Title

Communication key to avoiding family estate disputes

Description

Marlin Horst head shot

Testators can head off the threat of an estate dispute by explaining decisions to family members before death, says Toronto corporate and estates lawyer Marlin Horst.

“The worst situation is where someone passes away, and the family is shocked by the contents of the will,” says Horst, a partner with Shibley Righton LLP. “It shouldn’t be that way, but it’s that lack of communication that leads to so many family disputes.”

A recent survey carried out by TD Wealth identified family conflict as the biggest threat to estate planning, with almost half — 46 per cent — of respondents claiming it was their biggest worry. That figure was almost double any other concern, with market volatility and tax reform trailing behind at 24 per cent and 14 per cent respectively.

Digging even deeper into the issue of family conflict, 30 per cent of respondents cited beneficiary designation as the biggest point of contention. Other leading causes of conflict were non-communication and blended families, according to the survey.

The results come as no surprise to Horst, who advises his clients to forewarn family members about any decisions that depart from the norm.

“There are a few assumptions made in families that will not always hold true,” he tells AdvocateDaily.com. “So when a client wants to give a large portion to charity or differing amounts to their children, I ask them to think long and hard about it, and then to explain to their children what is going to happen and why.”

According to Horst, parents will frequently have understandable reasons for differential treatment of their children in a will, and he says the simple act of disclosing them offers a release valve for any developing sibling resentment.

“Parents may base the allocation on the actual or perceived financial need of each child,” he says.

But even equal treatment among children is no guarantee of smooth estate administration, especially in cases where one sibling feels they are more deserving than the others.

“It’s not unusual for the bulk of caregiving responsibilities for elderly parents to fall on one child, so if they get the same share as siblings who did nothing, that can cause strife, even though it’s a typical way to divide an estate,” Horst explains.

He says another common gripe can see bereaved family members divided along generational lines when testators make their bequests to their grandchildren rather than their direct offspring.

“It comes up more often in wealthier families, but the children of the deceased are offended because they see it as an indictment of their ability to be good stewards of the family wealth,” Horst says.

While he acknowledges some estate disputes are unavoidable, he says the chances are reduced when testators are open about their intentions.

“Communication is key in my mind,” Horst says. “At the same time, estate litigation is one of the fastest-growing areas of the law, and we’re going to be seeing a lot of movement in the coming years as the aging Baby Boomer generation — the wealthiest to ever live — transfer their assets to their children.”

Date_Published

2019-11-18

Title

Families face hardships when loved one dies without a will

Description

Marlin Horst head shot

Dying without a will is a selfish decision that can add financial hardship to families suffering with grief, legal experts say.

“When you don’t do anything, and there is a problem, you’re leaving it to somebody else to solve the problem, and that’s no kindness to the people that are grieving a person’s death,” says David Freedman, associate law professor at Queen’s University.

More than half of Canadians don’t have wills. Some people don’t like considering their death, while others carry misconceptions about how their estate will be distributed.

Among the big errors is assuming that all assets will go to the surviving spouse if there are children.

There’s no guarantee that will be the case anywhere in Canada. Provincial rules vary, with some allocating the first $200,000 or $300,000 to spouses, while others pass along one-third of the estate when there are children.

Common-law spouses can wind up with nothing in Ontario, Quebec, New Brunswick, Newfoundland and Labrador, and Nova Scotia, although they can be named beneficiaries outside the will for RRSPs, TFSAs or life insurance.

In Quebec, common-law couples have the same rights as those who are married by entering into civil unions.

The law says those without a will have died “intestate” with no instructions as to how their property should be divided and distributed.

That can put beneficiaries through a wild and costly maze involving the courts that can cause family friction and ill will.

“If you care about any people while you’re alive to leave them without a will you’re leaving people with such a mess,” says Tim Hewson, president of Legalwills.ca, an online service available in Canada outside Quebec.

Failing to have someone in charge of the estate can tear families apart, he said in an interview.

“Families who have previously got along just fine, if there’s no process, there’s nobody in charge, then that can cause a lot of animosity and acrimony in families.”

In an interview with AdvocateDaily.com, Toronto wills and estate lawyer Marlin Horst says, “it’s not really surprising” that so many people have put off the task.

“People generally do not want to consider their own mortality,” he says. “In particular, younger people do not believe it is an issue.”

Horst, a partner with Shibley Righton LLP, says the issue becomes more complicated in the case of blended families.

“If a person dies intestate and they are part of a blended family it becomes increasingly difficult to determine how the assets will be divided,” Horst says. “For example, are stepchildren dependents? The result may not be at all what the people involved thought would happen.

“In the modern world, the blended family issue is very important, and the law has not really caught up with that,” says Horst.

Having a will makes it simpler and less expensive to settle the estate and avoid the family arguments that sometimes end up in court, says Quebec notary Benoit Rivet.

“A lot of times, family problems will resurface with grief, and not having a will only escalates the problem. Because of this, they may end up in court simply because they can’t get along and are arguing about something that happened 30 years ago.”

He added that a notary can also ensure that the proper steps are taken to protect the heirs, who would be responsible if the estate has a lot of debts.

The forced distribution of assets wouldn’t likely reflect what most spouses would wish, and could see siblings or distant relatives inherit the estate even if the common-law couple had been in a 20-year relationship.

While Canada Revenue Agency recognizes common-law relationships after 12 months of cohabitation for taxation purposes, some provinces, including Ontario and Quebec, don’t for the purpose of inheritances.

The Western provinces of Alberta, Manitoba and Saskatchewan give common-law spouses some rights to property if they have been living together for two or three years or have a child together, said Sandra Foster, author of You Can’t Take It With You: Common-Sense Estate Planning for Canadians.

“There are many ways to define family, and only in a few provinces have the definitions of family under intestate even moved a little bit forward and become more modern,” she said in an interview.

“It could mean that the common-law spouse could end up with much less than they assumed that they would get.”

The living spouse would be forced to sue the estate for “unjust enrichment” to try to replicate how much of the family property would be available to her or him, said Freedman.

“Things can be done, but you’re playing a game of chess where every move is very expensive.”

Meanwhile, an estranged spouse of the deceased would still have a claim to the estate in some provinces since they aren’t divorced.

The lack of a will can be especially difficult when there are minor children. The court could be called upon to oversee the process and make financial decisions.

In Quebec, the surviving spouse may be entitled to half the value of family patrimony, including residences, furniture, vehicles and pension plans. The spouse would also receive one-third of the estate while two-thirds would be held for the children and be distributed automatically when they reach the age of majority, often not an ideal age to receive a large sum of money.

If the deceased does not have any children, the surviving spouse would receive two-thirds of the estate while one-third would go to the deceased’s parents and siblings.

A family living in Ontario with a surviving spouse and two children would see the spouse receive the first $200,000 and a third of the remaining estate, with the rest split equally between the children.

The guardianship of the children of single parents can be especially traumatic since a judge could have to decide the most appropriate person to care for the children without personally knowing any of the parties.

“So the children may be going to the wrong person,” said Hewson.

Horst says the solution is simple.

Date_Published

2019-10-15

Title

‘Complete autonomy’ essential when drafting a will

Description

Marlin Horst head shot

A recent Nova Scotia Supreme Court decision upholds the legal principle that people can leave their estate to whomever they want, provided they are fulfilling their support obligations, says Toronto wills and estate lawyer Marlin Horst.

“This judgment reinforces that testamentary autonomy can only be limited by legislation that specifies who is eligible for financial assistance upon the testator’s death,” says Horst, a partner with Shibley Righton LLP.

Court documents show that a man who owned several residential income-producing properties in Halifax left $50,000 each to two of his three grown daughters, and the rest of his estate to his son.

The three daughters commenced an action pursuant to the Testators’ Family Maintenance Act (TFMA), alleging their father’s will failed to make adequate provisions for them. According to the judgment, in Nova Scotia “to be a ‘dependant’ within the meaning of the definition does not require actual dependency or need. One need only be a child, widow, or widower of the testator.”

In response, court documents show, the son brought an application seeking a declaration that the TFMA provisions allowing independent adults to seek support from an estate violated s. 7 of the Canadian Charter of Rights and Freedoms, which reads: “Everyone has the right to life, liberty and security of the person and the right not to be deprived thereof except in accordance with the principles of fundamental justice.”

The judge ruled in his favour, saying that “A testamentary decision is a fundamental personal decision that is protected under s. 7.”

While this judgment is not really applicable to Ontario, since the two provinces have different rules around testamentary succession, Horst tells AdvocateDaily.com this case does provide a good summary of the case law in this area.

“In Ontario, a dependant is someone who is, or who should have been, supported in some way immediately prior to the testator’s death,” he says. “Under the Nova Scotia legislation, there is sort of a legal and a moral obligation to provide adequate support for your spouse and children, so this case revolved around what is adequate support, in a legal and moral sense.”

Horst says he is glad to see the judge found the TFMA language violated the spirit of the Charter.

“We should always start from the premise that people have complete autonomy when they draft their wills,” he says.

“So unless there’s legislation that specifically says you cannot do something, the testator has the freedom to deal with their property any way they see fit,” Horst says. “Parents sometimes disinherit their children. That happens.”

In Ontario, he says the rules around testamentary succession are tied into the Family Law Act (FLA), which stipulates that people have an obligation to provide support to dependants, which can be a spouse, a child or a parent

“The legislation in Nova Scotia is not as well defined, so I was pleased to see the judge read down the provisions, and decided to exclude non-dependent adult children from the definition of a dependant, which is already what we have in Ontario,” Horst says.

He notes the decision may lead to changes in Nova Scotia, as well as in British Columbia and Newfoundland-Labrador, which were identified in the judgment as having similar legislation.

“I think those three provinces will probably revisit their legislation at some point, to make it a little more strict and to avoid this kind of circumstance,” Horst says.

Another important difference between Ontario and Nova Scotia is that Ontario's Succession Law Reform Act provides that if one spouse dies, the surviving spouse has the choice to take what is provided under the terms of the will or to ask for the matter be dealt with under the terms of the FLA.

“For example, if one spouse died and left everything to their children and nothing to the surviving spouse, that person could make a family law claim against the estate, and it would be dealt with as if they separated on the date of death,” Horst says.

Date_Published

2019-09-18

Title

Removing executor of a will cannot be done on a whim

Description

Marlin Horst head shot

Removing the executor of a will is a difficult proposition — and for good reason, says Toronto wills and estate lawyer Marlin Horst.

Horst, a partner with Shibley Righton LLP, says it’s not enough for someone to say, “I dislike the fact that a certain person has been named executor.”

“The courts are loathe to remove an executor unless there’s something really seriously wrong with the naming of that person. It’s a fairly high standard,” he tells AdvocateDaily.com. “I think it is a good thing. The courts don’t want to intercede when someone actually gave thought to how they wanted their affairs dealt with after their death.

“The most important thing people should bear in mind is that courts will not generally step in to remove an executor unless there’s some really clear conflict of interest or some undue influence. It has to be pretty strong evidence.”

Pointing to a recent court decision, Horst says successfully arguing for the removal of an executor is a challenge.

In the case, a woman was named the executor of her grandmother’s estate, but her younger sister and mother argued in court that she should be replaced by a trust company because of “an untenable conflict of interest.”

Court was told a woman named her eldest granddaughter executor in 2008, and on June 27, 2018, one month before her passing, she reiterated her wish. The woman called a “family meeting two days later and confirmed her choice, saying her eldest granddaughter ‘had always been there for her.’”

The mother and sister argued a conflict arises out of a separate claim against the granddaughter that they filed under the Wills, Estates and Successions Act (WESA) that states, among other things, that the will made “inadequate provision” for the mother.

Court heard the claim also alleged that prior to her death, the grandmother transferred an interest in a Vancouver property she owned to the granddaughter she named as executor.

However, the court found “the administration of the estate in this case can safely be kept separate from the defence of the WESA” claim, and ruled there was no reason to replace the woman as executor.

“It is very difficult to get somebody removed as an executor because the standards are so high,” Horst says. “Here, for example, there was even a lawsuit, but because that lawsuit was not specifically in respect of the will, the court said this is not a conflict of interest.”

He says it comes down to respecting the wishes of the person who drafted the will.

“If someone put their mind to it and says, ‘I want this person to be the executor,’ the courts are going to sit back and say, ‘This person gave some thought to this, we’re going to abide by their wishes unless there is something seriously wrong with the choice they made.’”

Date_Published

2019-08-19

Title

Divorce agreements can affect estate settlements

Description

Marlin Horst head shot

Failing to fulfil your obligations in a divorce settlement can be costly, even after you pass away, says Toronto wills and estate lawyer Marlin Horst.

Noting a recent Ontario Superior Court case that awarded a deceased man’s ex-wife the $500,000 she would have been entitled to in a life insurance policy that was never purchased, Horst says it’s also important to ensure any agreement you make is clearly defined.

Court heard that when the couple divorced, the ex-husband agreed to take out a $500,000 life insurance policy naming his former wife as the irrevocable beneficiary. However, the man failed to secure the policy.

When he died, his ex-wife made a claim against his estate, and the court ruled in her favour.

“It’s the right judgment,” says Horst, partner with Shibley Righton LLP. “The requirement was to maintain life insurance and the individual failed to do that.

“Prior to his death, his ex-wife could have sued him for not maintaining a policy so that same suit can go against the estate.”

At the time the marriage broke down, there was an agreement in place that entitled the ex-wife to spousal support along with being named the beneficiary in the insurance policy, according to court documents.

At issue before the court was whether the policy was simply intended to “secure” payment of spousal support in the event the man died before his obligations were fulfilled.

However, in his summary judgment, Justice Michael Varpio ruled that the separation agreement contained no definitive language to indicate that the purpose of the policy was to ensure support was paid to completion, and “there is no genuine issue for trial insofar as the insurance obligation.”

“The judge made it pretty clear that the requirement to maintain insurance was not tied to the support,” Horst tells AdvocateDaily.com. “Often, support obligations run out at a certain point in time, but there was nowhere in the life insurance provisions stating that the life insurance could be terminated after the support obligations ran out. It was pretty obvious that there was no need for a trial on that point.”

He says the case also serves as yet another reminder to be clear when drawing up contracts.

“I think what it does say is that if you’re a family lawyer and you want to tie life insurance to spousal support, you better make it clear in the agreement,” Horst says. “There nothing here that said they were connected in any way.”

Date_Published

2019-07-05

Title

Pre-incorporation deals come with risks

Description

Marlin Horst head shot

People who put down a deposit for a property on behalf of a company that is not yet incorporated could lose that money if the buyer pulls out of the deal, says Toronto corporate lawyer Marlin Horst.

Horst, partner with Shibley Righton LLP, cites a recent Ontario Court of Appeal case where a man signed an Agreement of Purchase and Sale for three Toronto properties, stipulating that he was signing as a buyer “in trust for a company to be incorporated without any personal liabilities.”

He provided a deposit of $100,000 to secure the purchase, court documents state, but months later he advised the seller that he wanted out of the deal, and requested to have his deposit returned.

When the seller refused, the man sued, the judgment states, and the appeal court judge agreed with a lower court decision that the deposit should be forfeited.

“I think the court was correct in its decision,” Horst tells AdvocateDaily.com.

“There is a law of deposits, which is separate from what Ontario's Business Corporations Act (OBCA) says about pre-incorporation contracts,” he says.

Horst says the seminal authority on the nature of a deposit is an 1884 decision by the Court of Appeal in England. After referencing Roman law, the judge at that time stated that a deposit was “not merely a part payment, but is then also an earnest to bind the bargain so entered into, and creates by the fear of its forfeiture a motive in the payer to perform the rest of the contract.”

Under the OBCA, Horst says a contract entered into prior to incorporation is personal to the party who enters into the deal until that firm is incorporated, and the new entity assumes the responsibility.

“In this case, it appears the purchaser never incorporated the company and essentially walked away from the transaction,” says Horst.

“There’s a long line of cases that says a deposit stands to secure the performance by the party giving the deposit under the contract unless the contract says something else,” he says.

Horst says it is unrealistic to expect a contract to state that the deposit will be returned if the deal doesn’t go through for any reason.

“No vendor would agree to that,” he says, “though many contracts do stipulate the deposit will be returned because of A, B, C or D, with the agreement spelling out exactly what those conditions are.”

The judgment states that the man putting down the deposit thought his money was protected since he was signing as a buyer “in trust for a company to be incorporated without any personal liabilities.”

Horst says that wording protects the buyer from any damages incurred by the vendor because the deal didn’t go through, but that protection does not apply to the deposit.

“The court is saying the vendor could not go after the purchaser for anything in excess of the deposit when it became clear the purchase was not taking on that contract, but the deposit remains separate from that,” he says.

Horst says this judgment could be a wake-up call for people who aren’t really familiar with the law on deposits.

“There hasn’t been a case specifically about something like this for a very long time,” he says, “and I’m not sure of any other case that dealt with the interplay of s. 21 of the OBCA and the law of deposits.”

The judgment states that the section of the Act allows somebody to enter into an agreement without liability for the contract.

It reads, “If expressly so provided in the oral or written contract ... a person who purported to act in the name of or on behalf of the corporation before it came into existence is not in any event bound by the contract or entitled to the benefits thereof.”

The court referenced the section, noting “the provisions of the OBCA addressing pre-incorporation contracts do not displace the common law rules governing deposits in real estate transactions.”

Date_Published

2019-05-15

Title

Syndicated mortgage rule proposals offer protection

Description

Marlin Horst head shot

A Canadian Securities Administrators’ (CSA) plan to increase oversight of syndicated mortgages is an effort to protect ‘unsophisticated’ investors from risk, Toronto corporate lawyer Marlin Horst tells The Lawyer's Daily.

The CSA has issued a call for comments on proposed amendments that were first suggested in March 2018, The Lawyer's Daily reports.

The council for the provincial and territorial securities regulators indicates the changes will harmonize a regulatory framework for syndicated mortgage investments (SMI) and increase safeguards for investors, the publication reports.

An SMI is a way of funding commercial or residential developments with multiple investors putting their money together to target large-scale real estate projects, The Lawyer's Daily reports, adding the investment is a mortgage registered against title to the property being developed.

Horst, partner with Shibley Righton LLP, tells the publication that the mortgages are not uncommon in development, but there have been some high-profile “blow-ups.”

“They involved non-institutional, Mom and Pop-type investors who lost a lot of money when a big development went sideways,” he says. “The people who invested didn’t understand how risky their investment really was — so these regulations, if you cut right through them, are trying to protect those ‘unsophisticated’ investors from putting money in something they don’t understand.”

Horst tells The Lawyer's Daily that what is being introduced is not radical by securities regulation standards, but a big departure for the SMI market.

The publication reports that updates include proposals from a number of provinces calling for dealer registration and prospectus exemptions for larger, sophisticated institutional issuers. Among the suggested changes is a requirement that property appraisals take place within a six-month period as well as more guidance on establishing the identity of SMI issuers, says The Lawyer's Daily.

“I think what you are going to find is the more sophisticated and above-board syndicated mortgage operators are going have a bit of cost added to their business model, but not too much because they were probably already doing most of these things in terms of regulation and the like,” Horst says.

“What it should do is get rid of a lot of these developers going off on their own and putting together syndicated mortgages with people who don’t really understand what they are getting into. There will be more regulation, so it’s going to be the professionals who understand how the system works that are going to be best able to do them.”

The comment period on the proposals ends May 14, with the updates set to take effect Dec. 31, The Lawyer's Daily reports.

Date_Published

2019-04-10

Title

Properly worded shareholders agreement is a must

Description

Marlin Horst head shot

When someone dies with a life insurance policy listing a clear beneficiary, anyone with a dispute should have solid evidence to support their argument, Toronto corporate lawyer Marlin Horst tells AdvocateDaily.com.

Horst, partner with Shibley Righton LLP, cites a recent Ontario Court of Appeal case to illustrate his point.

Court documents show that in 2014, two men opened a jewelry store in London, Ont. As part of their business arrangement, they took out a life insurance policy on each other, with the company paying the premium. One of them died 16 months later, leaving the partner named as the sole beneficiary of a $250,000 policy.

The estate of the deceased partner, with the wife acting as trustee, disputed that payment. The judgment notes that she claimed that her husband verbally told her she would receive the life insurance money if he died. She also pointed to a handwritten note made by the insurance agent and attached to the policy, concerning a discussion between the two business partners about having a buy/sell agreement.

Horst explains that a buy/sell agreement stipulates that if one of the partners dies, the other one must use the insurance money to buy out the shares of the deceased shareholder. In this case, however, he says the buy/sell provision was not a formal part of the shareholder agreement.”

Instead, the policy simply named the partner as the beneficiary, without stipulating that he had to use the insurance money to buy out the shares from his former partner.

“The estate did not have any real evidence to back up its arguments that the insurance was being unjustly awarded,” says Horst. “What this case clearly shows is that when one side has really clear documentary evidence about an insurance award, the other side also needs very strong evidence to overthrow that.”

He says it is common for companies to buy life insurance for their principal shareholders, and to specify that it be used to purchase the shares of the deceased partner.

“In this instance, though, the shareholder agreement did not spell that out, and the courts can’t rely on hearsay evidence from the wife to deny that payment," Horst explains.

The handwritten notation from the insurance agent about the buy/sell agreement is of little value, he says, since the estate failed to obtain an affidavit or testimony from the agent about it.

“The fact the life insurance agent was not asked to give evidence may indicate that he wasn’t the person who could to step in and solve this issue,” Horst says.

This case shows the importance of having a properly worded shareholders’ agreement, Horst notes.

“If the idea is to have life insurance to buy out a deceased shareholder’s shares, which is very common, you better be sure you have all the agreements and language in place to show that,” he says.

While the appeal court sided with the living partner about the insurance, he says “the estate still has shares in the company, and someone has to buy those out, so it is not a complete loss for the wife.”

The final paragraph of the judgment refers to an alleged promissory note between the two partners, and an upcoming trial about it.

“We would encourage both counsel and the motions Bench to consider faster and cheaper alternatives for conducting a final adjudication on the merits of the claim,” the judgment reads.

Horst says it is evident that the appeal court judges “do not think this should be coming back to them."

"They want the two sides to reach a settlement on this issue, which will likely happen if the parties get together and reach some sort of arrangement on buying the shares,” he explains.

Date_Published

2019-03-21

Title

Font discrepancy helps expose sham trust

Description

Marlin Horst head shot

A former telecommunication executive’s attempt to shield family properties from his bankruptcy proceedings provides a textbook example of a sham trust, Toronto corporate lawyer Marlin Horst tells AdvocateDaily.com.

In a recent decision, an Ontario Superior Court judge ruled the trusts holding a farm and cottage for the benefit of the man’s children and stepchildren were void, relying in part on expert evidence that showed the font used in the text of the trust did not exist at the time he claimed to have drawn them up.

But Horst, partner with Shibley Righton LLP, says the font discrepancy was just the “icing on the cake” for the successful trustee in bankruptcy, whose motion to have the bankrupt’s interest in the properties declared assets of the estate — and therefore available to creditors — was granted.

“There were so many other things that pointed to the trust being a sham, and the decision lays those out in great detail,” he says. “There was very little evidence to suggest that the property was ever held genuinely in trust, and I think the result would have been the same, even without the font element.”

According to the decision, the two properties were bought in 1994 and 2003 respectively, long before the bankruptcy of the man, who claimed he had created the trusts one year after each purchase.

But the 1995 document relating to the cottage used a font named Cambria, which an expert testified did not exist until its creation for Microsoft in 2002, and even then, was not made publicly available until 2007. That year was also the earliest that a non-employee of Microsoft could have selected the font used in the trust document for the farm.

The man at the heart of the case was a senior executive at a telecommunications firm but ran into trouble in 2009 when he was removed from the board over payments to himself and other executives. In 2017, after the firm won a $5.6-million judgment against him, he filed for bankruptcy.

The trustee in bankruptcy moved for the declaration that the properties in the trust should be part of the estate, and the judge agreed that they were void as shams.

The judge cited a series of red flags surrounding the purchase of the two properties that suggested the trust lacked the requisite intention to create a valid trust, including the following:

the purported trust was not registered on title
mortgage documents made no reference to any trust
the bankrupt and his wife had free reign to use the cottage and paid for all related expenses without any accounting to their children
the lack of evidence that the existence of a trust was mentioned to anyone other than one of the couple’s sons, until years after it was allegedly created

Horst says it’s not uncommon for a vacation property to be held genuinely in trust.

“It doesn’t have to be acquired that way, but when there is a trust, it is usually either mentioned on title, or it’s made clear to the lender that it’s a trust property,” he says. “Neither happened in this case.”

Date_Published

2019-02-12

Title

Succession planning pays off for small businesses

Description

Marlin Horst head shot

Succession planning can ease the transition when the time comes to transfer ownership of family-run businesses, Toronto corporate lawyer Marlin Horst tells AdvocateDaily.com.

A recent report commissioned by the Canadian Federation of Independent Businesses (CFIB) found that just eight per cent of small and medium enterprise (SME) owners had a formal succession plan in place.

Around 40 per cent of the 2,500 respondents to the CFIB survey had an informal plan in place but more than half of the business owners had no plan at all for the life of the company after their departure.

That was despite evidence that 47 per cent of owners intended to leave their businesses within five years, and almost three-quarters wanted to be out within a decade. In addition, around 62 per cent intended to rely on the proceeds of an eventual sale to partially fund their retirement.

Horst, partner with Shibley Righton LLP, says it’s never too early to start planning a succession, but adds that he’s not surprised by the results of the survey.

“When I ask my clients if they’ve thought about a succession plan, the answer is usually no, because they’re not ready to retire,” he says. “But that’s not really a good answer, because you have to think about the possibility that something happens before then. You don’t want to be forced into a sale without a plan.”

Horst says implementing a succession plan can be a tough sell for owners who would rather get on with the day-to-day running of the business, a task that is frequently all-encompassing.

“They are reluctant to spend their energy on anything else,” he says.

However, he says the investment of time and money it takes to put together a formal plan is worth it, and has no shortage of scare stories to boost his argument.

“The worst circumstance is when someone falls ill or dies suddenly, and the business has to be sold on short notice. If no thought has been given to who might take over, the chances are you’re going to end up with a lower price than if you’d planned in advance,” Horst says.

Things may feel less urgent in a family business where the assumption is someone in the younger generation will take over, but Horst says the new boss may need a period of transition.

“If a family member isn’t ready to take over, then you might have to look to third parties or maybe one of the other executives,” he says. “But without a formal plan in place, it’s more difficult to discuss the transfer.”

According to the CFIB report, the organization expects a wave of Baby Boomer retirements to trigger a busy period of transfers in the coming years.

“While it is encouraging that a good proportion of business owners intend to pass their business on to a new generation, the lack of formal planning gives rise to significant risks for Canada’s competitiveness and prosperity,” research analyst Marvin Cruz wrote. “With potentially over $1.5 trillion in assets changing hands during the next 10 years, Canada cannot afford to have so many SME owners unprepared to make that transition.”

Date_Published

2019-01-23

Title

Court rules objection to trustee accounts not statute-barred

Description

Marlin Horst head shot

Executors should make sure beneficiaries are fully informed before taking compensation from the estate according to a recent decision, Toronto corporate lawyer Marlin Horst tells AdvocateDaily.com.

The case involved a disputed passing of accounts by a lawyer acting as an estate trustee on a $3-million estate.

The lawyer, who spent 10 years without formally passing accounts, argued beneficiaries’ objections to actions more than two years old should be struck out under the Limitations Act.

However, a unanimous panel of appeal court judges, sitting as the Divisional Court, upheld a lower court judge’s ruling in favour of the beneficiaries.

“By filing a notice of objection to accounts in response to an estate trustee’s application to pass accounts, a beneficiary is not commencing a proceeding in respect of a claim within the meaning of s. 4 of the Limitations Act,” Appeal Court Justice David Brown wrote for his colleagues in dismissing the appeal.

Horst, a partner with Shibley Righton LLP, says the court reached a logical conclusion. Had the ruling gone the other way, he explains that estate trustees would be able to defeat legitimate objections by simply delaying their passing of accounts.

“If the trustee was correct in his analysis, all you would have to do is to wait for long enough that any objections would become statute-barred,” says Horst, who did not act in the matter and comments generally. “Often, the passing of accounts is the first time the beneficiaries will see what has been spent, and it’s not possible to object to things that happened when you had no knowledge of them.”

The deceased in the case left a will that named the lawyer as executor and created two testamentary trusts for the benefit of her two children. The will also named her nieces and nephews as contingent beneficiaries should her own children have died before vesting in the trusts.

Although the executor never passed accounts formally for a decade, he regularly updated the testator’s children on his administration of the estate during informal meetings.

However, when a dispute with one of the children forced the lawyer to pass accounts in 2015, one the deceased's children and two of her nieces lodged objections, including over the amount of compensation the executor had taken.

The lawyer argued the regular meetings constituted consent for his conduct, and in any case, claimed the objections were statute-barred under the Limitations Act. However, a motion judge rejected his attempt to have the objections struck, and the appeal court agreed.

“One takeaway from the case is that trustees who are dealing with adult beneficiaries must make clear what the estate accounts are, and exactly what they are consenting to, particularly in terms of the trustee’s compensation,” Horst says. “If a trustee wants to take compensation before formally passing accounts, you need to make sure that you have got all the beneficiaries onside.”

Date_Published

2018-12-21

Title

Due diligence a sound strategy against fraud

Description

Marlin Horst head shot

A defrauded corporate lender who unsuccessfully tried to sue the government to cover $1.8 million in losses was always facing an uphill struggle, Toronto corporate lawyer Marlin Horst tells AdvocateDaily.com.

A better strategy for the lender would have been to conduct more stringent due diligence at the outset rather than suing the Crown after the fact, says Horst, partner with Shibley Righton LLP.

The Ontario Court of Appeal matter involved a lender who advanced $1.8 million in mortgages to a man on the grounds he was the sole owner and officer of a company. The loans were advanced after the lender checked the Ministry of Government and Consumer Services' corporate registry and found the man was listed as a director and officer.

However, it transpired that this was a complete fabrication and the man had merely filed a change order to the registration with no authority whatsoever.

The appellant argued that the ministry owed a duty of care to reasonably ensure the accuracy and reliability of the information it collected, maintained and disseminated for a fee when it knew or ought to have known that the appellant would rely upon such information.

“I would advise clients to rely on more than the corporate profiles, which are incorrect a quarter of the time,” says Horst, who was not involved in the matter and comments generally. “This is not because of anything the government has done, it’s simply because corporations don’t always update their profiles.”

This is why due diligence must rely on multiple sources, he says, including the old-fashioned method of picking up the telephone and making a call.

“In this day and age, everyone has an email or a website,” Horst says, adding the registrations branch doesn’t make judgment calls on whatever information they are given and just assumes what is being filed online is correct.

“This is different from getting a certificate under Personal Property Security Act, which is certified by the government and you could litigate if the information was incorrect,” he says of the mechanism by which property and financial instruments are registered to a specific owner.

Horst says the takeaway lesson is that there’s no substitute for multiple layers of due diligence and checking bona fides.

“It’s important to dig deeper and have several sources confirm what you have been told,” he says.

Date_Published

2018-11-26

Title

Family business disputes frequently about control, direction

Description

Marlin Horst head shot

It can be difficult for family business partners to keep emotions separate from management and operations, particularly when one generation is passing control off to the next, Toronto corporate lawyer Marlin Horst tells AdvocateDaily.com.

“Family business disputes are not as uncommon as people think, especially when you have a strong founder passing off an empire to the next generation,” says Horst, a partner with Shibley Righton LLP.

Earlier this month, an Ontario business magnate and his wife launched a lawsuit claiming their daughter, two grandchildren and others are allegedly mismanaging the family's assets and trust funds. The Canadian Press reports the suit, which has not been proven in court, seeks more than $500 million in damages.

In their statement of claim, the parents accuse their daughter and others of allegedly "having undertaken a series of covert and unlawful actions" that have been contrary to the best interests of other family members. As well, they claim their daughter led an extravagant lifestyle that has allegedly drained the company in excess of $70 million.

His daughter has denied the allegations stating, “Family relationships within a business can be challenging. My children and I love my father. However, his allegations are untrue and we will be responding formally to the statement of claim in the normal course of the court process,” the newswire reports.

Horst says a common point of friction in some companies is when elders back out to let the next generation run the family business.

“Sometimes they want to retire and pass off the day-to-day operations to their children. They step away, but they don't like what they see. It’s not so much that the younger family members are bad managers, it's just that they're taking the company in a different direction,” he says.

By stepping back, a founder of a family business may also be faced with a decrease in control — something they may never have experienced before.

“When transferring a family business to children and other family members, estate freezes are done, family trusts are set up, and it’s structured in such a way that the next generation has more control than they did before,” Horst says. “This can lead to conflict, power struggles and disputes overspending, for example.”

When family members fight over the direction or control of a company, it's a much different dynamic than it would be between unrelated business partners, he says.

“Even though the parties are adults, it can come back to dynamics like, ‘Dad always loved you best.’ These issues generally have nothing to do with the way the business is being run."

For example, Marlin points to the statement of the claim where the plaintiff says his daughter doesn't treat him with the respect he deserves.

"That's not a legal issue — that's a family issue,” he notes.

Horst, who was not involved in the matter and comments generally, says these types of family business typically don’t end up in court.

“Oftentimes, family members are willing to come to some kind of agreement to avoid the expense and public nature of litigation,” he says. “Occasionally there are people who have no interest in compromising and are willing to go down the road — despite the cost and unfavourable optics.”

The magnate said in a statement that he and his wife have made "considerable efforts" over the last two years to resolve the matter and filed the lawsuit as a last resort.

Date_Published

2018-10-29

Title

OCA clarifies s. 4 of Interest Act

Description

Marlin Horst head shot

A recent Ontario Court of Appeal ruling on interest disclosure is likely a relief to lenders as it confirms that a small violation of s. 4 of the Interest Act will not impact all interest payable under a loan agreement, Toronto corporate lawyer Marlin Horst tells AdvocateDaily.com.

The case centred around a number of loans made by one party to another — although the respondent party defaulted, it disputed the amount of interest owing.

Specifically, the respondent claimed that term in the loan agreement, requiring payment of a .003 per cent discount fee of the outstanding loans on the repayment date and every day thereafter while it remains outstanding, failed to comply with s. 4 of the Interest Act.

The Act requires that any written agreement for the payment of interest at a rate or percentage per day, week, month or any period less than one year must contain “an express statement of the yearly rate or percentage of interest to which the other rate or percentage is equivalent.”

“Section 4 provides that where an agreement fails to comply with this requirement, ‘no interest exceeding the rate or percentage of five per cent per annum shall be chargeable,’” notes the court.

According to court documents, the trial judge accepted the respondent’s arguments, and held that because the discount fee failed to comply, the appellant was entitled only to interest at the rate of five per cent per year in total — despite the fact that the loan agreements also provided for interest to accrue at 12 per cent per year before maturity, and 24 per cent thereafter in addition to the .003 per cent discount fee.

On appeal, the appellant argued that the “discount fee” is not interest, the loan agreements contain an annualizing formula that satisfies s. 4 or, alternatively, the appropriate remedy would be to limit the application of s. 4 to the discount fee rather than reduce the interest payable on the entire agreement to five per cent.

“The issue is if there’s a violation of s. 4, is all the interest payable under the loan agreement capped at five per cent in total or is it just the interest that violates the section? The appeal court said it’s just the interest that violates s. 4,” says Horst, a partner with Shibley Righton LLP.

“So that meant the 12 per cent, which increased to 24 per cent when there was an event of default, interest was not touched by the fact that s. 4 had been breached because there was disclosure in respect of that interest rate that complied with that section of the Act.”

Indeed, the appeal court agreed that while the discount fee is interest, the trial judge did err by finding that the fee contravenes the Interest Act, and by holding that all interest payable under the loan agreements should be limited to five per cent.

“The real takeaway from this is when you’ve got a number of different ways of calculating the interest for different items, if you violate s.4 for one but you comply for others, it doesn’t bring the whole interest rate down to five per cent — it’s just that particular rate that violates s. 4, which is a huge relief for lenders,” says Horst.

In this case, for example, the discount rate of .003 per cent, calculated at a yearly rate of 1.095 per cent, is well below the five per cent interest rate cap that applies when there is a violation of the Interest Act.

“So the end result is, yes, there was a violation of the s. 4, but the result of that is nothing because the interest rate was already below the five per cent cap,” says Horst.

The trial decision, says Horst, came as a bit of a shock to many people in the industry as suddenly, a violation of a small portion of the income they were earning as interest — the discount rate — would affect everything else.

“When that trial decision came out, people were panicking because they were suddenly looking at all their fees and other rates of interest to see whether they were in any way in violation because it could bring all the interest down to just five per cent,” he explains.

Following the Court of Appeal ruling, however, Horst says, “The fact that they get one small fee offside doesn’t have huge ramifications for lenders.”

Date_Published

2018-09-25

Title

Inheritance tax unlikely to benefit income inequality

Description

Marlin Horst head shot

A report that suggests the federal government could collect $2 billion annually if it implements a tax on inheritances of $5 million or more doesn’t take some unintended consequences into account, Toronto corporate lawyer Marlin Horst tells AdvocateDaily.com.

“One of the problems with an inheritance tax is that the very wealthy will structure their finances in such a way that they don't have to pay it,” says Horst, a partner with Shibley Righton LLP. “People will transfer everything to their heirs before they die or they will set up family trusts — money that will likely go offshore.”

The Canadian Centre for Policy Alternatives (CCPA) report looked at inequalities in wealth between those on the extreme high end in Canada and everybody else. Economist David Macdonald told CBC News the 87 wealthiest families in the country owned a collective $259 billion at the end of last year.

“He contrasted that with the numbers for the median Canadian family, which saw its net worth increase by just 15 per cent over the same time period — rising to $295,100 from $257,200,” the article states.

“While the group of super-rich would no doubt contain a large number of high earners, Macdonald says they are even more disproportionately made up of people who inherited much of their wealth,” it continues.

One solution to that growing income disparity, the CCPA says, is to implement an inheritance tax — a one-time fee an heir would pay upon receiving an inheritance paid out of the estate.

CBC News reports the United States, the U.K., France, Japan and South Korea all take up to 40 per cent or more of large inheritances.

Horst says Canada no longer has an inheritance tax, which was abolished for a number of reasons.

While the reintroduction of an inheritance tax would be a boon for estate lawyers, he says it won’t benefit society as a whole because it’s unlikely it would result in the $2 billion a year the CCPA estimates.

“The report made the assumption that no one would change their way of doing things. Of course, that is not the case when there's tax involved,” he says. “And wealthy people are in the best position to be able to arrange their affairs to avoid taxes.”

He says the U.S. has a 40 per cent rate but very few Americans pay that tax because most people have set up their affairs in such a way that they don't fall within the numbers to have the taxation come into play.

“If you have a family business, for example, the heirs already own the company by the time the person dies so the wealth has already been transferred to the next generation,” Horst says. “Really, the only ones you catch are people who are too lazy to do any tax planning.”

CBC News notes Harvard economics professor Greg Mankiw, who has written extensively on inheritance taxes, says “that keeping the tax on inheritances low or non-existent is the best way of encouraging investment, which boosts the economy and grows wages and government revenues over the long haul.”

Horst says the efforts that go towards mitigating taxation are not actually helping the economy in the same way as allowing wealth to grow and be invested.

“The money then goes into investments in the stock market, helping companies raise money and become more innovative,” he says. “Implementing an inheritance tax is an interesting idea that pops up every now and then, but doesn’t take into account that people will change their way of doing things.”

Date_Published

2018-08-23

Title

Blockchain technology not yet ready for mortgages

Description

Marlin Horst head shot

Proponents pushing blockchain technology to create mortgages are putting the cart before the horse, Toronto corporate lawyer Marlin Horst tells AdvocateDaily.com.

Horst, a partner with Shibley Righton LLP, says blockchain — best known as the encryption technology behind Bitcoin — is essentially a digital ledger that can be used for many other purposes beyond currency, but he’s wary of a scheme being promoted in Bermuda to create mortgages which investors could then purchase fractionally.

The Financial Post reports that the company would use local financial professionals to run “mortgage hubs” that would evaluate and underwrite them, dividing each property transaction into 100,000 Fractional Mortgage Share (FMS) units that could then be listed on the company’s blockchain-based exchange. Investors would purchase an FMS using blockchain-based tokens and would harvest principal and interest payments from the property’s owner each month.

In some cases the mortgages might also be crowdfunded with smaller fractions for investors but its setup is poorly timed and fraught with potential problems, Horst cautions.

While these mortgages are not available in Canada, promoters of the concept say it could be set up in any jurisdiction which raises a red flag, he says.

“First, the securities commissions in Canada are looking closely at blockchains because they are considered financial instruments and a form of security,” Horst says. “That means there will be regulation. We all remember the subprime mortgage crisis in 2008 and don’t want that happening again.”

Secondly, he says, investors thinking of putting funds into the Bermuda venture should step back and consider the risks.

“I practised law in Bermuda for a few years so I have a handle on how things work there,” Horst says. “The big difference is that there is no title registry. The banks simply take the title document and hold it for the term of the mortgage. They also do quite a bit of work to ensure the person they are issuing a mortgage to actually has a right to the title."

When things go wrong in that country, Horst says, it’s usually a drawn-out court battle because of the lack of a title registry.

“There’s no secured asset underpinning the mortgage just like there were with the bad assets attached to the loans in 2008,” he says. “This is an issue and we need regulation to make the rules clear to everyone on what is acceptable.”

Further, Horst says, the concept being floated would require the investors to mine the blockchain themselves in order to collect their principal and interest repayments. Mining involves adding transactions to the existing blockchain ledger of transactions distributed among all users.

“Blockchain mining requires a fast CPU and higher electricity usage. If these are small investors, you have to wonder whether they will have the resources to carry that out and still see a return,” he says.

The technology still has some flaws, he says, noting cyber currencies and blockchains remain vulnerable to hacking and theft.

While blockchain will likely become part of business and investment strategies at some point, Horst says it’s not yet ready for prime time.

“At worst, it’s a bad idea, and at best, it is an idea whose time has not yet come,” he says.

Date_Published

2018-07-16

Title

'Sandbagging' not a sure thing in Canadian courts

Description

Marlin Horst head shot

Sandbagging reflects poorly on all parties to a transaction, Toronto corporate lawyer Marlin Horst tells AdvocateDaily.com.

Horst, a partner with Shibley Righton LLP, explains that the practice arises in mergers and acquisitions when a buyer becomes aware that the seller will be unable to meet all the representations and warranties made in the agreement.

That allows the purchaser to close the deal with the intention of later suing the vendor in court for damages related to the known deficiencies since contracts normally provide indemnities for buyers in the event promises can’t be met.

Horst says examples of sandbagging are relatively rare in Canada, but the issue is growing as parties on both sides take the risk of an episode into consideration when completing transactions. Nevertheless, he says the trend is concerning.

“If vendors are making representations and warranties that are not correct, then it means they’re not doing their own internal due diligence properly,” Horst says. “If the buyer discovers something that the vendor itself doesn’t know, it shows a lack of knowledge about their own business.”

On the purchaser side, he says they are generally better served by addressing any deficiency they uncover, rather than holding it back to use as a weapon after closing.

“If a buyer finds something that’s contrary to the representations and warranties and it’s brought up before the deal closes, the chances are it can be handled with a reduction to the purchase price or some other fix,” Horst says.

In most cases, he says a risk analysis would favour dealing with these issues up front rather than turning to the courts later.

“The problem with bringing a lawsuit afterward, and litigators might not like to hear this, is that there is no certainty about what is going to happen,” Horst says. “You can have a case that you and everyone agrees is iron-clad, except for the judge, who sees it differently. You’re always taking a risk.”

In any case, Horst says buyers should be put off by the whiff of bad faith that sandbagging leaves behind.

“In the end, I think the duty to negotiate in good faith — as weak as it is in Canada at the moment — will stop the practice,” he says.

Horst explains that, historically, such a duty was never recognized at common law, but that it has developed over time, influenced by similar requirements in nations that operate under a civil code.

“The idea has crept into common law countries to lesser or greater degrees,” he says, adding that Canada is at the lower end of the spectrum.

“It has come up in a few cases with horrifically bad facts where the judges felt they had to find a way to help the aggrieved party,” Horst says. “Although there is a sense of a duty to negotiate in good faith in Canada, the jurisprudence is not very well developed here. A vendor could certainly make a case based on it, but it wouldn’t be a sure thing.”

Date_Published

2018-06-19

Title

Proposed CSA amendments to protect small investors

Description

Marlin Horst head shot

Proposed rules around syndicated mortgage investments (SMI) will help “weed out” those who are taking advantage of unsophisticated investors, Toronto corporate and commercial lawyer Marlin Horst tells The Lawyer’s Daily.

An SMI “is a method of funding commercial or residential developments where two or more people pool their money to invest in large-scale real estate projects,” the article states. “The investment is a mortgage registered against title to the property that is being developed.”

The legal publication notes the Financial Services Commission of Ontario has issued more than $1 million in fines against companies involved in the SMI market and the Canadian Securities Administrators (CSA) has put forward proposed amendments in an attempt to harmonize the regulatory framework across Canada.

Horst, a partner with Shibley Righton LLP, says the syndicated mortgage market is “ripe for taking advantage of less sophisticated investors,” who think a mortgage is a good, safe investment.

“You aren’t required to have a third-party appraisal of the property — you can right away see how you could manipulate this if you had an appraisal from a related company or entity that says the property is worth $10 million when really a third party would say it’s worth $5 million. There’s a huge difference on how protected that private mortgage would be,” he tells The Lawyer’s Daily.

Under the proposed amendments, the article states, “exemptions for filing a prospectus on SMIs with the securities regulators in some provinces would be removed. In addition, issuers of syndicated mortgages would be required to deliver property appraisals prepared by an independent, qualified appraiser.”

Horst says the proposed rules will make it more difficult for everyone in the SMI market — even the legitimate players — but “at the end of the day, it will weed out the people who are really taking advantage of unsophisticated investors.”

“The big change is taking away the prospectus exemptions, which means now [SMIs] will be like any other investment,” he says. “It takes away the ability of the less above-board syndication companies to take advantage of a small investor, which is really what the CSA is trying to protect here.”

Date_Published

2018-03-22

Title

Creditors can seize funds despite Mareva injunction

Description

Marlin Horst head shot

While a Mareva injunction is an effective tool to stop another party from dissipating their assets, a recent Ontario Court of Appeal (OCA) ruling confirms that it will not keep a creditor from being able to access those funds, Toronto corporate and commercial lawyer Marlin Horst tells AdvocateDaily.com.

In the case, one company was granted a Mareva injunction against another. However, a creditor later applied to vary the injunction, so that it could seize money in the second company’s account under a properly issued writ of seizure and sale.

While the company appealed the motion judge’s decision to vary the Mareva injunction, the OCA dismissed the appeal, noting: “... the appellant’s Mareva injunction gives it no proprietary interest in the funds in 701. It has been unable to date to prove or establish its claim in respect to account number 701. There is no basis for the third party, [the creditor], to suffer prejudice as a result.”

Horst, a partner with Shibley Righton LLP, says the ruling shows the courts will not stand in the way of a party who has received judgment from executing against funds in a bank account, even if a Mareva injunction is in place.

In addition, he says, if a party had been given security over their assets, a Mareva injunction would not stop the secured party from having the right to realize on those assets.

“If you’re looking to get a Mareva injunction, what you have to remember is that it’s a court order that stops the person you’re getting the injunction against from dissipating their funds. You’re not freezing those assets. It doesn’t mean that other creditors don’t have access to those assets — they do,” says Horst, who was not involved in the matter and comments generally.

“Of course they have to get a court order, but the court will generally grant the right to seize those assets if they are a legitimate creditor, even if there is a Mareva injunction,” he adds.

In this case, for example, the creditor took the correct procedural route, including proceeding with an action, receiving a judgment and going to the sheriff.

“At the last minute, there was a Mareva injunction in their way of realizing on the assets that were available to them. The appeal court ruled it is not going to stop a creditor from being able to access those funds,” Horst says.

While the ruling will not likely stop individuals from seeking a Mareva injunction in the right circumstances — generally, in the early stages of a lawsuit when one party thinks another may breach an agreement and they want to make sure that the assets aren’t dissipated before they have a chance to bring their action — Horst says it shouldn’t be viewed as a ‘freezing’ of the assets.

“It’s just an injunction against the specific person using those assets themselves.

“It’s important for someone getting that injunction to recognize all they’re doing is stopping the other party from using the assets, they’re not stopping the other creditors from having access,” he says.

Date_Published

2018-02-21

Title

Decision on personal guarantee a warning to credit bidders

Description

Marlin Horst head shot

Credit bidders will have to pay close attention to the wording of purchase agreements and guarantees after Ontario’s top court reduced the amount a company president owed from US$3 million to just US$250,000, says Toronto corporate and commercial lawyer Marlin Horst.

The defendant in the case provided a personal guarantee for corporate indebtedness, limited at $3 million, as part of a financing agreement with a bank. When the company’s debt was purchased by the plaintiff — a distressed debt lender — the guarantee was part of the deal.

After the company defaulted on its loans, the lender ultimately purchased its assets with a credit bid worth $34 million, $3 million less than the $37 million the defendant was owed by the company.

A motion judge ordered the former president to pay the full difference plus interest due to the guarantee, but a unanimous panel of Ontario’s Court of Appeal overturned the decision and reduced his liability to $250,000.

The court ruled that there was no evidence that $2.75-million worth of facility and forbearance fees, which were specifically excluded from the guarantee, had been included in the extinguished portion of the debt.

“The debt was treated as a whole; there was no issue of allocation,” the judges noted in their decision. As a result, they reduced the defendant’s liability under the guarantee to $250,000.

“Going forward, any creditor in this type of situation will want to make it very clear what their bid is paying off,” says Horst, a partner with the Toronto office of Shibley Righton LLP, who was not involved in the matter and comments generally.

“If it was clear that the offer was meant to go first towards fees, it would have made it more difficult for a court to rule in favour of the defendant,” he adds.

Horst says the open nature of the credit bid and the particular wording of the guarantee left the appeal court with room to find that the motion judge had erred in his original decision.

According to the appeal court ruling, the defendant saw the company’s interest rates hiked after the plaintiff bought its debt and blamed it for the difficulty he faced in servicing debts.

The former president also suspected the defendant “was engaging in a ‘loan to own’ strategy by which it consumed the equity value of the Company’s business through debt and fees with a view to ultimately owning the company,” the decision states.

“It’s one of those cases where the court seems more focused on finding a fair result, as opposed to a very technically correct legal result,” Horst says.

Date_Published

2018-01-12