks and Gabriel S. Moss, in Rowlatt on the Law of Principal and Surety, 4th ed. (London: Sweet & Maxwell, 1982) observed at p. 151:
A surety’s right to use securities given to the creditor by the principal is limited to the recoupment of the surety’s indemnity against the principal. If the surety makes terms with the creditor and settles the debt for a lesser sum, and then obtains an assignment of the creditor’s securities, he cannot recover more from the principal than he has actually paid [citing Reed v. Norris (1837), 6 L.J. Ch. 197 at 198, 2 My. & Cr. 361 at p. 374-376].
And at p. 152-3:
Where a co-surety pays the debt, or more than his proportion of it, and the principal is insolvent, the co-surety is entitled to contribution from his fellow co-sureties to equalise the burden.
[ . . . ]
The underlying principle of equity is that the creditors’ remedies against the co-sureties should be applied so as to apportion the burden rateably. If the remedies have been applied otherwise the court will correct the inequity as between the co-sureties.
[22] Kevin P. McGuinness, in his The Law of Guarantee, 2nd ed. (Toronto: Carswell, 1996) addressed the enjoyment of a benefit obtained by a co-surety from the principal in respect to the debt, at p. 516:
A surety who obtains a counter-security from the principal to which he may look for indemnification in the event that he is called upon to pay must hold that security for the benefit of all his co-sureties. By extension, the surety must bring into the hotch-pot for distribution among all co-sureties any amount which he receives from the realization of the security, even in cases where the surety entered into his commitment on the express understanding with the debtor that the security would be for his own exclusive benefit. The right to share in a security is that of the co-sureties and therefore is not liable to be defeated by any agreement between one of their number and the principal. This right is derived from the equitable principal that equality of treatment is equitable and that sureties should in general bear the burden of the guarantee in equal proportions, and also upon the principal that one co-surety must not withdraw something from the estate of the debtor for his exclusive benefit.
[Emphasis added.]
[23] While these passages do not address the precise circumstances before us, their general theme is to the effect that one surety may not act to the disadvantage of an equitable sharing of the debt as between the sureties and, where, as here, guarantees of all three co-guarantors are assigned to one guarantor, the two non-holding guarantors are entitled to share the benefit of all the security.
[24] It is said on behalf of Mr. Abakhan that the assignment of the debt permits him to enforce the debt as a creditor. I do not agree. Whatever arrangement was made between the creditor and Mr. Abakhan did not alter the relationship between the co-guarantors. The legal expectation when the guarantees were given was that the burden of the debt guaranteed would be equalized. As I have explained above, in the event Mr. Abakhan obtains judgment for the amount of the remnant debt, that burden would not be equal – Mr. Abakhan would be out of pocket significantly less than either Mr. Halpen or Mr. Diehl.
[25] The case of North American Leasing Ltd. v. Federal Business Development Bank (1989), 58 D.L.R. (4th) 505, 37 B.C.L.R. (2d) 216 (C.A.), referred to in the passage from the reasons for judgment replicated above, is relied upon by Mr. Abakhan as establishing his entitlement to judgment on the assignment. But North American Leasing was a different case. In North American Leasing a creditor became a co-guarantor, and then improved its position as a creditor. The case concerned a contest between creditors and not co-guarantors, and is simply an example of a case in which a creditor successfully improved its position as a creditor. The words of Lord Halsbury in Quinn v. Leathem [1901] A.C. 495 at 506 are apt: “. . . a case is only an authority for what it actually decides”.
[26] It is said for Mr. Abakhan that American jurisprudence favours his claim, particularly Fowler v. Strickland, 107 Mass. 552 (S.J.C. 1871) and Manuel v. Hicks Iron Works, 216 Cal. 459, 14 P.2d 756 (Sup. Ct. 1932). In Fowler the plaintiff payee of a note, endorsed the note and then permitted the payor to negotiate it with a third party for its full amount. Upon learning that the payor would not be able to meet the note at maturity, the plaintiff purchased the note from the third party creditor for a reduced value and successfully sued the payor of the note for its face value. In my view, Fowler is unlike the circumstances before us as it does not concern competing claims in equity of co-guarantors or their relationship. In Manuel a co-guarantor purchased the promissory note establishing the debt, as well as the guarantee. He then sued the debtor and his co-guarantors, and obtained judgment against each of them (recognizing that he was obliged in that action to pay his proportionate share of the note). On the issue as to the applicable limitation period the co-guarantors argued unsuccessfully that the plaintiff’s claim was as a guarantor for contribution, and not as a creditor. While Manuel on its face appears to support Mr. Abakhan in his submission that he was entitled to sue as an assignee, the case does not address the issue of equal sharing of the benefit of security obtained by a co-guarantor, and I would decline to follow it for the proposition advanced. I prefer instead the approach taken in Merchants Discount Co. v. Federal Street Corp., 300 Mass. 167, 14 N.E.2d 155 (S.J.C. 1937). In Merchants Discount Co. the Supreme Judicial Court of Massachusetts held that a co-guarantor who acquired the guaranteed note upon part payment of the debt could not enforce the note against the co-guarantors for its full face value.
[27] I draw two conclusions. First, Mr. Abakhan was bound to act in the interests of all guarantors in relation to the assigned debt instruments and therefore may not re-assign them to the prejudice of his co-guarantors. This means, contrary to the conclusion of the trial judge, that the advantage that Mr. Abakhan gained by the settlement and assignment of the debt and security was gained for all three. Second, Mr. Abakhan is not able to seek from his co-guarantors more than their proportionate share of the monies he paid to corral the debt from the Bank.
[28] Just as the Court of Chancery in Reed v. Norris held that a surety cannot settle with a creditor and, instead of treating the settlement as payment of the debt, treat it as an assignment of the whole debt to himself, Mr. Abakhan can not settle with the Bank, obtain an assignment of the remnant debt and enforce it against his co-guarantors.
[29] I am bolstered in this conclusion by the mischief that may be worked against the principle of equal sharing of the burden of a guarantee by judgment on a remnant debt in circumstances similar to the ones here present. It is easy to conceive of a case in which the first co-guarantor to make payment to a bank may then acquire an assignment of the security instrument and, suing upon it, derive a substantial profit from the transaction. Such a result would offend the long standing principles that govern the relationship of co-guarantors.
[30] The appeal was couched in terms of the application of s. 34 of the Law and Equity Act. Section 34 limits a guarantor’s recovery to a proportionate share of the debt for which, as between the co-guarantors, they are justly liable. Here, by the time of the action, Mr. Abakhan had ensured that he would not be liable for the remnant debt, and had obtained an assignment in his favour. That is, by his action Mr. Abakhan had determined the maximum amount for which the co-guarantors would be liable to the creditor, had paid that amount himself, and is entitled to a judgment from each of his co-guarantors for one-third that amount.
The Cross Appeal
[31] In their cross appeal Mr. Halpen and Mr. Diehl contend that the trial judge erred in finding that Mr. Abakhan had paid $225,000 to the bank on account of the companies’ debts.
[32] The finding that is challenged is a finding of fact. As is well known, this Court may not interfere with a finding of fact except in limited circumstances: Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235.
[33] In my view, it was open to the trial judge, on the evidence, to find that the debt of the companies was reduced by the amount of $225,000. That this was done by a separate agreement with the Bank whereby Mr. Abakhan agreed to make 11 equal annual payments is a matter between Mr. Abakhan and the Bank. The significant aspect is the Bank’s acknowledgement that the debt guaranteed by Mr. Halpen and Mr. Diehl was reduced by $225,000, and that Mr. Abakhan was the source of that reduction.
[34] In summary, I see no basis upon which to interfere with the conclusion of the trial judge on this finding of fact.
Conclusion
[35] For the reasons here stated, I would allow the appeal to the extent of setting aside the order and substituting for it an order for judgment in Mr. Abakhan’s favour against each of the respondents in the amount of one-third of $233,000 plus interest. I would dismiss the cross appeal.
“The Honourable Madam Justice Saunders”
I AGREE:
“The Honourable Chief Justice Finch”
I AGREE:
“The Honourable Mr. Justice Hall”