Executive Summary: Key Legal and Evidentiary Issues

• Dispute centered on the consequences of borrower default under a commercial loan agreement, including the lender’s entitlement to future interest and enforcement costs.

• Interpretation of contractual clauses, specifically prepayment and acceleration, was pivotal to determining the parties’ rights and obligations after default.

• Applicability of statutory protections under section 17 of the Mortgages Act and section 8 of the Interest Act was contested, with the court finding s. 17 inapplicable and s. 8 limiting interest on arrears.

• Borrowers’ conduct, including secret sale of collateral and delayed remittance of proceeds, was scrutinized for bad faith and compliance with contractual notice requirements.

• Reasonableness of lender’s enforcement costs and the effect of settlement privilege on evidence from payout negotiations were examined.

• The court ultimately determined the net amount owing, including principal, interest, broker fees, and costs, less credits for the bus sale and security deposit.

Facts of the case

Redback Tours Inc., a bus charter company, sought financing to purchase a new passenger coach bus after suffering financial setbacks, including the impact of the Covid-19 pandemic and mechanical failures with its main bus. Due to poor credit and past defaults, Redback and its directors, Paul and Angela Ferris, entered into a high-risk loan agreement with Canadian Equipment Finance & Leasing Inc. (CEFL). The loan required a substantial down payment, a high annual interest rate of 15.25%, personal guarantees from the Ferrises, and a collateral mortgage on their residence. The total amount to be repaid under the agreement was $829,532.40 over five years, with an initial loan of $559,250.

The loan agreement and early issues

The agreement was executed on January 22, 2024. Redback’s first payment was returned for non-sufficient funds but was later paid. The company also failed to keep up with insurance premium payments and did not notify CEFL of arrears, as required by the agreement. Although these issues were eventually resolved, further payment delays occurred, including a late HST recovery payment. By mid-2024, Redback sought a payout quote to potentially restructure its finances, but negotiations with CEFL did not result in an agreement.

Default and sale of collateral

After failed negotiations, Redback ceased compliance with the loan terms and, without notifying CEFL, secretly sold the bus to a third party. CEFL discovered the sale only after the bus was registered in Alberta and initiated enforcement actions, including issuing default notices and attempting repossession. The proceeds from the sale were eventually remitted to CEFL, but only after significant delay and under pressure.

Key contractual and statutory issues

The dispute centered on whether CEFL was entitled to claim the full amount of future interest and costs following default, and whether statutory provisions such as section 17 of the Mortgages Act (which caps interest after default on mortgages) and section 8 of the Interest Act (which limits interest on arrears) applied. The court distinguished between the prepayment and acceleration clauses in the agreement, finding that the acceleration clause applied due to default, allowing CEFL to demand all remaining payments. The prepayment clause, which would have required mutual agreement, was not triggered.

Section 17 of the Mortgages Act was found inapplicable because the agreement was a commercial loan secured by a collateral mortgage, not a traditional mortgage. Section 8 of the Interest Act did apply, capping interest on arrears at the contract rate of 15.25% but not permitting a higher rate.

Costs and conduct

The court reviewed the reasonableness of CEFL’s enforcement costs, ultimately finding them justified given the borrowers’ repeated defaults and deceptive conduct, including the secret sale of the bus. The court also addressed whether evidence from payout negotiations was protected by settlement privilege, concluding that the issue did not affect the outcome.

Ruling and outcome

The court declared that Redback Tours and the Ferrises were indebted to CEFL for a net amount of $192,615.00, after accounting for the sale proceeds of the bus and the security deposit. CEFL was also awarded $45,000 in court costs. The judgment favored CEFL, reflecting the borrowers’ multiple breaches and the enforceability of the lender’s contractual rights, including reasonable enforcement costs and interest at the agreed rate. The total monetary award in favor of CEFL was $192,615.00, plus costs of $45,000, as the successful party in the litigation. The court found the borrowers’ arguments regarding statutory interest caps and bad faith unpersuasive, and enforced the terms of the commercial loan agreement as written.