Legal Blog

What If

Creditors often settle with their debtors. They take less money than they would otherwise be entitled in exchange for the certainty of getting something, now. That works well with a lump sun payment. However, what happens when the settlement payment is to be paid over time and the debtors default? This scenario is the subject of South Holly Holdings Limited v. Nguyen and Ngoc, a 2006 Ontario Superior Court of Justice decision.

Reprise

The facts arose out of a motion to renew a 1992 writ of seizure and sale. As in the case of Adelaide Capital Corp. v. 412259 Ontario Ltd. (see October 2007 newsletter),  the debt arose out of a mortgage to Central Guaranty Trust, who assigned the mortgage to Adelaide Capital Corporation, who assigned the debt to the plaintiff.

After the mortgagee sold the mortgaged lands, there was a mortgage deficiency of $20,000. In 1998, Adelaide and the female debtor (“Wife”) agreed to settle the debt for $5,000 by payment of monthly cheques of $200. The letter agreement stated that when the last payment was made, Adelaide would send a release. Wife paid $2,100 and then defaulted.

In November 2006, after the second assignment, the plaintiff demanded payment of the original judgment debt (now $62,000 with interest at 14.25% per year) less the $2,100 paid. It took the position that since Wife had failed to meet her end of the settlement bargain, the full judgment debt was due.

Between 1998 and 2006, Wife had remarried and had some modest equity in her home that she jointly owned with her new husband, who knew nothing of this matter. Wife was stunned by the plaintiff’s  demand. To her knowledge, she owed only $2,900. However, the plaintiff indicated that it would move to seize her home if Wife did not come to the table. As the judge put it, “Ms. Tang had no legal representation. Faced with the loss of her home, and under the impression South Holly had the legal right to revert to the original judgment, Ms. Tang agreed to pay South Holly $31,000 to settle the debt.”

Wife signed minutes of settlement acknowledging that she owed $62,000 and agreeing to pay $31,000. These minutes at least impliedly stated that if she defaulted, she would be liable for the full judgment debt. The minutes also stated that Wife would consent to the plaintiff renewing its writ of seizure that had lapsed in 1998. Finally, Wife paid $15,000 towards the $31,000.

The plaintiff then applied to renew the writ. The judge demanded that Wife be allowed to attend court and make representations. After the hearing, the judge ruled.

1998 Agreement

There is no reason why a creditor cannot agree to take less than its debt. A promise to accept less money is binding on the creditor. A usual term of such an agreement is that the debtor must promptly pay the lesser agreed-upon sum. If the debtor fails to do so, the creditor can claim the original debt. When the agreement does not contain this term, a court has to interpret the agreement to determine whether the creditor can revert to the original debt.

The judge held that the agreement should be interpreted such that if Wife failed to pay the agreed amounts, then she would owe the settlement amount less the amounts that she had paid towards it (i.e. the settlement amount replaced the judgment amount). The judge held that the agreement should be interpreted against the plaintiff since Adelaide had drafted it, had superior bargaining power, was a sophisticated financial institution, and was dealing with a layperson who spoke English as a second language.  

Effect of 2006 Minutes

Once the judge determined that Wife only owed $2,900, she had to determine the effect of the 2006 minutes of settlement. The judge held that the plaintiff and Wife entered into the minutes based on a fundamental mistake. The plaintiff wrongly represented to Wife that she owed the original judgment debt. Even if the plaintiff believed its position was correct, its mistake as to whether the 1998 or the judgment debt prevailed was fundamental. The judge therefore set aside the minutes of settlement.

Interest 

The plaintiff requested interest on the $2,900 at 14.25%. After all, the debt had been owing since about 2000. However, the judge noted that the 1998 agreement made no mention of interest and therefore concluded that the agreement was to be inclusive of interest.

Since the total debt was $2,900, including interest, and Wife had paid the plaintiff $15,000, the judge ordered the plaintiff to return $12,100 to Wife.

Issue Writ 

For the sake of completeness, the judge turned her mind to whether she would grant leave to issue a writ of seizure and sale if her previous analysis was wrong and the 2006 minutes of settlement applied. She applied the criteria set out in the Adelaide Capital case and concluded that, “South Holly has failed to demonstrate the plaintiff has not, through its delay, waived its rights or otherwise acquiesced in non-payment of the judgment.” It seems that the judge felt that a couple of calls and one failed agreement over 16 years were not sufficient. The writ had been expired for 8 years and, in the meantime, to her detriment and that of her new husband, Wife had taken title to a house. These were powerful factors against the plaintiff. 

Smell Factor 

Judges are human. They do not wish to decide cases on technicalities; they want to do justice to the parties. If one party has conducted itself in a manner that is overbearing or unfair and the other party has acted in a manner that is not blameworthy, the judge will attempt to right a perceived injustice. That is what happened in this case.

The tip-off to the judge’s decision in this matter came in the first two sentences of the reasons for decision. “It will be a rare case where a judge declines to endorse a ‘consent’ order. This is one of them.”

Moral 

There are two morals to the story:

1.   Creditors should recognise when their actions may be perceived as improper and should be willing, in appropriate cases, to cut and run. The plaintiff had $15,000 of real money and should have recognised that its actions might not be considered kindly.

2.     When making an agreement with a debtor to accept a lesser, or even an appropriate, amount of money over time, the deal must always answer the question, “What if the debtor defaults in payment?” If money is paid, in what order is it applied among principal, interest, and costs? Upon default, what happens to the agreement; does it die, so that the parties revert to the original debt, or does it stay in force in place of the original debt? If it remains in force, is there interest on the unpaid portion of the amount to be paid? If there is no judgment at the time of the agreement, does the debtor consent to a judgment? May the creditor use the consent immediately or only upon default? If there is a judgment, does it simply remain in force or does it get set aside? If it gets set aside, when does it get set aside, immediately or after the last payment? The more questions that are answered in the agreement, the less the likelihood of a dispute if the debtor defaults.

Post Script

Although, to our knowledge, this case has not been appealed, one aspect of the case was referred to with approval in Adelaide Capital Corp v. Minott, a 2007 Ontario Divisional Court decision. In that decision, since Adelaide had given no reason for a delay, the motions judge refused to allow Adelaide to renew a writ of seizure and sale after a lapse of 14 years. Adelaide argued that because the limitations period for a judgment was then 20 years, it did not have to do so. The Divisional Court held that consideration of an unexplained delay was a proper exercise of discretion allowing the court to control its own process and dismissed Adelaide’s appeal.