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Undue influence introduction
Undue influence refers to a situation in which somebody is pushed into taking an action, usually with respect to their property, rather than under their own uninfluenced decision. The action does not a result of their true wishes or objectives, rather it is those of the influencer.
It is an equitable principle made use of to set aside particular transactions. While initially used on wills, it has also been found in various other transactions such as:
- powers of attorney; and
- a spouse providing a collateral mortgage on property owned by the spouse to support that spouse’s guarantee of a business loan taken out by the other spouse or a company owned by one or both spouses.
It is especially important to think about the concept of undue influence and its impact if suspected. This is especially true when the person being influenced is a senior when dealing with estates and wills.
In this Brandon’s Blog, I look at a recent decision of the Court of Appeal for Ontario in reviewing a lower court’s decision involving the presumption of undue influence.
Presumed undue influence
The decision of the Court of Appeal for Ontario in JGB Collateral v. Rochon, 2020 ONCA 464 (CanLII) was released on July 17, 2020. Mr. Rochon was Chairman and CEO of a publicly-traded Florida corporation (the “Company” or the “Corporation”). He was also a significant shareholder. The Company borrowed from a New York-based lender. As a condition of the loan, Ms. Rochon was required to give her personal guarantee to the lender for this debt, supported by a collateral mortgage over a farm property she owned in Lanark, Ontario. She did so.
The Corporation defaulted on the loan and filed for bankruptcy protection in the United States Bankruptcy Court. Mrs. Rochon’s guarantee was governed by New York State law, and the New York court decided that her guarantee was valid and enforceable. The lender used that finding to begin an action in Ontario seeking the possession and sale of the Ontario property.
The Ontario lower court decided that the collateral mortgage on the Ontario property was not enforceable due to the fact that:
- It was the result of presumed undue influence on Mrs. Rochon by Mr. Rochon.
- The lender had notice thereof.
- It did not sufficiently ensure that Mrs. Rochon got independent legal advice prior to providing the guarantee and collateral mortgage security.
The lower court’s decision of the presumed undue influence and undue influence
Whenever there is the presumption of undue influence, the evidence is needed to either prove or disprove the allegation of undue influence. As I mentioned earlier, these legal concepts arise many times in the Estates area. It is not unusual for an Estate Trustee to see the will be challenged on the basis that one or more of the beneficiaries used undue influence on the deceased when the most recent will was drafted and signed.
It also arises in commercial transactions, especially between spouses, when one spouse provides a guarantee like Mrs. Rochon did with collateral security.
The Court of Appeal started out by stating that the presumption of undue influence is a rebuttable presumption based on evidence. It emerges if the nature of the connection between the borrower and the guarantor, coupled with the nature of the transaction between them justifies, without any other evidence, an inference that the transaction was the result of the excessive impact of one party over the other. Evidence is then needed to prove or disprove the presumption of undue influence.
The motion judge decided that the crucial points supporting a presumption of undue influence were satisfied:
“[t]his 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”.
He found two attorneys acted for the stakeholders. One of them was the company’s general counsel and also Mr. and Mrs. Rochon’s daughter. He also noted the evidence of an officer of the lender, that he asked for and received confirmation from both lawyers that everything in the guarantee, including the declaration in it that its terms had been clarified to both Mr. and Mrs. Rochon by an independent lawyer.
The lower court judge decided that this was insufficient. The lender did not get a certificate that Mrs. Rochon was provided with independent legal advice. Additionally, there was no indication that Mrs. Rochon got legal advice independently from (as well as by an independent lawyer) to any kind of legal recommendations given to Mr. Rochon.
He commented that Mrs. Rochon’s difficulty to the enforceability of the mortgage would certainly have been counteracted by the easy tool of calling for ample proof, via a Certification of Independent Legal Advice (or comparable), that Mrs. Rochon was fully knowledgeable about the import of the security that she was offering.
Based on these findings, the lower court judge found that Mrs. Rochon’s guarantee and collateral mortgage security was the product of undue influence. Therefore her guarantee was unenforceable and the collateral mortgage was void and unenforceable.
The Court of Appeal for Ontario undue influence decision
The appellate court’s three-judge panel reviewed the lower court’s decision and found several errors. Based on the evidence, the Court of Appeal found that:
- Mrs. Rochon never argued undue influence in the New York State court case so that issue was never examined there.
- The motion court considered just the nature of the connection between Mr. and Mrs. Rochon. He fell short to think about the nature of the transaction between them.
- While Mr. and Mrs. Rochon swore in their affidavits before the motion court that Mrs. Rochon had no financial interest in the Company, they acknowledge in their factums before the appeal court that Mrs. Rochon had an interest in the Corporation. However, they suggest that it was not significant, and for that reason, the judge’s failure to clearly consider it is of no importance.
- The materials before the motion court included a Schedule 13D filing with the US Securities and Exchange Commission, signed by Mr. Rochon. It was also submitted with the Securities and Exchange Commission. It shows that Mrs. Rochon was a limited partner holding a 20% interest in a limited partnership holding around 35% of the common shares of the Corporation. The filing also said that she had the indirect right, through the limited partnership, to obtain dividends from, or profits from the sale of, any common shares of the Company owned by the limited partnership.
- Therefore, Mrs. Rochon had a significant interest in the Company.
- The Company was in numerous aspects that of a family business. The Rochon’s son and daughter were employed by the Corporation. Therefore, aside from her significant economic interest in the Corporation, Mrs. Rochon had a desire to do what she could to sustain it. As she confessed on cross-examination, signing documents when asked by her other half, such as those with this financing, was in both her and her other half’s best interests. From a business perspective, there was an advantage to Mrs. Rochon.
- Even if a presumption of undue influence did occur such that the lender was put on notice to make certain Mrs. Rochon was participating in the transaction of her own free will, the lender did so. The lower court judge improperly elevated the test of what a lending institution must do to secure itself from an assertion of presumed undue influence.
Particularly, take practical steps to attempt to ensure that the guarantor understands the deal and is becoming part of it freely, and understands the ramifications of becoming a guarantor, by recommending that the guarantor look for and get independent legal advice.
The lower court improperly boosted the onus on the lender to a demand that a loan provider obtains a written Certification from a lawyer that the attorney has provided independent legal advice to the guarantor. The Court of Appeal For Ontario found that the inquiries made by the lender of the attorneys sufficed to shield it from Mrs. Rochon’s assertion of presumed undue influence.
Therefore, the Court of Appeal for Ontario reversed the lower court decision and gave the lender judgment to seize and sell the Ontario property.
Undue influence summary
This is a very important case for entrepreneurs in Ontario. Entrepreneurs are by definition risk-takers. It is not unusual for them to not have any family assets in their name, either jointly or on their own. Rather, family assets can be shielded by having ownership by a spouse, other family members or a family trust. That way, if the company established by the entrepreneur runs into business problems, the family home or other assets are not at risk.
For this reason, it is common for a bank to ask not only for the entrepreneur’s guarantee for a bank loan to the company, but also the guarantee of his or her spouse. The bank also can and many times does ask for collateral security to stand in support of the spouse’s guarantee. So, it is important to understand when there may be a presumption of undue influence in getting the guarantee and collateral security and what tests the court will use if it is raised as a defence on the guarantee.
I hope you have found this undue influence Brandon’s Blog interesting and helpful. The Ira Smith Team family hopes that you and your family members are remaining secure, healthy and well-balanced. Our hearts go out to every person that has been affected either via misfortune or inconvenience.
We all must help each other to stop the spread of the coronavirus. Social distancing and self-quarantining are sacrifices that are not optional. Families are literally separated from each other. We look forward to the time when life can return to something near to typical and we can all be together once again.
Ira Smith Trustee & Receiver Inc. has constantly used clean, safe and secure ways in our professional firm and we continue to do so.
Income, revenue and cash flow shortages are critical issues facing entrepreneurs, their companies and individual Canadians. This is especially true these days.
If anyone needs our assistance for debt relief Canada COVID-19, or you just need some answers for questions that are bothering you, feel confident that Ira or Brandon can still assist you. Telephone consultations and/or virtual conferences are readily available for anyone feeling the need to discuss their personal or company situation.
The Ira Smith Trustee Team is absolutely operational and Ira, in addition to Brandon Smith, is readily available for a telephone consultation or video meeting.
