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BANKING - Loans - Loan commitments - Lines of credit

Wednesday, January 17, 2018 @ 8:45 AM  

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Appeal by the plaintiff, Willowbrook Nurseries Inc., from a trial judgment dismissing its action for breach of the respondent’s obligation to perform a lending agreement in good faith. The respondent, Royal Bank of Canada (RBC), had lent money to the appellant since 2005. To satisfy the appellant’s seasonal financing needs, the respondent would agree to a temporary accommodation request (TAR) that allowed Willowbrook to temporarily exceed its $2.75 million line of credit each winter. The overdraft amount was set by the parties’ mutual agreement each fall or winter and would typically be paid down in the following spring or early summer. Through the spring and summer of 2008, the appellant did not fully repay the $1.25 million worth of TAR extended in the winter of 2007, despite three extensions of time to do so. The appellant sought an additional $1.2 million TAR for the 2008 winter, along with a debt restructuring and separate $500,000 term loan request. The respondent’s risk manager refused to grant the 2008 TAR and transferred the appellant’s loans into Special Loans due to concerns about the appellant’s working capital, liquidity, and increased inventory levels. RBC demanded detailed financial information and up to date appraisals of the real property securing the appellant’s debt. Overdrafts in excess of agreed upon limits were no longer be permitted. Bank fees and interest charges were forecast to increase. The new account manager had to approve payment of all cheques. When the respondent refused to remove the appellant from Special Loans, the appellant changed banks. The appellant argued at trial that the respondent was obliged to advance additional credit because it had done so in the past. It also argued that placing its accounts in Special Loans amounted to a de facto demand for repayment without notice. The trial judge rejected the appellant’s argument that the respondent had acted in bad faith. He found that the respondent gave the appellant reasonable time to make other financial arrangements.

HELD: Appeal dismissed. It was the appellant that sought to change the prevailing course of lending conduct. It had not repaid the 2007 TAR, contrary to previous practice, and wanted an additional 2008 TAR. The appellant had exhausted its existing credit and it wanted more. The respondent was not obliged to accede to the appellant’s requests. The respondent had little time to assess the request for more money after receiving the recent year-end financial statements. Its power to move an account into Special Loans was a discretionary power provided for by the lending contract. The principle of good faith performance of contractual obligations did not extend so far as to require the respondent to subjugate its own financial interests by extending additional credit that it did not want to advance.

Willowbrook Nurseries Inc. v. Royal Bank of Canada, [2017] O.J. No. 6469, Ontario Court of Appeal, G.I. Pardu, G.T. Trotter and D. Paciocco JJ.A., December 12, 2017. Digest No. TLD-January152018005