If Peter Morton and Cinitel Corp. had their way, every lender
would have a distinct duty to a guarantor to permit the sale of a
defaulting borrower's assets as a going concern. In their
view, a lender should be required to maximize its recovery from the
borrower and to minimize any claim made on a guarantee.
Fulfilling that duty would also obligate a lender to keep funding a
borrower while that asset sale was negotiated and completed.
It is enough to make any lender cringe.
Fortunately, the Ontario Court of Appeal disagreed with Morton
and Cinitel's view of the lending world.
In O'Brien1, the Court faced a fairly typical
fact situation where Fifth Third Bank provided certain credit
facilities to MPI Packaging Inc., the indebtedness under which was
guaranteed by Morton and Cinitel, both of whom were related to the
Borrower2. The Borrower defaulted on its loans,
and a court-appointed receiver sold the Borrower's
assets. The Bank sued Cinitel and Morton on their guarantees
to recover the multi-million dollar shortfall following
realization, and upon a motion obtained summary judgment against
In advancing their appeal, the guarantors specifically argued
that (1) the Bank failed to act in a commercially reasonable manner
in realizing upon its security by failing to allow the sale of the
Borrower's assets as a going concern, and (2) the Bank and the
Borrower made material alterations and variations in the terms of
the Borrower's loan facilities without the consent of Cinitel
Surprisingly, Morton and Cinitel did not allege that the price
obtained by the receiver for the assets was commercially
unreasonable, but rather that the decision of the Bank to appoint a
receiver and pursue a liquidation sale rather than a sale as a
going concern was unreasonable. The Bank had a separate and
distinct obligation to the guarantors to protect and preserve the
Borrower's assets which had not been fulfilled in their view.
The Court of Appeal disagreed with the guarantors and
unanimously concluded that the Bank's conduct in realizing upon
its security was not commercially unreasonable in the
circumstances4. It held that (1) the concept of
commercial reasonableness should not be extended beyond collateral
realization, and (2) the Bank's reliance upon its strict legal
rights in the context of a commercial lending transaction between
sophisticated parties who have been represented by counsel could
not be regarded as commercially unreasonable. The Court noted
that the Bank had not entered into a formal forbearance agreement
whereby the Bank had agreed to continue to fund the Borrower while
efforts were undertaken to dispose of the Borrower as a going
concern. Consequently, there was no requirement in their view
for the Bank to continue to extend credit to the Borrower and
thereby increase its exposure when its loan agreements had
Morton and Cinitel's allegation that material variations had
been made to the Borrower's credit facilities without their
consent was also dismissed by the Court of Appeal, which found that
all of the changes were authorized by the principal loan agreements
and the guarantees. The guarantors had been intimately
involved throughout the efforts to resuscitate and sell the
Borrower's business, and were fully aware of the Bank's
contractual arrangements with the Borrower and the terms of their
It is encouraging to see that the Court of Appeal in O'Brien
held these sophisticated guarantors to the terms of the business
deal they had bargained for. The Court firmly rejected the
imposition of new duties upon lenders in making decisions about
extending credit or continuing to extend credit, and about
realization remedies to pursue. This decision should help to
close the door on inventive guarantor defences, at least for a few
1. Fifth Third Bank v. O'Brien, 2013 ONCA 5
2. The Court of Appeal's judgment does not specify the
specific relationship between Cinitel and the Borrower, and between
Morton and the Borrower. The Court simply describes them as
being intimately involved in the Borrower's contractual
arrangements. The decision of the motion judge does not
appear to have been commercially reported. Thus it is not
clear if Cinitel was a subsidiary or affiliate of the Borrower, or
if Morton was an officer or director of the Borrower.
3. O'Brien, at para. 3.
4. O'Brien, at para. 9.
5. O'Brien, at paras 12 and 13. The Court also noted
that there had been no agreement or representation by the Bank that
it would continue to support the Borrower financially while sale
efforts were undertaken (paragraph 16). The judgment suggests
that there was some discussion of forbearance, but that those
discussions were not completed and formalized into a signed
6. O'Brien, at paras 17 and 18.
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