Background
Iraj Mehrnia, president and sole shareholder of Readymix Foods Corporation, personally guaranteed a revolving demand loan that TD Bank extended to Readymix. The loan agreement was initially signed on September 11, 2007, with the guarantee section left blank; Mehrnia completed and signed the personal guarantee section three days later, on September 14, 2007. Credit was not actually advanced until September 27, 2007, and additional advances continued until 2022.
When the loan went into default, TD Bank sought judgment against both Readymix and Mehrnia. Readymix consented to judgment. Mehrnia contested his personal liability in a summary trial before Justice Koehnen of the Superior Court of Justice, arguing (1) absence of consideration for his guarantee, (2) lack of understanding of what he was signing, and (3) failure to receive independent legal advice. The trial judge rejected all three arguments and entered judgment against Mehrnia jointly and severally with Readymix for $60,036.89. Mehrnia appealed.
On appeal, Mehrnia narrowed his case to a single issue: that TD Bank provided no consideration for his guarantee because the bank had already committed to the loan before he signed it on September 14, 2007.
The Court’s Holding
The Court of Appeal for Ontario, per Thorburn, Madsen, and Rahman JJ.A., dismissed the appeal and upheld the judgment. The court agreed with the trial judge that valid consideration supported the guarantee. Mehrnia’s own evidence acknowledged that the TD Bank representative told him at the September 14 meeting that signing a guarantee was required if Readymix wanted any credit facility with TD — an admission that he understood the guarantee was a condition of the lending relationship.
The court further noted that the demand nature of the loan and TD’s contractual right to amend its terms at any time meant the bank had not irrevocably committed to advancing funds as of September 11. TD could have cancelled the facility entirely before any advance or required a new application tied to a personal guarantee. In any event, no credit was actually advanced until September 27 — after the guarantee was executed — and subsequent advances over the following years were made in reliance on Mehrnia’s guarantee. Consideration was therefore present.
The court distinguished Mehrnia’s reliance on Villeneuve v. Turner, [1990] O.J. No. 385 (Dist. Ct.), where funds had already been advanced before the guarantee was requested and the guarantor had not been told he was signing a guarantee. Neither circumstance applied here. The appeal was dismissed with solicitor-and-client costs of $27,543.48 awarded to TD Bank as agreed by the parties.
Key Takeaways
- A personal guarantee signed before any credit is actually advanced is supported by valid consideration, even if the underlying loan agreement was executed a few days earlier with the guarantee section left blank.
- A borrower’s own acknowledgment that a guarantee was presented as a condition of obtaining a credit facility constitutes an admission that the guarantee was a quid pro quo for the lending relationship.
- Where a demand loan agreement preserves the lender’s right to amend terms or cancel the facility, the lender has not irrevocably committed to advancing funds and may properly require a guarantee as a condition before doing so.
- The rule that a guarantee lacks consideration when given after a lender has already advanced funds (as in Villeneuve) does not apply when advances post-date execution of the guarantee.
Why It Matters
This decision reinforces the enforceability of personal guarantees obtained by lenders as a standard condition of commercial lending, even where the guarantee is signed a short time after the initial loan document and the guarantee section was initially left blank. Lenders can take comfort that demand-loan structures — which preserve the bank’s right to alter or withdraw the facility — preserve the consideration argument even when there is a brief gap between signing the loan and signing the guarantee.
For commercial borrowers and their counsel, the case is a reminder that a guarantor’s own words about understanding the transaction can be used against them. Sophisticated business owners who sign documents labeled “Personal Guarantee” and who acknowledge being told the guarantee is a lending condition will face an uphill battle arguing lack of consideration or lack of understanding.