A recent Ontario Court of Appeal decision reviewed the doctrine of the presumption of undue influence in the context of a collateral loan default in a case where a wife claimed that she only agreed to the transaction because her husband told her to do so.
What Happened?
A husband and wife guaranteed the indebtedness of a publicly traded Florida corporation (the “Florida corporation”) to a Delaware limited liability company (the “Delaware company”). The wife granted a mortgage over a property she owned in Lanark, Ontario to the Delaware company as collateral security for the Florida corporation’s indebtedness to the Delaware company.
The Florida corporation defaulted under the loan and filed for bankruptcy relief in the United States Bankruptcy Court. The guarantee was governed by New York law, and the New York Supreme Court found that the guarantee was valid and enforceable.
More than 50% of the Florida corporation’s outstanding shares were owned by entities controlled by the husband, who was also the Florida corporation’s Chairman and Chief Executive Officer.
The Delaware company commenced an action in Ontario seeking possession and the subsequent sale of the Ontario property.
Lower Court Decision
The motion judge concluded that the mortgage on the Ontario property was not enforceable because it was the product of presumed undue influence on the wife by the husband; the judge also found that the Delaware company had constructive notice thereof, and that it did not adequately ensure that the wife received independent legal advice before she agreed to the mortgage. The judge dismissed the Delaware company’s action for enforcement of the mortgage.
The motion judge came to this conclusion after finding that the essential facts supporting a presumption of undue influence were met. He stated:
“This is a classic case of a spouse who unquestioningly complied with any and all requests by her husband to sign documents related to his business.”
The judge also noted that there was no indication that the wife had received legal advice independent from that given to the husband.
He concluded the wife had established, on a balance of probabilities, that she had been subject to undue influence by her husband at the time she agreed to the mortgage conditions.
What is “Presumed Undue Influence”?
The Court of Appeal began by explaining that the doctrine of undue influence and its evidentiary companion, the presumption of undue influence, is a rebuttable evidential presumption.
The court stated that it arises if the nature of the relationship between the debtor and the surety coupled with the nature of the transaction between them justifies, without any other evidence, an inference that the transaction was the result of the undue influence of one party over the other. The court then explained that when the presumption arises, there are two results, as follows:
1) A lender is put on notice and inquiry. In order to protect itself from a claim that the guarantee provided to it was obtained by undue influence by the benefitting spouse or party, the lender must take reasonable steps to try to ensure that the proposed guarantor understands the transaction and is entering into it voluntarily by encouraging the guarantor to seek and obtain independent legal advice and a full explanation of the transaction.
2) If the lender has not taken the reasonable steps and the guarantor seeks to avoid liability on the guarantee or security by claiming that it was obtained by undue influence, the evidential onus is on the lender to adduce sufficient evidence to rebut the presumption.
The court then stated:
“The judge must decide on the totality of the evidence whether the allegation of undue influence has been proved. The nature and ingredients of the impugned transaction between the benefitting spouse or party and the other party are essential factors in deciding both whether the evidential presumption has arisen and whether the lender has rebutted it. If the judge concludes that there was no undue influence, the presumption is rebutted and does not apply”.
Court of Appeal Decision
Applying the principles of presumed undue influence to the case, the court found that the motion judge erred in his application of the doctrine.
First, in determining whether the presumption arose, the court found that the motion judge had considered only the nature of the relationship between the husband and wife and had failed to consider the nature of the transaction between them. The court found that the wife benefited from the transaction and that the relationship between the husband and wife did not justify an inference that the mortgage was procured by undue influence.
Second, the court stated that even if a presumption of undue influence had arisen, the Delaware company had taken measures to ensure that the wife was entering into the transaction freely. The court found that the inquiries made by the Delaware company were sufficient to protect it from the wife’s assertion of presumed undue influence.
Third, the court found that the motion judge did not go on to consider whether, on the totality of the evidence, the allegation of undue influence had been proven. The court stated:
“While [the wife] swore in her affidavit that she believed that she did not have any alternative but to sign the loan documents, as the motion judge noted, in her cross-examination she admitted that she signed the loan documents of her own free will and that her husband did not threaten or force her to sign any of the documents. She said in cross-examination “I have a choice, yes, I do”. When pressed on the inconsistency, she said “I had no choice but to sign the document because my choice was to ignore it and just sign the thing”. She also admitted that she swore and signed her affidavit because her husband asked her to. [The wife]’s own evidence rebuts the presumption on which she seeks to rely.”
As a result, the court found that the presumption of undue influence had been rebutted and allowed the appeal.
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