Undue Influence and Spousal Guarantees
August 19, 2020
There is not always undue influence when a spouse personally guarantees the corporate debt of their spouse’s business. A written certificate of independent legal advice is not always required to maintain the validity of the guarantee.
Historically, courts have found undue influence makes a guarantee unenforceable in situations which typically involve a vulnerable person, and often the loss of a longtime asset such as a family farm. Spouses who hope to avoid losing their property rely upon this approach with mixed success. Certificates of independent legal advice are often the key to a court finding that there was not undue influence.
In the recent case of JGB Collateral v. Rochon, the family farm was lost.
The Ontario Court of Appeal overturned the ruling of a motions court judge who had ruled that a mortgage on Ontario property owned by Mrs. Rochon was unenforceable. The mortgage was security to support a debt owed by a publicly traded Florida corporation, which was over 50% owned or controlled by Mr. and Mrs. Rochon. As a result, the family farm owned by Mrs. Rochon’s family for generations was subject to sale or foreclosure to pay the debt.
In doing so, they clarified the law in Ontario on undue influence and independent legal advice.
The presumption of undue influence is a “rebuttable evidentiary presumption”. It arises out of the nature of the relationship between the primary borrower and the person giving the guarantee. In certain situations, that relationship justifies an inference, without additional proof, that the giving of the guarantee was the result of undue influence.
The appeal court clarified that the presumption has two results:
- The lender is put on notice of inquiry. This means that the lender must take reasonable steps to try to ensure that the spouse understands the transaction and is entering into it voluntarily. This in turn means that the lender ought to encourage the spouse to obtain independent legal advice, and a full explanation of the transaction.
- If the lender has not taken the reasonable steps, and the spouse claims undue influence then the onus is on the lender to present the evidence to show that there was not undue influence. In doing so, the judge must consider all of the evidence. The nature and ingredients of the transaction are essential elements in determining whether undue influence existed.
In the Rochon case, the motions judge placed great weight on the absence of written confirmation of independent legal advice. He also emphasized the nature of the relationship, without considering the nature of the transaction. He found that Mrs. Rochon “unquestioningly complied with any and all requests by her husband to sign documents”.
The motions judge seems to have thought that this means that the guarantee is not enforceable, unless the lender can accomplish the Herculean task of rebutting the presumption. He based this on the absence of a written certificate of independent legal advice, despite evidence that the lender had received verbal assurances from Ms. Rochon’s lawyer.
Unlike many spousal guarantors, Mrs. Rochon had a significant interest in the corporation. Although publicly traded, it was in many ways a family business. Mrs. Rochon benefited from the business. In fact, money from the business had helped buy the farm from family members. The loan she guaranteed was in her best interest as well as her husband’s.
She admitted signing the documents of her own free will, and had a choice whether or not to sign. The fact that she signed and chose to ignore the risk is not proof of undue influence.
The Court of Appeal ruled that when both the relationship and the transaction were looked at together, there was no presumption of undue influence.
They went further, and looked at what the lender had done, ruling that, in this case, a written certificate of independent legal advice was not necessary. They determined that the motions judge had unduly focused on that fact. The lender’s representative had asked Mr. and Mrs. Rochon’s lawyers whether everything in the guarantee had been explained to them, including the statement in the guarantee that it was explained to them by an independent lawyer. That satisfied the duty of inquiry.
They took a further important step and stated that even in the absence of independent legal advice, the presumption can be rebutted.
Even if the presumption arose, the nature and ingredients of the transaction together with Mrs. Rochon’s evidence, rebutted the presumption.
This case provides a useful road map for lenders as to their obligations, and is a reminder to borrowers not to bet the family farm unless you are willing to lose it.