A court’s equitable jurisdiction has its limits in a commercial loan contract
Written by Ty Schmidt
In the recent decision of Century Services Corp v. LeRoy, taking place amidst a protracted foreclosure proceeding, the British Columbia Court of Appeal found that the court below erred in “purporting to exercise an equitable jurisdiction to disallow the contractually agreed-upon rate of interest” for a redemption amount between a secured creditor and a commercial loan’s guarantor.[1] It was determined that the law of equity has its limits, and a court may not “rewrite a commercial loan agreement solely by virtue of the judge’s opinion that an interest rate (though legal) was excessive”.[2]
In 2007, the Royal Bank of Canada demanded payment of loans (in the amount of $18,000,000) to the debtor company, Ted Leroy Trucking Ltd. (“TLT”),[3] who then obtained a stay of proceedings under the CCAA for financial restructuring.[4] In 2008, TLT entered into a commercial loan agreement with Century Services Corp. (“Century”), who advanced $14,250,000 to RBC to acquire TLT’s debt, for which Century would receive interest at an annual rate of 24 percent, compounded monthly. [5] In an effort to aid in the restructuring process, Ms. LeRoy signed a limited recourse guarantee for $2,000,000 secured by a mortgage on the LeRoys’ home. In a matter of months, TLT defaulted on its payments to Century and petitioned itself into bankruptcy. TLT’s assets were auctioned and there was still a deficiency, causing Century to seek payment from Ms. LeRoy for the amount guaranteed plus interest. Century then commenced foreclosure proceedings for the mortgage on the LeRoys’ home, sparking a legal dispute that would continue for well over a decade, and require multiple trials involving various issues.
In the 2021 trial in the set of proceedings considered here, the trial judge determined what redemption amount Ms. LeRoy owed to Century, and the interest rates that would apply to it. It was found that the redemption amount was about $378,000 and that if interest was calculated by the contractual rate from 2009 to 2021, the redemption amount would be about $6.5 million.[6] By contrast, if the rate was instead at the prejudgment rate, pursuant to the Court Order Interest Act,[7] the total amount owing would be about $426,000. Additionally, the trial judge pointed out that there was evidence that Century had already collected more funds than was owed to it for the loan to TLT (a gain of roughly 12 percent).[8] The trial judge concluded that including the contractual rate of interest for Ms. LeRoy’s redemption would result in a “significant injustice” and exercised their discretion to vary the interest rate to the court order rate.[9]
The 2021 decision was appealed in the case at hand, with the rate of interest being the most substantive issue in the case. The Court was quick to decide that the trial judge had no jurisdiction to vary the rate, and that any variation could generally only apply to the date from which interest runs in a foreclosure. It was posited that courts should be hesitant to interfere with contractual interest rates between commercial parties, and that modern courts do not have “discretion to ignore or vary contractual terms of which they disapprove.”[10] According to the Court, it was up to Ms. LeRoy to pay something to Century in order to prevent interest building up over what has now been more than twelve years.[11] The Court recognized the fact that these situations are much more difficult when the collateral is somebody’s home, but still held that the trial judge could not vary the interest rate, even if the rate was excessive. [12] Accordingly, the redemption calculations were remitted back to the court below.
While on its face this decision appears to be an unjust result for Ms. LeRoy, it highlights the principle that courts will not impose their own views on a commercial contract that was initially agreed to by all parties involved. It also demonstrates the importance of knowing the potential consequences of signing into a high-risk loan for the purpose of rescuing an insolvent business. Lastly, this case serves as yet another example of the costs of protracted litigation and why it is critical to resolve disputes as efficiently and early as possible, especially when interest accrues over the course of litigation.
[1] Century Services Corp v LeRoy, 2022 BCCA 239 at para 100 [“Century“].
[2] Ibid at para 89.
[3] Ibid at para 10.
[4] Ibid.
[5] Ibid.
[6] Ibid at para 56.
[7] RSBC 1996, c 79
[8] Century, supra note 1 at para 57.
[9] Ibid at para 58.
[10] Ibid at para 89.
[11] Ibid at para 93.
[12] Ibid.