Why Enforcement on Personal Guarantees Can Be so Challenging for Creditors

Why Enforcement on Personal Guarantees Can Be so Challenging for Creditors

Commercial lenders often require that the principal of the corporate borrower guarantee the loan.  Even though the guarantee is often unsecured, the lender reasons that a valuable personal residence will offer material recovery for the lender if the corporate borrower fails.  Realizing on real estate is notoriously difficult, however, and a recent decision of the Ontario Superior Court of Justice has stymied creditors’ efforts to fine-tune the process.

Historical Challenges to Recovering on Money Judgments Against Real Estate

After a creditor obtains a judgment on an unsecured personal guarantee, it is prudent to have the court issue a writ of seizure and sale against the judgment debtor.  The writ is filed with the local sheriff.  Ontario’s Execution Act identifies the sheriff’s sale process as the primary method for the enforcement of a writ of seizure and sale against a judgment debtor’s real property. The precise details of this process are aptly described as a black box.  Policies and practices governing the sale process are not published and vary across sheriffs’ offices.  To the extent that experience helps identify the rules of this process, experience shows the rules to arguably be random and irrational.

For example, in one case, the sheriff refused to close the sale of a property with the winning bidder at a sheriff’s sale auction due to a local rule not to accept winning bids at less than 60% of the lowest appraised value of the auctioned property.[1] The court upheld the sheriff’s decision as the notice of sale contained a provision that it was subject to cancellation by the sheriff without further notice for “other conditions as announced.”[2]

Perhaps owing to the uncertainty over process, and obvious downsides to selling a house through an auction at a courthouse versus a normal sales process that exposes the property to a wider market of potential buyers through a listing on a multiple listing service, sheriffs’ sales struggle to realize anything approaching market value of a judgment debtor’s property.

Development of an Alternative Enforcement Process

In 2015, an Ontario judge in Canaccede International Acquisitions Ltd. v. Abdullah established that the court could make an order for a reference remedy leading to the sale of a judgment debtor’s property as an alternative to the sheriff’s sale process where the circumstances warranted it, in the absence of binding authority or an overriding policy reason.[3] This alternative relief involved two steps.  First, a reference hearing under rule 54.02(2)(b) of Ontario’s Rules of Civil Procedure inquiring into the relevant issues of the sale of the relevant property.[4] Second, once such a hearing had taken place and determined that the judgment debtor had an interest in the property that may be sold to satisfy the judgment debt, the creditor could move for an order for sale by private contract pursuant to rule 55.06(1).[5] This alternative process allowed the property to be listed with a real estate agent in the active market resulting in a more expedient sale with a higher sale price benefitting all parties as compared with the ad hoc auction process run by a sheriff.[6]

In the recent case of BNS v. Robson,[7] a judgment creditor appropriately relying on Canaccede and cases that followed sought an order for a reference and judicial sale remedy as an alternative to the sheriff’s sale process.  Despite evidence demonstrating the benefits of the two-step process over the sheriff’s sale, the court dismissed the motion and held that evidence concerning the pros and cons of the respective processes was not sufficient to warrant the use of an alternative remedy.[8]

Summary of the Decision in Robson

The court in Robson began by following the approach used in Canaccede, where the motions judge held that in order to employ the reference and judicial sale process, there must be:[9]

1. An impediment to the employment of a sheriff’s sale or “special circumstances”; and
2. A benefit to the employment of an equitable receiver that would make their use just and equitable.

However, Valente J. in Robson noted that such “special circumstances” will be rare.  His Honour declined to follow his own decision in BNS v. Shahabiaski[10] where he had held an affidavit from counsel discussing the benefits of the judicial sale remedy over the sheriff’s sale process to be sufficient in establishing an impediment to the employment of that process.[11] In Robson, Valente J. concluded that the legislature’s explicit choice to identify the sheriff’s sale process as its preferred mechanism for the enforcement of a writ of seize and sale against real property suggested that any impediment to the employment of this process must be of a legal nature.[12]  In Robson, the judge did not accept the judgment creditor’s submission that sufficient impediment was present to justify a departure from the usual process.[13]

For a time, Canaccede provided an example of a legal impediment where the judgment creditor was prevented by Canada’s Personal Information and Electronic Documents Act (“PIPEDA”) from obtaining mortgage discharge statements sheriffs required before initiating a sale.[14] However, the Supreme Court of Canada held in a 2016 case that PIPEDA did not interfere with the court’s ability to make orders for the purpose of collecting debt owed by an individual to the organization requesting the information.[15] Accordingly, no precedent for a legal impediment justifying the special circumstances that would warrant the two-step process followed in Canaccede and Shahabiaski remains.

Back to the Drawing Board

With the decision in Robson, the only readily available mechanism for the enforcement of a writ of seizure and sale against real property is the sheriff’s sale process as identified in the Execution Act. While courts still recognize the reference and judicial sale process as a possible alternative remedy, Robson demonstrates the court’s reluctance to apply such a remedy. Absent some legislative change, judgment creditors’ would thus be prudent to materially discount any anticipated recovery on an unsecured guarantee hinging on the proceeds of sale of the guarantor’s home.  Where there is heavy reliance on the property of the guarantor, a prudent lender should consider obtaining general security or assignment of specific collateral as security so that a receiver may be appointed to run a value-maximizing sales process rather than leaving the task to the sheriff.

[1] LeBlanc v Ontario, 2021 ONCA 204 at para 3.
[2] Ibid at paras. 5 and 9.
[3] Canaccede International Acquisitions Ltd. v Abdullah, 2015 ONSC 5553 [Canaccede] at para 27.
[4] Ibid at para 7.
[5] Ibid at para 8.
[6] Ibid at para 28.
[7] BNS v Robson, 2023 ONSC 3116 [Robson] at para 11.
[8] Ibid. at para 11.
[9] Canaccede International Acquisitions Ltd. v Abdullah, 2015 ONSC 5553 at para 20.
[10] BNS v Shahabiaski, CV-21-599 (unreported). [Shahabiaski]
[11] Robson at para 5.
[12] Ibid at para 9.
[13] Ibid at para 11.
[14] Canaccede International Acquisitions Ltd. v Abdullah, 2015 ONSC 5553 at para 25.
[15] RBC v Trang, 2016 SCC 50 at para 25.

by Jeffrey Levine and Daniela Hartmann (Summer Student)

A Cautionary Note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2023