Indexed as:

Eisen Finance Ltd. v. Stott

Between

Eisen Finance Limited, plaintiff, and

Jack K. Stott, defendant

[1984] O.J. No. 1087

No. 2869/79

 Ontario Supreme Court - High Court of Justice

 Non-Jury Sittings - Windsor, Ontario

Saunders J.

Heard: March 9, 1984.

 Oral judgment: March 9, 1984.

(12 pp.)

Counsel:

R.G. Colautti, for the plaintiff.

D.E. Wires, for the defendant.

1 SAUNDERS J. (orally):-- This is a claim on a promissory note. It is not disputed that the note was properly executed and delivered and that it has not been paid. The defence is that the plaintiff holder agreed to obtain payment from sources available to it; that it did not do so; and that it is now estopped from claiming payment.

2     In 1967 Marvin Eisen, the president of the plaintiff Eisen Finance Limited, Jack K. Stott, the defendant, Charles Keil and Alan Flood, each acquired twenty-five percent of the share capital of Air Windsor Limited. At all relevant times the business was managed by Keil. Stott and Flood were investors. They were kept informed concerning the company affairs by irregular reports. Stott, who is an experienced executive, visited the business premises on a fairly frequent basis. Eisen Finance provided book-keeping services to Air Windsor and opened its mail. Keil had been an employee and minority owner of some of the companies associated with Eisen for a number of years. It would be fair to say that he and Eisen were and remain close. Keil relied on the advice and assistance of Eisen in dealing with the business problems of Air Windsor. Eisen was interested in the affairs of the company because he was not only a shareholder but also a substantial creditor.

3     In addition Eisen Finance provided short-term bridge financing from time to time to accommodate Air Windsor. This was done on the request of Keil to which Eisen would agree if there was assurance that the cash to cover the advance was certain to be forthcoming in the near future. Both Eisen and Keil say that no interest was charged on such advances. The financial records filed as exhibits appear to confirm such an arrangement.

4     In about 1969 Eisen sold his twenty-five percent shareholding interest to Keil for a dollar. Up to that time he says that each shareholder had made an equal investment in the company.

5     The audited financial statements of Air Windsor reveal that from at least December 31st, 1974, the company was in a serious adverse financial position. The accumulated deficit had risen from $296,000. in 1974, to $500,000. as at December 31st, 1976, and was to rise to $564,000. by the end of 1977.

6     The financial condition was a matter of great concern to the shareholders. Some time in 1977 Stott and Keil discussed the possibility of bankruptcy but decided against it. A decision was made to attempt a sale of the shares on the basis that the licences of the company had some marketable value. This was accomplished by agreement in August 1978 although the transaction was not completed until the summer of 1979.

7     The account of Air Windsor at the Canadian Imperial Bank of Commerce at the beginning of September, 1977, was in an overdraft position. Keil says that the bank was pressing him to reduce the overdraft, although he does not now remember the extent of the bank line of credit. The documents filed as exhibits show that the company had been in an overdraft position since at least the previous July 7th, and that although there had been fluctuations, there had been a steady increase in the overdraft so that by September 14, for example, it had reached nearly $45,000. The next day, however, it was down to $35,000.

8     Keil says he had reached the conclusion that he needed $50,000. to reduce the bank overdraft. It would appear that his concern, which was shared by Stott, was that if the bank called its loan and enforced its security the company would no longer be saleable.

9     Eisen says that Keil came to him for a loan to cover the overdraft which he refused because he considered Air Windsor to be insolvent. Subsequently he says he met Keil and Stott and that Stott offered to guarantee the loan. Eisen refused to advance funds on that basis but indicated that he would be willing to lend the money directly to Stott. Stott says there was no agreement at that meeting for such a loan to be made. He says that subsequently Keil told him that Stott had agreed to borrow the funds from Eisen Finance. A promissory note and cheque were prepared which Keil took to Toronto where he had the note signed and the cheque endorsed by Stott in favour of Air Windsor. Keil then returned to Windsor with the documents. The cheque was deposited in the bank account of Air Windsor on the 29th of September, 1977.

10     Stott's version of what occurred is quite different. He says that Keil approached him about the need for $50,000. to assist in financing an aircraft transaction which was expected to be profitable. He and Flood agreed to put up their share of $12,500. each, as a loan. Keil did not have his share of $25,000. and no means of raising it. Keil, Stott and Eisen met in Windsor to discuss the situation. Keil there mentioned his working arrangements with Eisen whereby Eisen Finance would resort to the cash inflow of Air Windsor to recoup short-term advances. It was Stott's understanding that this is what would be done in the case of his loan. On that basis he thereupon, at Windsor, signed the note and endorsed the cheque. He says that if that understanding had not been agreed to he would not have entered into the transaction.

11     The injection of $25,000. into Air Windsor was recorded on its books as an advance by Stott. Stott says he did not authorize it to be treated in that way and that he regarded the injection as a short-term interest bearing loan to the company.

12     Four interest payments were made by Air Windsor on the note but after March 1978 no further payments were made because, according to Keil, there was no money in the company to pay them.

13     For reasons unexplained, Eisen Finance made no effort to collect payment from Stott of either principal or interest until January 1979 which was over a year after the principal became due.

14     Stott also did nothing about his indebtedness to Eisen. He says that knowing Eisen he was sure the loan would have been collected from Air Windsor.

15     With the benefit of hindsight Stott appears to have taken a somewhat casual approach, given the precarious financial condition of Air Windsor.

16     When the shares were sold in 1978, the shareholders also disposed of their advances for nominal consideration. It would appear that the $25,000. which Stott received from Eisen Finance and put into Air Windsor was included, so far as Air Windsor was concerned, in the advances so disposed of. The $12,500. advanced by each of Stott and Flood received the same treatment. In addition, in order to make the sale, both Stott and Flood expended significant sums to pay off the liabilities of Air Windsor.

17     Eisen says that the $25,000. indebtedness to Eisen Finance was discussed during the sale negotiations, although he had a contrary recollection on his examination for discovery.

18     Stott cannot recollect such a discussion. If such a discussion did take place, in my view, it was not of such a nature as to make an impression on Stott. So far as Stott was concerned the indebtedness did come to light before the closing of the transaction in the summer of 1979. He had received two letters from Eisen Finance requesting that he confirm the terms of the outstanding loan.

19     By agreement dated July 4th, 1979, between Keil on the one part and Stott and Flood on the other, Keil acknowledged that $25,000. had been borrowed from Stott by Eisen Finance for the benefit of Air Windsor and covenanted and agreed in effect to pay one half of the amount which Stott had paid or caused to be paid to Eisen Finance on account of the monies so borrowed. Such agreement is signed by all three individuals and would constitute as between them an acknowledgement by Stott of the indebtedness to Eisen Finance.

20     The defence in this action is founded on promissory estoppel. The principals are well recognized and not disputed. The doctrine of promissory estoppel applies wherever one party by his unambiguous words or conduct assures the other party that the strict contractual relationship between them will not be insisted upon and the other party acts upon the assurance to his detriment (Tudale Explorations Ltd. and Bruce et al., 20 O.R. (2d), 593.)

21     It is alleged on behalf of Stott that there was an agreement with Eisen that the usual practice adopted by Eisen Finance on its short-term advances would prevail. That is, payment of the debt out of monies coming into Air Windsor. That was as far as Stott went in his evidence.

22     In the course of the submissions it was argued there was an understanding that the Stott indebtedness should receive a priority over other obligations of the company in the same manner that the monies advanced by Eisen Finance appear to have received priority. It was further argued that Eisen Finance had assured Stott that the monies would be forthcoming within the 90-day period. The onus of establishing the existence of such an agreement or arrangement is on the defendant. There is no letter or other writing which confirms or even refers to such an understanding.

23     It would appear that during the time when Air Windsor was endeavouring to obtain funds to reduce the overdraft, that there were discussions between Keil and Stott, when Eisen was not present. They both agree that at such times the overdraft problem was discussed. While Keil denied this in his evidence I consider it not unlikely that the two of them on those occasions may also have discussed a proposed transaction involving one or more aircraft; the practise of Eisen Finance with respect to bridge financing and the proposed future sale of the company.

24     By letter dated the 27th of September, 1977, Stott wrote to Keil enclosing two cheques each for $12,500. representing the contribution of Flood and Stott to the required $50,000. In that letter Stott refers to the desirability of security for the $50,000. being put in place after the bank's security on receivables so that the lenders may have a prior claim against other payables.

25     It is clear that in that letter Stott had regarded the monies as in the nature of a loan. It would appear to me that that letter was written before Stott had agreed to borrow money from Eisen Finance for the purpose of providing additional funds to Air Windsor. It also appears that at that time Stott was looking for security for any advance that he was prepared to make.

26     The parties agree that there was only one meeting amongst Eisen, Stott and Keil concerning the $25,000. transaction. There is a dispute as to when it occurred in the course of the negotiations. As previously indicated, Eisen and Keil say that it was held before Stott had agreed to borrow the funds and Stott says that it occurred at the time the funds were borrowed and made available to Air Windsor.

27     I find, on the balance of probabilities, that nothing was said at the meeting, whenever it occurred, in the presence of risen, about the repayment of the note other than an expression of the understanding between Keil and Stott that it was to be paid by Air Windsor out of available cash flow. Specifically I find that there was no undertaking by Eisen to do anything with respect to collecting.

28     From the evidence, there was no way that Eisen could reasonably have given assurance that the money would be repaid. He impressed me as a careful business man and I accept his evidence that Eisen Finance would not have advanced the funds to Air Windsor. I find he gave no such assurance. Keil was of the opinion that in September 1977 there was no prospect of repayment. His opinion was borne out by subsequent events. It was submitted that when the note became due at the end of December, 1077, the company received $32,000. which would then have been available to satisfy the note. The bank records indicate that a repayment at that time would have put Air Windsor in an overdraft position of approximately $32,000. thus recreating the problem which the parties were attempting to solve in the previous September.

29     While the records of Air Windsor are incomplete and to a certain extent, unsatisfactory, it was not demonstrated that it was ever in a position to repay the note after it became due.

30     Subsequent events do not appear to be inconsistent with the view that I take of the arrangements. The monies advanced by Stott were entered as a shareholder's advance, although he says it should have been shown as a loan. The distinction is a narrow one in the circumstances. Stott and his accounting advisor did not question the treatment and regarded it as a shareholder's advance right up to the time it was transferred for nominal consideration to the purchasers of the shares.

31     As previously indicated Stott would appear to have recognized his obligation to Eisen Finance when he entered into the indemnity agreement with Keil.

32     I must conclude that the defendant has failed to satisfy the onus that is on him, that there was an arrangement such as he described. I think it more probable that the money was injected for the purpose of keeping the company alive until it could be sold, and that Stott regarded his contribution as a shareholder's advance. While he was prepared to agree to dispose of it at a nominal value, he did not expect to be called on for repayment by Eisen Finance. He and Flood had done a great deal to reduce the liabilities of the company and he probably thought that he had done his share to help out.

33     There being no finding of the alleged understanding, it is not necessary to consider detrimental reliance. However, in my opinion the evidence does not support the contention that Eisen gave an assurance having the effect of a guarantee that monies would be forthcoming to pay the loan. If Eisen agreed to anything -- and I find that he did not -- it was merely to withdraw funds out of available cash flow. As it has not been demonstrated that there was no such cash flow available, there could, in my view, be no detrimental reliance.

34     It was submitted that Eisen should have informed Stott that the note was not paid when due and that he should have brought it up at the negotiations that led up to the sale of the company. While if he had done so he might have avoided trouble at a later time, and while it might have been something that one would have expected him to do as a business man, having in mind his lengthy association with Stott, he was under no obligation in law to do so. There was no evidence that his failure to remind Stott of his obligation was deliberate on his part.

35     On the other hand, Mr. Stott and his accountants had the records available to them at all times and could have made inquiries as to the status of the loan.

36     The plaintiff is entitled to succeed in its action. There will, therefore, be judgment for the plaintiff in the agreed amount of $46,056.56. The plaintiff is entitled to its costs.

qp/s/mes