COURT OF APPEAL FOR ONTARIO

CITATION: 7636156 Canada Inc. (Re), 2020
    ONCA 681

DATE: 20201028

DOCKET: C67634

Brown, Paciocco and Nordheimer
    JJ.A.

In the Matter
    of Bankruptcy of

7636156 Canada Inc., of the City of Vaughan,

In the Province of Ontario

BETWEEN

OMERS Realty Corporation

Responding Party (Appellant)

and

The Fuller Landau Group Inc., in its capacity as trustee

in bankruptcy of 7636156 Canada Inc.

Moving Party (Respondent)

John Finnigan, D.J. Miller, and Scott
    McGrath, for the appellant

Harvey Chaiton and Sam Rappos, for the
    respondent

Heard: June 11, 2020 by video conference

On appeal from the order of Justice Glenn
    J. Hainey of the Superior Court of Justice, dated October 22, 2019, with
    reasons reported at 2019 ONSC 6106, 74 C.B.R. (6th) 312.

BROWN J.A.:

I.

OVERVIEW

[1]

The main issue raised on this appeal concerns the right of a commercial
    landlord to draw on a letter of credit, posted as security by its tenant,
    following the disclaimer of the lease by the tenants trustee in bankruptcy.

[2]

7636156 Canada Inc., previously known as RM2 Canada Inc. (the Tenant),
    leased an industrial building from the appellant, OMERS Realty Corporation (the
    Landlord). The Tenant made an assignment in bankruptcy on May 1, 2018. The
    respondent, The Fuller Landau Group Inc. (the Trustee), was appointed trustee
    of the bankrupt Tenants estate. The Trustee, pursuant to statutory authority,
[1]
disclaimed the lease on July 23,
    2018.

[3]

Pursuant to the terms of the lease, the Tenant had put in place a $2.5
    million letter of credit from the Bank of Nova Scotia (BNS) in favour of the
    Landlord (the LOC). The Landlord made draws on the LOC after the Tenants bankruptcy,
    both before and after the Trustees disclaimer of the lease. The draws were for
    the full amount of the credit.

[4]

On a motion brought by the Trustee, the motion judge determined that the
    Landlord was only entitled to draw on the LOC to recover the amount of its
    preferred claim for three months accelerated rent under s. 136(1)(f) of the
Bankruptcy
    and Insolvency Act
, R.S.C. 1985, c. B-3 (
BIA
).
[2]
In the alternative, the motion
    judge concluded that, in accordance with the terms of the lease, the LOC should
    have been reduced to approximately $1.35 million on May 1, 2017 (just under a
    year prior to the date of bankruptcy), with the Landlords draws limited to the
    reduced amount.

[5]

The Landlord appeals. It submits that the independent obligations
    created by the LOC between the issuer bank, BNS, and itself as beneficiary were
    not affected by the Trustees disclaimer of the lease. Nor, on a proper
    interpretation of the lease, did the amount of the LOC reduce in May 2017.

[6]

For the reasons set out below, I would allow the appeal. I conclude that,
    notwithstanding the Trustees disclaimer of the lease, the Landlord was
    entitled to draw on the full amount of the LOC. I also conclude that the motion
    judge erred in interpreting the lease to require a reduction of the amount of
    the LOC on May 1, 2017.

II.

FACTS

A.

The Lease

[7]

The Landlord owns an industrial building located at 71 Royal Group
    Crescent, Vaughan, Ontario (the Premises), which it leased to the Tenant by
    lease dated February 18, 2014 (the Lease). The term of the Lease was ten
    years, commencing on May 1, 2014 and expiring on the last day of April 2024.

[8]

Schedule C of the Lease contains Supplemental Terms and Conditions.
    Section 2(a) of Schedule C requires the Tenant to arrange a letter of credit in
    the amount of $2.5 million in favour of the Landlord as beneficiary for an
    initial term of one year, renewed annually on an automatic basis until 60 days
    after the expiry of the Leases term. Section 2(a) stipulates that the LOC is
    to continue to stand as security should the Tenant become bankrupt. Sections
    2(a) and (b) also contain provisions dealing with the reduction in the value of
    the LOC during the term of the Lease. I will review the terms of s. 2 of the
    Lease in some detail later in these reasons.

B.

The Letter of Credit

[9]

In accordance with the terms of the Lease, the Tenant arranged for the
    LOC, an irrevocable standby letter of credit issued by BNS on May 2, 2014 in
    the amount of $2.5 million in favour of the Landlord as beneficiary. The LOC
    was renewed each year prior to the date of bankruptcy. I will describe the
    terms of the LOC later in these reasons.

[10]

The
    Tenant pledged cash collateral in the amount of $2.5 million to BNS in support
    of the LOC, which was held in a GIC pursuant to an Authority to Hold Funds on
    Deposit agreement. BNS registered a financing statement against the Tenant
    under the
Personal Property Security Act
, R.S.O. 1990, c. P.10 (
PPSA
).
    The Trustee has not disputed the validity of the BNS security.

[11]

As
    of the date of the Tenants assignment in bankruptcy, no reduction had been
    made in the amount of the LOC.

C.

The bankruptcy of the Tenant

[12]

On
    May 1, 2018, the Tenant made an assignment in bankruptcy and the Trustee was appointed.
    On July 23, 2018, the Trustee disclaimed the Lease.

D.

Events relating to payments under the Lease

[13]

As
    of the date of bankruptcy, there were no arrears of rent owing under the Lease.

[14]

Following
    the Tenants assignment in bankruptcy, the Landlord made three demands to draw
    on the LOC up to its full amount of $2.5 million. The first draw, in the amount
    of $207,732.28, was made on May 16, 2018, before the disclaimer of the Lease. The
    second draw, in the amount of $1,709,768.40, occurred on December 4, 2018, and
    the third, in the amount of $582,499.32, on April 2, 2019. The draws covered
    the following losses claimed by the Landlord:

(a)

$207,732.28 for rent for May 2018;

(b)

$1,621,160.72 for rent for the months of August
    2018 through to and including April 2019;

(c)

$368,479 for the unamortized cost for the
    Landlord Allowance as per the terms of the Lease, inclusive of interest; and

(d)

$302,628 for restoration costs, as per the terms
    of the Lease.

[15]

In
    support of each demand, the Landlord provided BNS with a certificate confirming
    the indebtedness of the Tenant under the Lease and that the amount is due and
    payable to the Beneficiary by [the Tenant], payment of which has been requested
    from [the Tenant] and has not been received.

[16]

BNS
    accepted the Landlords draws under the LOC and paid out the full amount of the
    LOC. BNS has never asked the Landlord to return the funds paid out.

[17]

A
    day after the first draw on the LOC, the Landlord filed a proof of claim with
    the Trustee for a priority claim under
BIA
s. 136(1)(f) in the amount
    of $623,196.84 for three months accelerated rent: May, June, and July 2018. Under
BIA
s. 146, the rights of lessors are to be determined according to
    the law of the province in which the leased premises are situated, subject to
    the priority ranking of the landlords preferred claim under
BIA
s.
    136. Section 38(1) of the
Commercial Tenancies Act
, R.S.O. 1990, c.
    L.7 (
CTA
) limits a landlords preferential lien for rent in the
    event of a tenants bankruptcy to rental arrears for three months pre-bankruptcy
    and accelerated rent for three months post-bankruptcy.
BIA
s.
    136(1)(f) creates a preferred claim for a landlord similar in scope.

[18]

The
    Landlords proof of claim attached a schedule explaining the Landlords
    position that it was entitled to make draws under the LOC.

[19]

On
    October 3, 2018 the Trustee disallowed the Landlords proof of claim, stating
    that the Landlords preferred claim for three months accelerated rent had been
    satisfied by the Landlords May 2018 draw on the LOC and the Trustees
    authorization of an additional partial draw for the balance of the preferred
    claim. The disallowance went on to state that: (i) the funds used to pay draws
    made against the LOC came from funds that belonged to the bankrupt Tenant; (ii)
    the amount of the LOC should have been reduced by $1.14 million on May 1, 2017;
    and (iii) the Landlord had failed to provide the Trustee with evidentiary
    support for its claims for further damages in respect of the Tenants
    obligations under the Lease.

[20]

The
    Landlord appealed the disallowance to the Registrar in Bankruptcy. By reasons
    dated December 27, 2018, Master Mills allowed the Landlords appeal in part
:
    In re: 7636156 Canada Inc.
, 2018 ONSC 7737. She held that since the
    Landlord had drawn on the LOC for the May 2018 rent, the Trustee properly
    disallowed its preferred claim for that month. However, the Landlord was entitled
    to assert its claim for accelerated rent for the other two months either
    against the proceeds of the estate or by a further draw on the LOC. According
    to the Master, the Trustee therefore improperly disallowed the preferred claim
    of $415,464.56 for those two months: at paras. 19 and 25.

E.

Events concerning the reduction in the value of
    the LOC

[21]

In
    late May 2018, the Trustee advised the Landlord of its position that the cash
    collateral pledged to BNS was an asset of the bankrupt Tenant that vested in
    the Trustee, subject to BNS secured claim. As well, the Trustee asserted that
    the terms of the Lease mandated an automatic reduction in the amount of the LOC
    to $1.14 million on May 1, 2017, the start of the 37
th
month of the
    term. The Trustee requested the Landlord to authorize BNS to reduce the LOC by
    that amount. On the other hand, if the Landlord drew on the LOC beyond the
    reduced amount, the Trustee advised it would challenge such draws as unjust
    enrichment.

[22]

The
    Landlord disputed the Trustees position, contending that under the Lease
    reductions in the amount of the LOC were permissive, not mandatory. In any
    event, the Landlord took the position that the Tenant had been delinquent in
    the payment of rent prior to May 1, 2017 and so was not entitled to a reduction
    in the value of the LOC. Specifically, the Landlord provided evidence that the
    rent payment due February 1, 2015 was not paid until February 3, 2015 and the
    rent due on July 1, 2015 was not paid until July 2, 2015.

III.

THE TRUSTEES MOTION

A.

The motion

[23]

The
    Trustee moved for a determination of the amount that the Landlord was entitled
    to draw on the LOC. In the event the court found that the Landlord had drawn more
    than it was entitled to on the LOC, the Trustee sought orders directing the
    Landlord to pay the excess to the Trustee and for BNS to release to the Trustee
    the remaining cash collateral for the LOC. Although served, BNS did not
    participate in the motion.

[24]

Before
    the motion judge, the parties largely advanced the positions set out in their
    respective proof of claim and notice of disallowance.

B.

The motion judges reasons

[25]

The
    motion judge concluded that the Landlord was only entitled to draw on the LOC
    for three months accelerated rent under
BIA
s. 136(1)(f): at para.
    18. In his reasons, the motion judge:

(i)

stated that a disclaimer of lease by a trustee in bankruptcy operates as
    a voluntary surrender of the lease by the tenant with the consent of the
    landlord, which extinguishes all obligations of the tenant under the lease: at para.
    24;

(ii)

rejected
    the Landlords submissions that (a) the autonomous obligation of BNS to it
    under the LOC meant that the proceeds of the LOC were not the property of the
    bankrupt Tenant and (b) the Trustee had no legal right to obtain redress from
    the Landlord under the LOC: at paras. 31-33;

(iii)

affirmed that upon the disclaimer of a lease by a
    trustee, a bankrupt tenant no longer owes any obligations to the landlord under
    the lease, with the result that the landlord is not entitled to draw on a
    letter of credit provided as security under the lease for any amounts in excess
    of the landlords three months accelerated rent preferred claim under
s.
    136(1)
(f) of the
BIA
: at para. 39; and

(iv)

determined
    that this conclusion was not affected by the decision of the Supreme Court of
    Canada in
Crystalline Investments Ltd. v. Domgroup Ltd.
,
    2004 SCC 3, [2004] 1 S.C.R. 60 because the obligation of BNS, as issuer of the
    LOC, to make payment to the Landlord beneficiary was wholly dependent on the
    continued existence of the Bankrupts obligations to the Landlord under the
    Lease. BNS had no independent obligation to make any payment to the Landlord
    pursuant to the [LOC] unlike an assignor or guarantor who has its own
    independent contractual obligations with a landlord to perform the tenants
    obligations under the Lease: at paras. 40 and 44.

[26]

In
    reaching these conclusions, the motion judge relied on case law from this and
    other courts, which I will discuss in some detail later in these reasons.

[27]

The
    motion judge stated that in the event his decision was held to be incorrect, he
    would have reduced the amount of the LOC to $1,357,135.53 based on his
    interpretation of the LOC reduction provisions in the Lease: at paras. 47-51.

[28]

In
    the result, the motion judge ordered the Landlord to pay the Trustee
    $1,876,803.14, being the $2.5 million of the LOC less three months accelerated
    rent of $623,196.84.

IV.

THE ISSUES ON THIS APPEAL AND THE STRUCTURE OF THE ANALYSIS

[29]

This
    appeal raises two issues:

(1)

Issue 1
: Did the motion
    judge err in holding that, upon the disclaimer of the Lease by the Trustee, the
    Landlord was not entitled to draw on the LOC for amounts in excess of the
    Landlords preferred claim under
s. 136(1)
(f) of the
BIA
?

(2)

Issue 2
: Did the motion judge err in holding that on
    May 1, 2017 the amount of the LOC was reduced to $1,357,135.53?

[30]

As
    I will explain, my answer to both questions is yes.

[31]

I
    will divide the analysis of
Issue 1
into two parts:

(a)

Under
Issue 1(a)
, I consider the extent of the
    Landlords right to draw on the LOC under the principles governing standby
    letters of credit. I conclude that BNS treated the Landlords drafts on the LOC
    as complying presentations,
[3]
thereby triggering its obligation to pay. I also conclude that the Landlords
    conduct in drawing on the LOC did not engage the fraud exception to the
    principle of the autonomy of letters of credit. Under the legal principles
    governing letters of credit, the Landlord was entitled to draw on the LOC to
    the amount available;

(b)

Under
Issue 1(b)
, I determine that this conclusion
    is not altered by the principles of insolvency law, in particular those
    concerning the effect of a trustees disclaimer of a commercial property lease.
    I do not accept the Trustees argument that, where the trustee of a bankrupt
    tenant has disclaimed a lease, the principles of insolvency law override the
    autonomy of letters of credit so as to limit the right of a landlord to draw on
    a letter of credit to a claim for three months accelerated rent.

[32]

The
    final section of these reasons will deal with
Issue 2
, namely whether
    the motion judge erred in holding that the terms of the Lease required a
    reduction in the value of the LOC on May 1, 2017. In my respectful view, the
    motion judge committed an error on an extricable question of law in
    interpreting the Lease. As a result, I conclude that the Landlord was entitled
    to draw the full $2.5 million under the LOC.

V.

ISSUE 1(A): THE LANDLORDS ENTITLEMENT TO DRAW UNDER THE
    PRINCIPLES GOVERNING STANDBY LETTERS OF CREDIT

A.

The positions of the
    parties

[33]

On the motion below, the Landlord argued that the autonomy
    principle for letters of credit precluded the Trustee from obtaining redress
    in respect of the LOC. The motion judge did not accept that submission: at
    para. 33. On appeal, the Landlord renews that submission.

[34]

The
    Trustee, on the other hand, argued that the fraud exception to the autonomy
    principle applied to prevent the Landlord from drawing on the LOC. The motion
    judge did not find it necessary to deal with that issue. Before us, the Trustee
    renews its submission that it was entitled to challenge draws by the Landlord
    under the fraud exception as the Landlord had no right to make a demand under
    the [LOC] following the disclaimer of the Lease, other than for three months
    accelerated rent.

[35]

Before explaining why I reject the Trustees submission that the
    fraud exception applies, I begin by discussing the nature of standby letters
    of credit, what is meant by the autonomy principle and the related notion of a complying
    presentation, and the fraud exception. I will then set out why the fraud
    exception does not apply in the circumstances of this case, with the result
    that the Landlord is entitled to draw on the LOC under the principles governing
    letters of credit.

B.

The governing legal
    principles

Standby letters of credit and the autonomy
    principle

[36]

The LOC is a standby letter of credit, which consists of an
    undertaking by the issuing bank, BNS, to honour drafts or other demands for
    payment by the beneficiary Landlord upon compliance with the conditions
    specified in the credit: Kevin McGuinness,
The Law of Guarantee
, 3rd
    ed. (Toronto: LexisNexis, 2013), at §16.4.

[37]

By its terms, the LOC was subject to the version of the
    International Chamber of Commerce Uniform Customs and Practice for Documentary
    Credits (UCP) in effect on the date it was issued by BNS, which was the 2007
    Revision, ICC Publication no. 600 (UCP 600). Under article 1 of UCP 600, the rules
    for documentary credits apply to any standby letter of credit.

[38]

The formation of a standby letter of credit involves three
    parties: the account customer of the issuing bank who applies for the credit,
    in this case the Tenant; the issuing bank, BNS; and the beneficiary of the
    credit, the Landlord. A standby letter of credit is a performance-securing
    mechanism in that it constitutes an obligation of the issuer to the beneficiary
    to make payment on account of any default by the applicant customer in the
    performance of an obligation upon certification by the beneficiary that the
    applicant has failed to fulfil its obligations to the beneficiary: McGuinness,
    at §16.45. As such, the starting point in any standby letter of credit
    transaction is the formation of an underlying contract between the applicant
    customer of the issuing bank and the beneficiary of the credit.

[39]

Nevertheless, a fundamental characteristic of standby letters of
    credit is their autonomy from the underlying transaction between the applicant
    and the beneficiary. This critical characteristic was explained by the Supreme
    Court of Canada in
Bank of Nova Scotia v. Angelica‑Whitewear Ltd.
,
    [1987] 1 S.C.R. 59, at pp. 70 and 103:

The fundamental principle governing documentary letters of
    credit and the characteristic which gives them their international commercial
    utility and efficacy is that the obligation of the issuing bank to honour a
    draft on a credit when it is accompanied by documents which appear on their face
    to be in accordance with the terms and conditions of the credit is independent
    of the performance of the underlying contract for which the credit was issued.
Disputes between the parties to the underlying
    contract concerning its performance cannot as a general rule justify a refusal
    by an issuing bank to honour a draft which is accompanied by apparently
    conforming documents. This principle is referred to as the autonomy of
    documentary credits
.

[I]t is essential that [the issuing banks] obligation to pay
    should not be subject to determination after the event by what actually
    transpired in the performance of the underlying contract. That is the other
    side of the principle of autonomy. The obligation of the issuing bank to the
    beneficiary of a credit must at all times be independent of the actual
    performance of the underlying contract. [Emphasis added.]

[40]

Article
    4(a) of UCP 600 elaborates on the autonomy of the obligation arising between
    the issuing bank and the beneficiary:

A credit by its nature is a separate
    transaction from the sale or other contract on which it may be based. Banks are
    in no way concerned with or bound by such a contract,
even
    if any reference whatsoever to it is included in the credit
.
    Consequently, the undertaking of a bank to honour, to negotiate or to fulfil
    any other obligation under the credit is not subject to claims or defences by
    the applicant resulting from its relationships with the issuing bank or the
    beneficiary. [Emphasis added.]

Article 5 reinforces the autonomous character of a
    letter of credit by stating that [b]anks deal with documents and not with
    goods, services or performance to which the documents may relate.

[41]

The
    autonomous nature of letters of credit is essential for their commercial
    risk-minimization function. As described by McGuinness, at §16.47:

The beneficiary of a letter of credit obtains
    a gold standard of payment assurance for the underlying commercial transaction.
    Stand-by letters of credit create a potential obligation for the issuer that is
    completely independent of the business arrangement for which it was an
    inducement.

[42]

A
    standby letter of credit is drafted to define the scope and terms of the
    issuers undertaking so that the issuer need only examine the terms of the
    letter of credit and the documents presented by the beneficiary to determine
    whether there is a liability to pay: McGuinness, at §16.44. When the documents
    specified under a letter of credit are delivered, or presented, to an issuing
    bank, the bank must examine the presentation to determine, on the basis of the
    documents alone, whether or not the documents appear on their face to
    constitute a complying presentation: UCP 600, arts. 2 and 14(a). When an
    issuing bank determines that a presentation is complying, it must honour: UCP
    600, arts. 7(a) and 15(a). When an issuing bank determines that a presentation
    does not comply, it may refuse to honour, in which case it must give a single
    notice to that effect to the presenter: UCP 600, arts. 16(a) and 16(c).

The fraud exception to the principle of autonomy of letters of
    credit

[43]

An
    exception exists to the general rule that an issuing bank is obliged to honour
    a draft under a documentary credit when the tendered documents appear on their
    face to be regular and in conformity with the terms and conditions of the
    credit. The exception arises in the case of fraud by the beneficiary which has
    been (a) sufficiently brought to the knowledge of the bank before payment of
    the draft, or (b) demonstrated to a court called on by the customer of the bank
    to issue an interlocutory injunction to restrain the bank from honouring the
    draft:
Angelica-Whitewear
, at p. 71.

[44]

In
Angelica-Whitewear
, the Supreme Court described the scope of the fraud
    exception at p. 83:

In my opinion the fraud exception to the
    autonomy of documentary letters of credit should not be confined to cases of
    fraud in the tendered documents but should include fraud in the underlying
    transaction of such a character as to make the demand for payment under the
    credit a fraudulent one  In my view the fraud exception to the autonomy of a
    documentary credit should extend to any act of the beneficiary of a credit the
    effect of which would be to permit the beneficiary to obtain the benefit of the
    credit as a result of fraud.

[45]

The beneficiary under a letter of credit is not entitled to make
    a demand for payment under a letter of credit where there is no right to make
    such demand as between the beneficiary and the applicant under the terms of the
    underlying contract: McGuinness, at
§17.338
.
    However, given the principle of the autonomy of letters of credit, the fraud
    exception is carefully constrained to protect the commercial utility of the
    letter of credit:
430872 B.C. Ltd. v. KPMG Inc.
, 2004 BCCA 186, 26
    B.C.L.R. (4th) 203, at paras. 30-31.
The fraud exception
    does not encompass a demand for payment made in the face of a legitimate
    contractual dispute
but requires some impropriety, dishonesty, or deceit,
    which would include instances where the demand can be said to be clearly untrue
    or false, utterly without justification, or made where it is apparent that
    there is no right of payment:
Royal Bank v. Gentra Canada Investments Inc.
(2001), 147 O.A.C. 96 (C.A.), at para. 8;
Cineplex Odeon Corp. v. 100 Bloor
    West General Partner Inc.
, [1993] O.J. No. 112 (Gen. Div.), at paras.
    31-32; McGuinness, at §17.343.

[46]

In a case where no application is made for an injunction to
    restrain payment under a letter of credit and the issuing bank has to exercise
    its own judgment about whether to honour a draft, establishing the fraud
    exception requires showing that the fraud was so established to the knowledge
    of the issuing bank before payment of the draft as to make the fraud clear or
    obvious to the bank:
Angelica-Whitewear
, at p. 84. As Blair J. (as he
    then was) put the matter in
Cineplex Odeon
, the exception is fraud,
    not something less than fraud: at para. 29.

[47]

When presented with documents that appear on their face to be
    regular, an issuing bank has no duty to satisfy itself by independent inquiry
    that the beneficiary has not engaged in fraud. It is only when the fraud
    appears on the face of the documents or when fraud has been brought to its
    attention by its customer or some other interested party that the bank must decide
    whether fraud has been established requiring it to refuse payment:
Angelica-Whitewear
,
    at p. 88.

C.

Analysis

[48]

Does
    the fraud exception apply in this case, as the Trustee contends? In arguing
    that it was entitled to challenge the draws by the Landlord under the fraud
    exception, the Trustee does not submit that there was a fraud in the documents
    tendered by the Landlord to BNS. In oral argument, the Trustee acknowledged
    that the documentation submitted by the Landlord to BNS accorded with the terms
    of the LOC. The Trustees acknowledgment is understandable. The LOC authorized
    the Landlord to draw on BNS by a draft at sight that was accompanied by your
    signed statement certifying that the amount drawn under this [LOC] is due and
    payable to you by [the Tenant] that you have requested payment of the said
    amount from [the Tenant] and have not received payment. BNS honoured each of
    the presentations made by the Landlord. The only inference available from the
    record is that BNS concluded that the documents presented by the Landlord
    appeared on their face to constitute complying presentations.

[49]

Instead,
    the Trustee appears to contend that the Landlord engaged in a fraud related to
    the transaction between it and the Tenant. Specifically, the Trustee alleges
    that certificates that the Landlord presented to BNS were clearly untrue or
    false since they stated that the Tenant had defaulted in its obligations under
    the Lease after the Trustee had disclaimed it. Accordingly, the Landlord had no
    right to make demands on the LOC when it did, with the result that its conduct
    fell within the fraud exception to the autonomy principle.

[50]

I
    am not persuaded by the Trustees argument. The statements by the Landlord in
    the certificates it presented to BNS were not clearly untrue or false when
    assessed in the context of the underlying contract (the Lease) between the
    beneficiary (the Landlord) and the applicant (the Tenant).

[51]

The
    Lease required the Tenant to post the $2.5 million LOC. Section 2(a) of
    Schedule C to the Lease describes the purpose of the LOC:

The [LOC] shall be held by Landlord as
security for indemnification of Landlord in respect of any
    losses, costs or damages incurred by Landlord
arising out of the failure
    by Tenant to pay Annual Rent or any other amounts payable under this Lease or
    resulting from any failure by Tenant to observe or perform any obligations
    contained in this Lease or resulting from any default under this Lease or
resulting from any termination, surrender, disclaimer or
    repudiation of this Lease whether by Landlord as a result of the default of
    Tenant or in connection with any insolvency or bankruptcy of Tenant or
    otherwise
. [Emphasis added.]

[52]

In
    the Lease, the parties agreed that the LOC would continue to stand as security
    in the event the Tenant became bankrupt and the Lease was disclaimed in the
    bankruptcy proceeding. Section 2(a) states, in part:

If at any time during the term of the [LOC],
    Tenant defaults in the payment of any Annual Rent or other amounts payable
    under this Lease or in the performance of any of its other obligations under
    this Lease or
if this Lease is
    surrendered, terminated, disclaimed or repudiated whether by Landlord as a
    result of default of Tenant or in connection with any insolvency or bankruptcy
    of Tenant or otherwise, then Landlord at its option may
, in addition to any and all other rights and remedies provided for
    in this Lease or at law,
draw a
    portion of or all of the Principal Amount of the [LOC], whereupon the proceeds
    thereof shall be applied
firstly
towards repayment of the cost of Landlords
    Work
[4]
and other costs
referred to above,
secondly
    to compensate Landlord for damages suffered by it as the result of Tenants
    default
, and the balance, if any, will be
    returned to Tenant.

The rights of Landlord
    hereunder, in respect of the [LOC], shall continue in full force and effect and
    shall not be
waived, released, discharged,
    impaired or
affected by reason of
    the release or discharge of Tenant in any
receivership,
bankruptcy
, insolvency, winding-up or other creditors proceedings including,
    without limitation, any proceedings under the
Bankruptcy
    and Insolvency Act
(Canada) or the
Companies Creditors Arrangement Act
(Canada),
or the surrender, disclaimer,
    repudiation or termination of the Lease in any such proceedings and shall
    continue with respect to the periods prior thereto and thereafter as if the
    Lease had not been surrendered, disclaimed, repudiated, or terminated
. [Emphasis added.]

[53]

The LOC tracked the parties agreement by stating that it was
    issued in connection with lease payments and lease defaults for the Premises.
    It authorized the Landlord to draw on BNS up to $2.5 million, which would be:

available by your drafts at sight, indicating L/C number and
    date, accompanied by:

- Your signed statement certifying that the amount drawn under
    this Credit is due and payable to you by [the Tenant] that you have requested
    payment of the said amount from [the Tenant] and have not received payment.

- The original of this Credit.

[54]

Significantly, the LOC also stated that:

This Credit will not be released, discharged or affected by the
    bankruptcy, receivership or insolvency of [the Tenant] or by [the Tenant]
    ceasing to exist  nor by any disclaimer or repudiation of the [Tenant] lease
    with you.

[55]

Accordingly,
    the agreement between the Landlord and Tenant was that the rights of the
    Landlord under the Lease in respect of the LOC would continue in full force and
    effect in the event of the Tenants bankruptcy, and any disclaimer therein, as
    if the Lease had not been disclaimed.
The terms of the
    Lease and LOC clearly gave the Landlord the right to draw on the LOC for losses
    arising from the disclaimer of the Lease in the Tenants bankruptcy proceeding.
[5]
The Landlord presented such drafts
    and BNS honoured them as complying presentations.

[56]

An
    additional reason for rejecting the Trustees submission that the fraud
    exception applies concerns the Landlords conduct when it made the draws under
    the LOC. The record does not contain any evidence that the Landlord acted with
    impropriety, dishonesty, or deceit. In the schedule to its May 17, 2018 proof
    of claim, the Landlord transparently informed the Trustee of the legal basis
    upon which it was acting:

The Creditor is the beneficiary of a letter of
    credit in the amount of $2,500,000.000 issued by the Bank of Nova Scotia (Scotia
    Bank) dated May 2, 2014 (the LOC). The Creditor does not regard the LOC as
    an asset or property belonging to the estate of the Debtor. Rather, the
    Creditor regards the LOC as a contract as between it and Scotia Bank, and that
    contract is independent of any relationship between the Creditor and the
    Debtor. The funds are the property of Scotia Bank, not the Debtor. The trustee
    therefore does not have a claim on the undrawn portion of the security
    represented by the LOC.

[57]

Although the Trustee disagreed with that position, the most one
    can say is that the Landlord made demands for payment on the LOC in the face of
    a legitimate contractual dispute with its Tenants Trustee.

D.

Conclusion on Issue
    1(a)

[58]

Applying the principles governing letters of credit, I conclude
    that when the conduct of the Landlord in drawing the LOC, assessed in light of
    the language of the Lease and LOC, is measured against the rigorous standard of
    proof applicable to establish the fraud exception to the autonomy principle,
    the Trustee has not demonstrated that the Landlords conduct fell within the
    fraud exception to the principle of autonomy of letters of credit.

VI.

ISSUE 1(B): THE EFFECT OF THE TRUSTEES DISCLAIMER OF THE LEASE

[59]

That
    conclusion leads to the next issue, which I perceive stands at the centre of
    the Trustees challenge to the draws made by the Landlord. The Trustee argues,
    in effect, that when it disclaimed the Lease, the Landlord was thereupon
    precluded by the operation of insolvency law from drawing on the LOC for any
    amount in excess of the Landlords preferred claim for three months
    accelerated rent. The Trustee contends that such a principle of insolvency law
    overrides the autonomy principle for letters of credit and imposes a legal
    limit on the amount the Landlord could draw. I shall now consider this argument
    by the Trustee.

A.

The jurisprudence on the effect of a
    trustees disclaimer of lease

[60]

Based
    on his review of the case law starting with the decision in
Re Mussens Ltd.
,
    [1933] O.W.N. 459 (S.C.), the motion judge held it is settled law in Ontario
    that a disclaimer of a lease by a trustee in bankruptcy operates as a
    voluntary surrender of the lease by the tenant with the consent of the
    landlord, which extinguishes all obligations of the tenant under the lease: at
    para. 24. That led the motion judge to conclude the following, at para. 39:

[T]he law of the Province of Ontario remains that, upon the
    disclaimer of a lease by a trustee in bankruptcy, the bankrupt no longer has
    any obligations owing to the landlord under the lease, and the landlord is not
    entitled to draw on a letter of credit provided as security under the lease for
    any amounts in excess of the Landlords three months accelerated rent
    preferred claim under
s. 136(1)
(f)
    of the
BIA
.

[61]

As
    I will first explain, in this passage the motion judge overstated the effect of
    a trustees disclaimer of a lease, in part because he did not have the benefit
    of this courts decision in
Curriculum Services Canada/Service Des
    Programmes DÉtudes Canada (Re)
, 2020 ONCA 267, 150 O.R. (3d) 529. I will
    then explain why the motion judge erred in limiting the Landlords ability to
    draw on the LOC to its preferred claim under
BIA
s. 136(1)(f).

[62]

Curriculum
    Services
clarified that a trustees disclaimer does not operate as a
    voluntary surrender of a lease with the consent of the landlord for all
    purposes. The decision contains an extensive review of the case law concerning
    the effect of the disclaimer of a lease by a trustee in bankruptcy on a
    landlords ability to claim for amounts owing under the lease. The review
    starts with
Re Mussens
and proceeds through
Cummer-Yonge
    Investments Limited v. Fagot
, [1965] 2 O.R. 152 (S.C.),
affd
    [1965] 2 O.R. 157n (C.A.)
and
Crystalline Investments
,
    decisions which the motion judge also considered in this case. There is no need
    to repeat that exercise. Suffice it to say that its review of the jurisprudence
    led this court in
Curriculum Services
to make three main points:

(i)

First, the key principle that emerged from
Crystalline
    Investments

is that the disclaimer of a
    lease by the tenants trustee benefits only the insolvent party: at para. 65;

(ii)

Second,
    while
Crystalline Investments
is consistent
    with the principle stated in
Re Mussens

that a disclaimer operates to end the bankrupt tenants obligations
    under the lease, the decision does not support an interpretation of
Re Mussens
that would characterize a disclaimer as a
    consensual surrender for
all purposes
:
    at para. 65; and

(iii)

Third, a
    trustees disclaimer of a bankrupt tenants lease ends the rights and remedies
    of the landlord
against the bankrupt
    tenants estate
with respect to the unexpired term of the lease,
    apart from the three months accelerated rent provided for under the
CTA
and
BIA
. This court
    stated, at para. 89:

The Landlords unsecured claim, however it is characterized,
    is precluded because the disclaimer brings to an end both the Tenants ability
    to insist on performance of the Lease by the Landlord and the
Landlords ability to claim in the Tenants
    bankruptcy

in respect of any of its
    remedies. [Emphasis added].

[63]

Curriculum
    Services
was concerned with the scope of a landlords claim against the
    proceeds realized from the property of a bankrupt. By contrast, the issue in
Crystalline
    Investments
and
Cummer-Yonge
involved the effect of a trustees
    disclaimer of a lease on the ability of a landlord to assert claims against
    third parties  such as initial tenant assignors and guarantors  for amounts
    due under the disclaimed lease.
Cummer-Yonge
had denied a landlords
    claim against the guarantors of a bankrupt tenants performance of all
    covenants under the lease because of the trustees disclaimer. In
Crystalline
    Investments
, the Supreme Court overruled
Cummer-Yonge
, stating,
    at para. 42:

Post-disclaimer, assignors and guarantors ought to be treated
    the same with respect to liability. The disclaimer alone should not
    relieve either from their contractual obligations.

[64]

Left
    unexamined in
Crystalline

Investments
was whether its
    reasoning about the survival of a landlords claims against assignors and
    guarantors applied equally to claims by landlords on letters of credits issued
    by financial institutions at the instance of tenants. In the present case, the motion
    judge concluded, at para. 44, that
Crystalline Investment
s

reasoning
    did not apply to claims by a landlord under a letter of credit:

In my view, Major Js comments [in
Crystalline
    Investments
] do not apply to BNS obligations as the issuer of the [LOC]
    because its obligation to make payment to the Landlord under the [LOC] was
    wholly dependent on the continued existence of the [Tenants] obligations to
    the Landlord under the Lease.
BNS had no
    independent obligation to make any payment to the Landlord pursuant to the [LOC]
    unlike an assignor or guarantor who has its own independent contractual
    obligations with a landlord to perform the tenants obligations under the Lease
.
    [Emphasis added.]

[65]

In
    my respectful view, the motion judges conclusion was an error for two reasons.

[66]

First,
    his decision runs counter to first principles. A basic principle applicable to
    standby letters of credit is that the issuing bank, such as BNS, has an
    independent obligation to make payment to the beneficiary. The relationship
    between the issuer (BNS) and the beneficiary (Landlord) is controlled by the principle
    of the independence or autonomy of standby letters of credit, not by the
    principles governing the claims that a landlord could make against the estate
    of a bankrupt tenant. Under the autonomy principle, the issuer must pay the
    beneficiary upon proper certification, subject to the limited exception for
    fraud: McGuinness, at §16.13. At paras. 48 to 58 above, I concluded that the
    conduct of the Landlord did not fall within the fraud exception so as to
    constrain the application of the autonomy principle to the Landlords ability
    to draw on the LOC.

[67]

Second,
    the motion judges decision also runs counter to the weight of authority
    regarding the interplay between a trustees disclaimer and a landlords ability
    to draw on a letter of credit, especially the decision of this court in
Lava
    Systems Inc. (Receiver & Manager of) v. Clarica Life Insurance Co.
(2001), 31 C.B.R. (4th) 284 (Ont. S.C.), revd (2002), 161 O.A.C. 53 (C.A.),
    which I regard as the guiding authority.

[68]

Counsel
    referred us to cases from Ontario and British Columbia that considered the
    effect of a trustees disclaimer on a landlords ability to draw on a letter of
    credit arranged by the tenant. The cases pull in different directions, with
    several heavily influenced by principles enunciated in
Cummer-Yonge
that
    were later overruled in
Crystalline Investments
. All the cases
    pre-date the decision of the Supreme Court of Canada in
Crystalline
    Investments
.

[69]

Two
    are decisions of this court:
Titan Warehouse Club Inc. (Trustee of) v.
    Glenview Corp.
(1988), 67 C.B.R. (N.S.) 204 (Ont. S.C.), affd (1989), 75
    C.B.R. (N.S.) 206 (Ont. C.A.); and
Lava Systems
. One is a decision of
    the British Columbia Court of Appeal,
West Shore Ventures Ltd. v. K.P.N.
    Holding Ltd.
, 2001 BCCA 279, 88 B.C.L.R. (3d) 95, leave to appeal refused,
    [2001] S.C.C.A. No. 302. And two are decisions of judges of the Superior Court
    of Justice, both of whom became members of this court:
885676 Ontario Ltd.
    (Trustee of) v. Frasmet Holdings Ltd.
(1993), 17 C.B.R. (3d) 64 (Ont. Gen.
    Div.) (Blair J.); and
Peat Marwick Thorne Inc. v. Natco Trading Corp.
(1995), 22 O.R. (3d) 727 (Gen. Div.) (Feldman J.).

[70]

I
    propose to review the decisions in chronological order: (i)
Titan Warehouse;
(ii)
Frasmet
; (iii)
Natco
;
    (iv)
West Shore
; and (v)
Lava Systems
. As I will outline,
Titan
    Warehouse
and
West Shore
limited the scope of a landlords
    ability to draw on a letter of credit to its statutory preferred claim.
Natco
did not involve a letter of credit, but in
obiter
comments supported
    that approach. By contrast,
Frasmet
and
Lava Systems
(at
    least in its result) recognized the landlords right under the letter of credit
    to draw amounts beyond the statutory preferred claim. Once I have reviewed the
    jurisprudence, I will consider the impact of the decision in
Crystalline
    Investments
on this earlier jurisprudence and the present case.

Titan

Warehouse
(Court of Appeal, 1991)

[71]

In
Titan Warehouse
, clause 22.00 of the lease required
    the tenant to provide the landlord with an irrevocable letter of credit on the
    following terms:

[T]o
guarantee
to
    the Landlord the payment by the Tenant of the Rent and Additional Rent payable
    pursuant to this Lease during the first five (5) years of the Term. The said
    Letter of Credit shall be payable to the Landlord in the event of the
    bankruptcy of the Tenant  and shall be payable upon the Landlord delivering to
    the issuing Bank or Financial Institution, a certificate signed by an officer
    of the Landlord, confirming that the Tenant is in arrears of payment of Rent
    and/or Additional Rent pursuant to this Lease... [Emphasis added.]

For any draw, the letter of credit required the
    landlord to provide a statutory declaration stating that it was entitled to
    the amount drawn hereof in accordance with the terms of [the] Lease Agreement
    between the tenant and the landlord.

[72]

The tenant went into bankruptcy and the trustee disclaimed the
    lease. The trustee sought directions that the landlord was not entitled to draw
    on the letter of credit for any rent beyond the date of disclaimer. At first
    instance, at p. 208, the application judge allowed the trustees application, holding
    as follows:

In my view, the
Cummer-Yonge Investments
    Ltd., supra
, decision is dispositive of the application and the
    counter-application. The landlord is afforded protection by the letter of credit
    for any amount of rent owing up to the date of disclaimer but not thereafter.

[73]

In
    a very brief endorsement, at pp. 206-7, this court affirmed the motion judges
    ruling, stating:

In our opinion, the letter of credit incorporated the terms of
    the lease by reference. Clause 22.00 thereof states that the letter of credit
    was
intended to guarantee
to the landlord payment of the rent by the tenant. In our view, the words
    making the letter of credit payable "in the event of the bankruptcy of the
    tenant", read in the context of the clause as a whole, must be related to
    the stated purpose of the letter of credit. In addition, the payment of the
    letter of credit cannot be obtained except upon proof that the tenant was in
    arrears of payment of rent, an event which was precluded by the disclaimer by
    the trustee. [Emphasis added.]

Frasmet

Holdings
(Gen. Div., 1993)

[74]

Frasmet Holdings
was a 1993 decision of Blair J. (as he
    then was). The tenant provided its landlord with an irrevocable letter of
    credit which, according to the lease, was to secure the Tenants obligations
    under this lease. Blair J. found that the letter of credit was provided, in
    part, to secure the landlords recovery of the cost of significant leasehold
    improvements. The tenant went into bankruptcy and the trustee disclaimed the
    lease. The landlord made a demand for payment under the letter of credit, and
    the trustee asked the court to restrain the payment.

[75]

The trustee submitted that the principle in
Cummer-Yonge
was dispositive of a letter of credit situation involving a bankrupt tenant.
    Blair J. disagreed, stating that:

(i)

Cummer-Yonge
dealt with a guarantee,
    not a letter of credit. A fundamental difference exists between a letter of
    credit, which is a very specialized form of security, and a guarantee, which is
    not a form of security at all (except in a loose, non-legal sense of that
    term): at para. 27;

(ii)

The
    decision in
Titan Warehouse
was
    distinguishable as it appeared to turn on the specific language of the letter
    of credit in that case, the purpose of which was to guarantee to the landlord
    payment of the rent by the tenant. There is a very material distinction
    between a guarantee and a letter of credit: at paras. 29 and 39;

(iii)

Letters of credit are a
    specialized form of commercial credit, designed by their very nature to be free
    and clear of the equities between the parties to the underlying transaction.
    They constitute an independent contract between the issuer and the beneficiary.
    This principle of "autonomy" goes to the root of the practice
    surrounding their issuance. The only admitted exception to the principle is
    fraud: at para. 30

[76]

Those
    distinctions led Blair J. to conclude, at para. 36, that since the stated
    purpose of the letter of credit was to secure the tenants obligations under
    the lease and since bankruptcy is a situation for which security is necessary,
    the landlord was entitled to draw on the letter of credit.

[77]

Blair
    J. further recognized, at para. 41, that while the bankruptcy of the tenant and
    the subsequent disclaimer of the lease by the trustee released the tenant and
    its trustee from the obligations under lease:

[T]hey cannot, in my opinion, deprive the Landlord from having
    resort to the security for which it bargained in order to protect itself in the
    case of the very kind of eventuality which has occurred. Nor can they relieve
    the Bank of its obligation, under its contract with the beneficiary of the
    Letter of Credit, to pay upon being presented with the appropriate certificate

[78]

Later,
    in
Lava Systems
, this court referred with approval to Blair J.s
    analysis of how an irrevocable letter of credit differs from a guarantee.

Natco
(Gen.
    Div., 1995)

[79]

In the present case, the motion judge noted that Blair J.s
    reasoning in
Frasmet
was called into question by Feldman J. in
Natco
.
    However, several observations are in order about
Natco
. First, the
    case did not involve a letter of credit; it concerned a security interest taken
    by the landlord in the equipment of the tenant. Second, the reasons in
Natco
followed
Cummer-Yonge
s holding regarding the unenforceability of a
    guarantee given by the tenant, a holding overturned in
Crystalline
    Investments
. Finally, Feldman J. acknowledged that since courts had
    recognized that in appropriately drafted leases the obligation of a guarantor
    could survive the termination of a lease following a tenants bankruptcy, it
    followed that a letter of credit or other security could be drafted to secure
    an obligation that survives the bankruptcy: at p. 732.

West Shore
(B.C.C.A, 2001)

[80]

The motion judge relied on the decision of the British Columbia
    Court of Appeal in
West Shore
, a case in which a majority of that
    court required a landlord to repay amounts drawn under a letter of credit
    arranged by its tenant. The letter of credit provided that draws could only be
    made when the beneficiary landlord made a demand accompanied by a certificate
    stating that the amount of the letter of credit was being drawn upon pursuant
    to clause 3A of the lease. That clause entitled the landlord to draw upon the
    letter of credit for the full amount of monies represented thereby as prepaid
    rent and or fulfilment of the other obligations of the Lessee in respect of
    this lease, without limitation to any other rights or remedies of the Lessor at
    law or in equity if any one or more of the events as set out in clause 8.1(d),
    (e), (f), (g) or (h) should occur. Clause 8.1(f) provided that a default
    occurred under the lease if the tenant was declared bankrupt.

[81]

The majority concluded that any losses suffered after the
    trustees disclaimer could not be regarded as falling within the language of
    clause 3A of the lease: para. 33. The majority focused its analysis on how the
    lease expressed the obligations secured by the letter of credit stating, at
    para. 36:

If the obligations secured are the obligations
    of the tenant under the lease then the security is no longer security for
    anything when the obligations of the tenant under the lease come to an end.
But where the obligations secured are obligations, perhaps
    independent obligations, to make good the losses suffered by the landlord by
    reason of the tenants bankruptcy or other default, which might well include
    damages for loss of rent over the duration of the tenancy, then those separate
    obligations might well survive the bankruptcy of the tenant
. [Emphasis
    added.]

[82]

Although
    the court ordered the landlord to repay the full amount of the letter of credit,
    it noted that its decision turned on the language of the lease and the letter
    of credit, stating, at para. 41: We should add that a differently drawn lease
    and a differently drawn letter of credit could have produced a different
    result.

[83]

I agree with the B.C. Court of Appeal that a landlords
    entitlement to draw on a letter of credit in a given case will turn on the
    particular language of the lease and letter of credit. In the present case, the
    language of the Lease and LOC differs significantly from that at issue in
West
    Shore
. As noted, here the Lease specifically provides that the LOC acts as
    security for indemnification of the Landlord for losses resulting from any
    termination, surrender, disclaimer or repudiation of this lease  in connection
    with any insolvency and bankruptcy or otherwise and that the Landlords rights
    in respect of the LOC were not affected by the disclaimer of the Lease in any
    bankruptcy proceeding but would continue with respect to the periods prior
    thereto and thereafter as if the Lease had not been surrendered, disclaimed,
    repudiated or terminated. As well, the LOC expressly states that it will not
    be released, discharged or affected by the bankruptcy of the Tenant or the
    disclaimer of the Lease.

Lava Systems
(Court of Appeal, 2002)

[84]

The most recent decision of this
    court on the issue is that in
Lava Systems,
a decision referred
    to by the Trustee on the motion below
[6]
but not mentioned in the motion judges reasons
.

[85]

In
Lava Systems
, the lease required the tenant to provide
    the landlord with an irrevocable letter of credit:

[A]s security for the faithful performance by the Tenant of all
    the terms, covenants and conditions of this Lease for which the Tenant is
    responsible. The Landlord may draw upon the Letter of Credit in whole or in
    part as may be necessary to compensate the Landlord for any loss or damage
    sustained due to the Tenant's breach of its obligations under this Lease.

[86]

To
    draw on the letter of credit, the landlord was required to provide the issuer
    with a statement that the amount drawn is in connection with the indebtedness
    of [the tenant] with respect to the demised premises. The letter of credit
    also stated that it would survive the termination, repudiation, surrender
    and/or discharge of the Lease ... but within the validity of this Credit.

[87]

A
    private receiver was appointed over the tenant. At that point, the landlord
    drew the full amount of the letter of credit to cover future rent and the cost
    of tenant inducements. The tenant then went into bankruptcy and the trustee
    disclaimed the lease. The trustee took the position that the landlord was only
    entitled to draw on the letter of credit for the amount of the landlords
    preferred claim under
BIA
s. 136(1)(f). The trustee applied for
    directions, including the return by the landlord of any excess draw.

[88]

The
    application judge ordered the landlord to return the excess amount drawn.
    Following the decisions in
Cummer-Yonge
,
Titan Warehouse
, and
Natco
, the application judge held that the only right of the landlord which
    survived the termination of the lease was the preferential lien under
BIA
s. 136(1)(f).

[89]

This
    court allowed the landlords appeal. It identified two issues on the appeal:

(i)

As the funds drawn on the letter of credit by the landlord were the
    property of the bank and not of the bankrupt tenant, did the tenant or its
    receiver and manager have a legal right to recover any funds that the landlord
    may have improperly claimed and been paid under the letter of credit?

(ii)

Did
    the application judge err in holding that the landlords draw on the letter of
    credit was limited to its statutory entitlement?

This court decided the first issue in favour of the
    landlord; it did not address the second issue.

[90]

As
    to the first issue, this court held that the tenants receiver-manager did not
    have a legal right to recover draws made by the landlord on the letter of
    credit. The court reached this conclusion on the basis of the autonomy of
    letters of credit, stating, at para. 5:

On the basis of these principles, whether [the
    landlord] was entitled to draw on the letter of credit, and, if so, in what
    amount, is a matter between it and the bank that issued the letter of credit.
    In making payment pursuant to [the landlords] demand, the bank adhered to its
    obligations under the letter of credit. The funds which it paid to [the
    landlord] were its property, not that of [the tenant]. Had [the landlord] not
    drawn on the letter of credit, the balance remaining available to [the
    landlord] under the letter of credit would continue to be the property of the
    bank. In such circumstances, neither [the tenants] receiver and manager, nor
    its trustee in bankruptcy, would have any claim on the undrawn portion of the
    security represented by the letter of credit. In my view, the fact that [the
    landlord] had obtained these funds as a result of its demand under the letter
    of credit places [the trustee/receiver] in no better position than it would
    have been in had [the landlord] not issued its demand. This is because the
    funds available as security under the letter of credit at all times were the
    property of the bank.

[91]

However, the court stated, at para. 9, that there are two
    situations in which a trustee might have a legal right to obtain redress
    against a beneficiary landlord who drew on a letter of credit:

(a)    If
    the bank had assigned to the receiver any claim that it had against the
    landlord: To succeed, the bank or the receiver as assignee of the banks
    interest, would have to prove that [the landlord] acted fraudulently as that is
    the only basis on which an issuer of a letter of credit can obtain redress from
    the beneficiary; or

(b)    If
    the tenant had reimbursed the bank for the amount drawn by the landlord on the
    letter of credit, the tenant, or its receiver, might have a claim against the
    landlord for breach of a clause in the lease that the landlord would hold the
    proceeds from any draw as security for the performance by the tenant of
    obligations under the lease.

[92]

This
    court concluded that, since the record in
Lava Systems
did not contain
    evidence of either situation and there was no finding of fraud against the
    landlord, the receiver had no right to recover draws made by the landlord on
    the letter of credit.

[93]

Of
    the two cases decided by this court
Titan Warehouse
(1989) and
Lava
    Systems
(2002)  I regard the reasoning in
Lava Systems
as the
    more persuasive for two reasons.

[94]

First,
    the decision in
Lava Systems
addressed the principle of the autonomy
    of documentary letters of credit, whereas that in
Titan Warehouse
did
    not deal with the principle.
Lava Systems
referred, with approval, to
    the extensive analysis of Blair J. in
Frasmet
explaining how an
    irrevocable letter of credit differs from a guarantee. The portion of
Frasmet
s
    reasons cited with approval by this court included the following statement by
    Blair J., at para. 36:

It can scarcely be gainsaid that an event which is sure to
    impair a tenant's ability to honour its obligations under the lease is its
    bankruptcy. Why should [the landlord], which had obtained for itself a stand-by
    letter of credit as collateral security in connection with the lease
    transaction, be precluded from calling upon that security when the very kind of
    situation for which security is most likely necessary arises? In my view, in
    the circumstances of this case, it should not be so precluded.

[95]

Lazar
    Sarna, in
Letters of Credit: The Law and Current Practice,
loose-leaf
    (2020-4), 3rd ed. (Toronto: Thomson Reuters Canada Ltd., 2019), at p. 5-39,
    echoes the comments of Blair J.:

It is widely assumed, with ample justification, that the right
    of the beneficiary to obtain payment upon the letter of credit from the issuer
    is in no way affected by the insolvency or bankruptcy of the applicant. Indeed,
    one of the fundamental commercial reasons for the use of the letter of credit
    mechanism is to secure anticipated payments in a manner which would not rely
    upon the will, status or financial faith of the applicant.

See also: David Bish,
Canadian Bankruptcy and
    Insolvency Law for Commercial Tenancies
(Toronto: LexisNexis, 2016), at p.
    248.

[96]

Second,
    the brief decision in
Titan Warehouse
regarded the language in the
    letter of credit that stated it was intended to guarantee to the landlord
    payment of the rent by the tenant as subject to
Cummer-Yonges
treatment of guarantors of leases in bankruptcies. However, that aspect of
Cummer-Yonge
was overturned by the Supreme Court in
Crystalline Investments
and is
    no longer good law.
[7]

[97]

I
    turn now to the application of
Lava Systems
in the context of this
    case.

B.      The application of
Lava Systems

[98]

Lava
    Systems
applied the principle of the autonomy of letters of credit,
    although it recognized two exceptions to that principle. Neither applies in the
    present case.

[99]

The
    first exception would arise if BNS had assigned to the Trustee any claim it had
    against the Landlord. The Trustee, as assignee, would have to prove that the
    Landlord acted fraudulently in drawing on the LOC.

[100]

BNS made no such
    assignment but, in any event, the Trustees repeated submissions that the
    Landlords draws were improper simply bring the analysis back around to the
    question of whether the Landlords draws under the LOC fell within the fraud
    exception to the autonomy principle. For the reasons set out in paras. 48 to 58
    above, I have concluded that on this record the Landlords conduct in drawing
    on the LOC did not fall within the fraud exception to the autonomy principle.

[101]

According to
Lava
    Systems
, the second situation in which the Trustee might be entitled to
    redress from the Landlord for draws made on the LOC would be if the Tenant had
    reimbursed BNS for the amount of any improper draw by the Landlord on the
    LOC.

[102]

In
Lava Systems
,
    this court stated, at para. 9, that if the tenant in that case had reimbursed
    the bank for the amount drawn by the landlord, the tenant or its receiver might
    have a claim against the landlord for breach of clause 26.01(b) of the lease
    for the amount of the improper draw. Clause 26.01(b) of the lease provided that
    if the landlord drew down on the letter of credit, it would hold the proceeds
    as security for the performance by the tenant of its obligations under the
    lease.

[103]

The Trustee relies on this
    portion of the decision in
Lava Systems
to submit that where a bank
    reimburses itself from the tenants property as a result of an improper draw by
    a landlord on a letter of credit, a trustee may have recourse against the
    landlord if the draws were improper. As the Trustee notes, in the present case
    the Landlords draws on the LOC diminished the amount of the GIC held by BNS as
    security, which otherwise would have been available for distribution to the
    Tenants creditors.

[104]

I do not accept this
    submission by the Trustee for three reasons.

[105]

First, the comments in
Lava Systems
about the effect of a right of reimbursement from the
    bankrupt tenants estate were anchored in the specific language of the lease in
    that case: namely, clause 26.01(b). The Trustees attempt to stretch that
    case-specific lease language into a principle about the effect of any right by
    an issuer to seek reimbursement from the bankrupts estate must now be read in
    light of the decision in
Crystalline Investments
. In that case, the
    Supreme Court rejected the argument that the existence of a right of
    indemnification for an initial tenant assignor or guarantor against a bankrupt
    tenant would frustrate the objectives of the
BIA
or was a good reason
    to regard a trustees disclaimer of a lease as its termination for all
    purposes: at paras. 32-33. The Supreme Court observed that
BIA
s. 179
    conserved the liabilities of alternative debtors.
[8]
Further, Major
    J. stated, at para. 35:

[W]here an original tenant seeks indemnification on a
    contingent claim, provided the claim is provable and not disallowed, it would
    fall into the insolvency to be dealt with in accordance with the scheme of
    the
Act
. The
    assignor simply joins the other unsecured creditors in the proceedings. If
    such a claim is approved, it cannot satisfy and at the same time frustrate
    the
Act
.

[106]

As this court noted in
Lava Systems
, at para. 5, under the law concerning standby letters of
    credit the funds an issuing bank pays to a beneficiary are the property of the
    bank, not the applicant customer: see also McGuinness, at §16.54.
[9]
Although an issuing bank does not have a right of subrogation against its
    applicant customer in the event it is called upon to pay under a letter of
    credit, its contract with the customer applicant may include a right to
    reimbursement:
Westpac Banking Corp. v. Duke Group Ltd.
(1994), 20
    O.R. (3d) 515 (Gen. Div.), at pp. 530-39; McGuinness, at §17.92; Sarna, at p.
    8-43. Where such a contractual right of reimbursement exists, a bank may seek
    reimbursement for any amounts it is required to pay out under a letter of
    credit. In this respect, a contractual claim for reimbursement brought by an
    issuing bank would have the same economic effect on a bankrupt tenants estate as
    a claim for indemnification brought by an original tenant assignor or
    guarantor. Applying the reasoning of
Crystalline Investments
, the
    existence of such a contractual right to reimbursement by an issuing bank would
    not frustrate the objectives of the
BIA
or justify treating a
    trustees disclaimer of a lease as its termination for all purposes.

[107]

The second reason is a
    factual one. As noted above in para. 10, BNS held cash collateral security in
    the form of a GIC from the Tenant in support of the LOC and BNS had registered
    a
PPSA
financing statement against the Tenant. The banks realization
    on its security following its payments of draws by the Landlord no doubt
    reduced the amount available for distribution to the Tenants unsecured
    creditors. However, the scheme of distribution set out in
BIA
s. 136
    recognizes that the amount available for distribution to unsecured creditors is
    subject to the rights of secured creditors.
[10]
In the present case, the Trustee has not disputed the validity of the BNS
    security.

[108]

The final reason lies
    in the provisions of the
BIA
or, more specifically, in what the
BIA
does not contain. To accept the Trustees position would, in effect, be
    tantamount to accepting the proposition that the
BIA
does not permit a
    landlord to take security from its tenant, through the vehicle of a letter of
    credit, that would exceed the amount of a claim for accelerated rent under
BIA
s. 136(1)(f). Yet, the
BIA
does not contain any such language of
    limitation or prohibition. Whether the
BIA
should contain such a
    limitation is a matter for Parliament to consider.
[11]
As part of any
    such consideration, Parliament no doubt would have to weigh the costs of
    eroding the principle of autonomy of standby letters of credit against any
    benefits arising from the limitation advocated by the Trustee.

C.      C
onclusion on Issue 1

[109]

For these reasons, I
    conclude that the motion judge erred in limiting the Landlords entitlement to
    draw on the LOC to its preferred claim under
BIA
s. 136(1)(f) for
    three months accelerated rent. BNS accepted the Landlords draws on the LOC as
    complying presentations. The Trustee has not established that the Landlords
    conduct in drawing on the LOC, when assessed in light of the language of s.
    2(a) of Schedule C to the Lease and of the LOC, fell within the fraud exception
    to the principle of the autonomy of letters of credit. Finally, I see no
    provision in the
BIA
or principle of Canadian bankruptcy law that
    overrides the autonomy principle and precluded the Landlord from drawing on the
    LOC for amounts in excess of its preferred claim against the bankrupts estate
    for three months accelerated rent. Consequently, I conclude that the Landlord
    was entitled to draw up to the full amount available under the LOC.

[110]

Next, I consider whether
    the amount available was the face amount of $2.5 million or a reduced amount of
    $1,357,135.53.

VII.

ISSUE 2: DID THE TERMS OF THE LEASE MANDATE A REDUCTION IN THE
    VALUE OF THE LOC ON MAY 1, 2017?

A.      The issue stated

[111]

As an alternative
    submission on the motion below, the Trustee argued that the language of the LOC
    mandated a reduction in its value on May 1, 2017 to $1.357,135.53. The motion
    judge accepted that argument. The Landlord submits that the motion judge erred
    in that conclusion. I agree that the motion judge erred in his interpretation
    of the Lease. As I will explain, his interpretation of the Leases LOC
    reduction clause was based on an error concerning an extricable question of
    law.

B.      The provisions of the Lease

[112]

Section 2(a) of Schedule
    C to the Lease contains a provision concerning reductions in the value of the
    LOC during the term of the Lease. For the value to be reduced, the Tenant must
    never have been in default and must have promptly paid all rent:

If Tenant is not then and has not been in
    default of its obligations under this Lease and
has at all times promptly
    paid all Rent throughout the Term
, the [LOC]
shall
decline in value as set out in
    subparagraph (b) below (the value of the [LOC] from time to time being
    hereinafter referred to as the Principal Amount). [Emphasis added.]

[113]

Section 2(b) sets out
    the mechanism by which the amount of the LOC could be reduced during the term
    of the Lease:

If Tenant is not then
    and has not been in default of its obligations under this Lease and has at all
    times promptly paid all Rent throughout the Term, this Lease has not been
    disclaimed
, and at no time has Landlord been
    required to draw upon the [LOC] (failing any such pre-conditions, this
    subparagraph (b) shall cease to have application), the [LOC]
may
be reduced
    as follows:

(i) on the thirty-seventh (37th) month of
    the initial Term, the [LOC]
may
be reduced by an amount equal to fifty percent (50%) of the
    Permitted Decline Amount (as herein defined)

For the purposes of this Paragraph 2(b) of
    Schedule C, Permitted Decline Amount means a sum equal to (I) [$2.5 million];
    less (II) an amount equal to the Annual Rent, the estimated Operating Costs and
    taxes, and HST thereon, payable by Tenant for the last month of the initial
    Term. [Emphasis added.]

[114]

The
    language in s. 2(a) differs from that in s. 2(b). The former states that if
    certain conditions are met, the LOC shall decline in value as set out in
    subparagraph (b); whereas subparagraph (b) states the LOC may be reduced in
    value. However, that difference does not play a role in the determination of
    this issue, which turns on whether the motion judge erred in finding that the
    Tenant had satisfied the pre-conditions for a reduction in the value of the LOC.
[12]

[115]

The
    37
th
month of the initial term referred to in s. 2(b) commenced on
    May 1, 2017. No reduction in the amount of the LOC was requested or made at
    that time. As a result, the amount of the LOC at the time of the Tenants
    bankruptcy remained at $2.5 million and that was the amount the Landlord drew
    down.

C.      The reasons of the motion judge

[116]

The motion judge
    accepted the Trustees submission that the language of the LOC mandated a
    reduction in its value on May 1, 2017, and so, even if the Landlord was
    entitled to draw on the LOC for amounts in excess of its statutory preferred
    claim for three months accelerated rent, the draws could not exceed $1,357,135.53.

[117]

At paras. 48 to 51 of
    his reasons, the motion judge stated:

The terms of the Lease clearly require the [LOC]
    to be reduced to $1,357,135.53 as of May 1, 2017 if there have been no events
    of default under the Lease and the [Tenant] has paid rent promptly. I find that
    the language used in the Lease makes this reduction in value of the [LOC] mandatory
    if these conditions are met.

There were no events of default under the
    Lease before the bankruptcy and the delays by the [Tenant] in paying rent were
    relatively minor. Further, the Landlord never advised the [Tenant] that it had
    failed to pay rent promptly under the terms of the Lease.

In my view, the term promptly means within a
    reasonable time and not on the actual date that the rent is due. I find that
    the [Tenant] paid its rent within a reasonable time.

For these reasons I have concluded that the
    value of the [LOC] was reduced to $1,357,135.53 as of May 1, 2017.

D.      Analysis

[118]

Although the decision
    of the Supreme Court of Canada in
Sattva Capital Corp. v. Creston
    Moly Corp.
, 2014 SCC 53, [2014] 2 S.C.R. 633 teaches, at paras. 52-54,
    that appellate courts should give deference to first instance decision-makers
    on points of contractual interpretation, deference does not apply when the
    interpretation is marked by an error on an extricable question of law. In my
    respectful view, the motion judges interpretation of the Leases LOC reduction
    clause was based on an error concerning an extricable question of law.

[119]

The error concerns the
    motion judges interpretation of the word promptly in ss. 2(a) and (b) of Schedule
    C to the Lease. Any decline in value of the LOC during the term of the Lease
    required that the Tenant had at all times promptly paid all Rent through the
    Term. The motion judge interpreted the word promptly to mean within a
    reasonable time and not on the actual date that the rent is due.

[120]

Legal errors made in
    the course of contractual interpretation include the failure to consider a
    required element of a legal test:
Sattva
, at para. 53. A fundamental
    legal precept of contractual interpretation requires an examination of the
    contract as a whole, not just a consideration of the specific words in dispute.
    Individual words and phrases must be read in the context of the entire
    document: Geoff R. Hall,
Canadian Contractual Interpretation Law
, 3rd
    ed. (Toronto: LexisNexis, 2016), at p. 16.

[121]

In his reasons, the
    motion judge did not take into account several provisions of the Lease that are
    relevant to the interpretation of the word promptly in ss. 2(a) and (b) of
    Schedule C. First, s. 1.01 of the Lease provides that the Tenant was to pay the
    Annual Rent in equal monthly amounts payable  on the first day of each
    calendar month during the Term. No provision of the Lease exempted statutory
    holidays from this requirement. No provision qualified this obligation to
    permit the Tenant to pay rent within a reasonable time of the first day of
    each calendar month.

[122]

Second, s. 15.03(a) of
    the Lease provides that the failure to pay rent when due constitutes a default:
    when the Rent hereby reserved is not paid in full when due, and
such default
continues for five (5) days after written
    notice  (emphasis added). A default therefore occurs if rent is not paid when
    due, namely on the first day of each calendar month.

[123]

Third, s. 16.08 states
    that [n]o provision of this Lease shall be deemed to have been waived by
    Landlord or Tenant unless such waiver is in writing signed by the other. There
    was no evidence that the Landlord had waived in writing the Tenants obligation
    to pay rent on the first day of each calendar month.

[124]

Taken together, these
    three provisions do not support the motion judges interpretation that the word
    promptly in ss. 2(a) and (b) of Schedule C of the Lease means within a
    reasonable time and not on the actual date the rent is due. Yet, these three provisions
    did not form part of the motion judges analysis.

[125]

One purpose of the LOC
    was to provide the Landlord with security that the Tenant would perform its
    obligations under a long-term lease, one of which was the payment of rent.
    Reducing the value of the LOC would decrease the protection enjoyed by the
    Landlord against the Tenants default. No doubt that is why ss. 2(a) and (b)
    use tight language when setting the pre-conditions for a reduction in the
    value of the LOC: a reduction in the value did not depend upon the absence of
    an event of default
[13]
but on the Tenant paying
    rent promptly at all times. The failure to pay rent on the date due would
    put the Tenant in default (although not an event of default). When considered
    in that context and in light of the whole Lease, promptly means payment of
    rent when due  namely, on the first day of each calendar month.

[126]

This interpretation
    finds further support in s. 3.03 of the Lease, which stipulates [a]t Landlord's
    request, Tenant will make all payments under this Lease by way of electronic
    funds transfer from Tenant's bank account. Electronic fund transfers eliminate
    the problem associated with the physical delivery of a rent cheque, such as
    when the due date falls on a statutory holiday. The evidence of Alistair
    Pickering, a representative of the Landlord, was that it would have requested a
    move to electronic funds transfer as a normal course of action.

[127]

There was no dispute
    that prior to May 1, 2017 the Tenant had twice failed to pay rent when due on
    the first day of each calendar month: the rent payments due February 1, 2015
    and July 1, 2015.
[14]
Consequently, there were
    two occasions prior to May 1, 2017 when the Tenant had failed to pay rent
    promptly for the purposes of ss. 2(a) and (b) of Schedule C to the Lease. Due
    to those failures, the Tenant had not satisfied the pre-conditions for a
    reduction in the value of the LOC on May 1, 2017. The motion judge erred in
    finding otherwise.

VIII.

DISPOSITION

[128]

For the reasons set
    out above, I would allow the appeal, set aside the order of the motion judge,
    and dismiss the Trustees motion.

[129]

The Landlord is
    entitled to its costs of the appeal and its costs below. If the parties are
    unable to agree on those amounts, they shall file written submissions not
    exceeding three pages in length, together with bills of costs, within 10 days
    following the release of these reasons.

Released: DB OCT 28 2020

David
    Brown J.A.

I
    agree. David M. Paciocco J.A.

I
    agree. I.V.B. Nordheimer J.A.

[1]
A trustee in bankruptcy has the power to disclaim any lease of the
    bankrupts property:
BIA
,
s. 30(1)(k);
Commercial Tenancies Act,
R.S.O. 1990, c. L.7, s. 39(1).

[2]

BIA
s. 136(1)(f) states:

136

(1)
Subject to the rights of secured
    creditors, the proceeds realized from the property of a bankrupt shall be
    applied in priority of payment as follows:

(f)
the lessor for arrears of rent for a period of three
    months immediately preceding the bankruptcy and accelerated rent for a period
    not exceeding three months following the bankruptcy if entitled to accelerated
    rent under the lease, but the total amount so payable shall not exceed the
    realization from the property on the premises under lease, and any payment made
    on account of accelerated rent shall be credited against the amount payable by
    the trustee for occupation rent.

[3]
Article
    2 of the International Chamber of Commerce Uniform Customs and Practice for
    Documentary Credits, 2007 Revision, ICC Publication no. 600, defines a
    complying presentation as a a presentation that is in accordance with the
    terms and conditions of the credit, the applicable provisions of these rules
    and international standard banking practice.

[4]

Section
    3 in Schedule C of the Lease defined the Landlords Work, which consisted of a
    number of pre-occupancy improvements to the Premises by the Landlord. The hard
    and soft costs of the Landlords Work were capped at $500,000. Upon default
    under the Lease, the Tenant was required to pay the Landlord the unamortized
    cost of the Landlords Work.

[5]

The
    language found in the Lease and LOC reflects, to an extent, the advice found in
    the professional insolvency commentary on drafting letters of credit. The
    commentary suggests how a landlord can draft a letter of credit so that its
    ability to make draws is not limited to its preferred claim under
BIA
s. 136(1)(f) in the event of its tenants bankruptcy and the trustees
    disclaimer of the lease. Some commentators have offered that a landlord could
    draft the lease and letter of credit to provide that its ability to draw on the
    letter of credit does not depend on the continuing obligations of the tenant
    under the lease. Instead, the lease and letter of credit could provide that the
    letter of credit is security for damages or loss suffered by the landlord as a
    result of a breach or termination of the lease: Clive S. Bird and Kendall E.
    Andersen,
Various Landlord Issues in
    British Columbia Insolvencies (
2003) Insolvency Institute of
    Canada Article 2003-10, at p. 3; Darrell M. Gold,
Letters of Credit, Tenant Bankruptcy and Lease Disclaimers  Is Your LC
    Worth the Paper Its Written On? (9 January 2020), online:
Robins
    Appleby LLP:
    <www.robinsappleby.com/resources/in-the-media/details/2020/01/09/letters-of-credit-tenant-bankruptcy-and-lease-disclaimers-is-your-lc-worth-the-paper-it-s-written-on>.

[6]

Factum
    of The
Fuller Landau Group Inc., Trustee in Bankruptcy,
    dated June 4, 2019, at paras. 58-60
; Reply Factum of The Fuller Landau
    Group Inc., Trustee in Bankruptcy, dated June 28, 2019, at para. 4.

[7]
The
    same is true of the
obiter
comments in
Natco
that called into
    question the analysis of Blair J. in
Frasmet
. The comments in
Natco
also relied on
Cummer-Yonges
treatment of guarantors that was
    overturned in
Crystalline Investments
.

[8]

BIA
s. 179 states: An order of discharge does not release a person who at the time
    of the bankruptcy was a partner or co-trustee with the bankrupt or was jointly
    bound or had made a joint contract with the bankrupt, or a person who was
    surety or in the nature of a surety for the bankrupt.

[9]

As
    a result, a bank pays a beneficiary with its own funds, not those of the
    applicant customer: Sarna, at p. 5-29 & 5-39.

[10]
As
    the Supreme Court of Canada recently held in

Chandos
    Construction Ltd. v. Deloitte Restructuring Inc.,
2020 SCC 25, at para. 40,
    the anti-deprivation rule is not offended when commercial parties protect
    themselves against a contracting counterpartys insolvency by taking security,
    acquiring insurance, or requiring a third-party guarantee.

[11]
The
    case laws lack of clarity about the ability of a landlord to draw on a letter
    of credit following a trustees disclaimer of the lease has led commentators to
    suggest some convoluted solutions. For example, building on
Crystalline
    Investments
, some commentators suggest that a landlord could require a
    third party, such as a guarantor or indemnifier, to arrange for the letter of
    credit, instead of the tenant: Norton Rose Fulbright, Tenant Insolvency Issues
    for Commercial Landlords in Alberta (28 May 2020) online: <www.nortonrosefulbright.com/en-ca/knowledge/publications/d3d54f6a/tenant-insolvency-issues-for-commercial-landlords-in-alberta>;
    Steven Jeffrey,
Cummer-Yonge
 a Post-Mortem:
Crystalline
    Investments Ltd. v. Domgroup Ltd.

(2006) 21 Banking & Finance L.R.
    263, at p. 300.

[12]

In
    its factum, the Trustee argues that the reduction in the value of the LOC was
    mandatory and not conditional on any request by the Tenant to the Landlord for
    a reduction. However, by its terms the LOC was irrevocable and for the amount
    of $2.5 million. A credit cannot be amended without the agreement of the
    issuing bank and the beneficiary: UCP 600, art. 10(a); McGuinness, at §17.149.
    Consequently, whatever view one takes of the differing shall and may
    language in ss. 2(a) and (b) of the Lease, any reduction by the issuer BNS in
    the amount of the LOC would require either the agreement of the Landlord or a
    court order directing the amendment by reason of the Landlords breach of a
    requirement in the Lease that it agree to a reduction.

[13]

Section
    15.03(a) of the Lease provides that an event of default occurs if the Rent
    hereby reserved is not paid in full when due, and such default continues for
    five (5) days after written notice.

[14]

The Landlord had to follow up with the Tenant on February 3,
    2015 to request payment of the February rent.


COURT OF APPEAL FOR ONTARIO

CITATION: Ballanger v. Ballanger, 2020 ONCA
    626

DATE: 20201006

DOCKET: C66137

Juriansz, Hourigan and Thorburn
    JJ.A.

BETWEEN

Colleen Debra Ballanger

Applicant (Appellant)

and

Michael John Ballanger

Respondent (Respondent)

and

Kelly
    Hearnden

Respondent

Shannon Beddoe and Jonathan Robinson,
    for the appellant, Colleen Ballanger

Gary S. Joseph and Aaron M. Mastervick,
    for the respondent, Michael Ballanger

Joseph J. Neal, for the respondent,
    Kelly Hearnden

Heard: September 29, 2020 in
    writing

On appeal from the order of Justice
    Emile Kruzick of the Superior Court of Justice, dated October 9, 2018, with
    reasons reported at 2018 ONSC 4256.

REASONS FOR DECISION

i.

OVERVIEW

[1]

This is an
appeal
by Ms. Ballanger from the trial judges orders on spousal support,
    retroactive spousal support, and retroactive child support. She also appeals
    from the trial judges award of costs to her in the amount of $15,000.

[2]

Ms. Ballanger claims the trial judge made
    palpable and overriding errors in granting insufficient spousal support,
    failing to order retroactive spousal and child support, and in awarding costs.

[3]

For the reasons that follow, the appeal is
    dismissed.

ii.

THE EVIDENCE AND FINDINGS OF THE TRIAL JUDGE

Background Evidence

[4]

Ms. and Mr. Ballanger began living together in
    1979, married in 1985, and separated in 2004. They had three children. At the
    time of trial, Ms. Ballanger was 62 years old and Mr. Ballanger was 65 years
    old.

[5]

During the marriage, Ms. Ballanger remained at
    home to look after the children and manage the household.

[6]

At the time of trial, Mr. Ballanger was a
    financial advisor, and had formerly been a stock broker. His income fluctuated,
    sometimes greatly, from year to year. Ms. Ballanger had upgraded her skills
    since separation but was not gainfully employed.

[7]

In 2006, Ms. and Mr. Ballanger agreed that Mr.
    Ballanger would pay Ms. Ballanger $1,500 in child support and $2,500 in
    spousal support. As part of this agreement, Ms. Ballanger received the net
    proceeds of sale of the matrimonial home and cottage (which the trial judge
    calculated to be approximately $134,000 for the home and $350,000 for the
    cottage).

[8]

In 2008, after Ms. Ballanger had applied for an
    increase in support based on an increase in Mr. Ballangers income a temporary
    order was made that Mr. Ballanger pay $2,734 in child support for the
    youngest child and $8,500 in spousal support based on an income of $350,000.
    Mr. Ballanger was also ordered to pay Ms. Ballanger $101,276 in retroactive
    support.

The Positions of the Parties at Trial

[9]

At trial, both parties agreed to divorce.

[10]

Ms. Ballanger sought spousal and child support,
    both retroactive and prospective. She also asked for an order that Mr.
    Ballanger procure life insurance to secure her claims, and for costs of the
    trial. Ms. Ballanger claimed Mr. Ballangers support obligations should be
    based on an imputed income of $400,000 per annum.

[11]

Mr. Ballanger sought to reduce the amount of
    support payable from the amount set out in the 2008 order, relying on line 150
    of his tax return on which his stated income was $136,000. He also claimed he
    had paid over $200,000 more than he should have in spousal support since 2008
    as reflected in his last ten years tax returns. He sought to impute income to
    Ms. Ballanger in the amount of at least $30,000 per annum.

[12]

He claimed he had met his child support
    obligations and he relied on the order of Horkins J. dated November 1, 2017,
    that no further sums are owed for child support.

[13]

The trial took eight days.

Spousal Support

[14]

The trial judge ordered Mr. Ballanger to pay
    spousal support in the amount of $6,500 per month based on an imputed annual
    income of $225,000. He imputed income of $25,000 to Ms. Ballanger.

[15]

In so doing, the trial judge held that relying
    on Mr. Ballangers line 150 income tax return for 2017 would not result in the
    most accurate determination of his income given that his income had fluctuated
    greatly over the last many years. The trial judge noted that for the period
    between 2008 and 2017, Mr. Ballanger earned a total of $2.8 million resulting
    in an annual average of $280,000 per year during that period. He concluded that
    given the fluctuations, averaging the income resulted in a more accurate
    result. The trial judges assessment was based on all of the evidence before
    him on Mr. Ballangers income, including but not restricted to his tax returns
    over the period.

[16]

The trial judge noted that Ms. Ballanger had
    upgraded her skills by taking a four year course in interior design after
    separation in 2004, and there was no satisfactory explanation for why she had
    not secured employment.

[17]

As for Ms. Ballangers claim for retroactive
    spousal support, there were some years in which, based on his actual income,
    Mr. Ballanger should have paid more in support than he did. Mr. Ballanger had
    also engaged in blameworthy conduct  a relevant factor in awarding retroactive
    spousal support - by failing to disclose his income every six months as ordered
    by Gordon J.

[18]

Despite this, the trial judge concluded that a
    retroactive spousal support award would not be appropriate or fair. This was
    because Ms. Ballanger had failed to pay any income tax on the taxable spousal
    support she received, had declared bankruptcy in 2013, and had been relieved of
    the tax debt. The trial judge pointed out [t]he result of the wifes
    bankruptcy exceeded the amount she claims in spousal support arrears. As such,
    she had received all of her spousal support tax-free and a net support benefit
    higher than the amount she claimed Mr. Ballanger should have paid. The trial
    judge therefore concluded that, If there were hardship, the bankruptcy
    relieved her of the hardship for which she now claims retroactive support.
    Moreover, he held that an award of retroactive spousal support would create
    financial hardship for Mr. Ballanger.

Child Support

[19]

The trial judge dismissed both Ms. Ballangers
    claim for retroactive child support and Mr. Ballangers claim that he had paid
    too much in child support and s. 7 expenses.

[20]

He held that Mr. Ballanger had not produced his
    income information as ordered, but that this was mitigated by the fact that Mr.
    Ballanger later assumed most of the children's post-secondary education
    expenses, which expenses exceeded his statutory child support obligation.

[21]

The trial judge also noted that Mr. Ballanger
    diligently paid his child support obligations pursuant to the temporary order
    of February 28, 2008 (para. 195). The trial judge held that Mr. Ballanger was
    not responsible for Ms. Ballangers financial circumstances leading to her
    bankruptcy and that Mr. Ballanger consistently abided by the terms of the 2008
    order such that Ms. Ballanger received the support as per the court order.

iii.

ANALYSIS AND CONCLUSIONS

[22]

The Supreme Court of Canada has instructed
    courts of appeal to accord significant deference to the decisions of trial
    judges relating to support orders. The discretion involved in making a support
    order is best exercised by the judge who has heard the parties directly. The
    deferential standard of review avoids giving parties an incentive to appeal
    judgments to attempt to persuade the appeal court that the result should be
    different. This approach promotes finality in family law litigation and
    recognizes the importance of the appreciation of the facts by the trial judge.

[23]

An appeal court can therefore only interfere
    with the trial judges decision if there is a material error such as a serious
    misapprehension of the evidence, or an error in law. It is not entitled to
    overturn a support order simply because it would have made a different decision
    or balanced the factors differently: see
Hickey v. Hickey
, [1999] 2
    S.C.R. 518, at paras. 11-12.

[24]

In making a spousal support order, the Court may
    impute such income to a spouse as it considers appropriate in the
    circumstances, including where it appears that income has been diverted that
    would affect the level of child support, where the spouse has failed to provide
    income information when under a legal obligation to do so, and/or where the
    spouse unreasonably deducts expenses from income:
Spousal Support Advisory
    Guidelines
, Section 19(1) (d), (f), (g).

[25]

In so doing, the amount selected must be
    grounded in the evidence. When imputing income based on intentional
    under-employment or unemployment, a court must consider what is reasonable in
    the circumstances:
Drygala v. Pauli
(2002), 61 O.R. (3d) 711 (Ont.
    C.A.), Tab 5, paras 44 and 45.

[26]

The Supreme Court confirmed that the court
    retains jurisdiction to retroactively vary a child support order after the child
    no longer qualifies as a child of the marriage:
Michel v. Graydon
,
    2020 SCC 24.

[27]

In this case, the trial judge heard evidence
    over eight days. In his thoughtful and comprehensive reasons, he considered all
    of the relevant factors and arrived at reasonable conclusions.

[28]

We, of course, agree with Ms. Ballanger that,

[i]t would be erroneous and unjust for support
    payors to flout their court-ordered obligations, allow support recipients to
    fall into bankruptcy and then rely on the bankruptcy to evade their legal
    obligations. Such a result undermines both the critical role that ongoing financial
    disclosure plays in family law, and the policy objectives of child and spousal
    support orders more generally.

[29]

However, that principle does not apply here, as
    Mr. Ballanger neither caused nor contributed to Ms. Ballangers bankruptcy.
    Instead, the trial judge found as follows at para. 198: While I do not blame
    the wife for the circumstances she found herself in, the husband acted
    consistently abiding by the terms of the February 28, 2008 court order so that
    there was an ongoing pattern and certainty governing their financial affairs.

[30]

The trial judge found that Mr. Ballanger paid
    the full amount of 2008 court‑ordered spousal and child support until
    trial, based on an imputed income of $350,000. This was significant support of
    $2,500 for child and $8,500 for spousal support, totalling $132,000 annually. And
    while his income was higher than $350,000 in a few of the intervening years (a
    fact he should have disclosed as part of the court-ordered disclosure), the
    husband's income was considerably lower than the imputed amount upon which he
    paid support in at least as many years. This is reflected in the historic
    income chart set out at para.114 of the trial judges reasons.

[31]

The trial judge held that Ms. Ballanger's
    bankruptcy resulted from a tax debt that arose from her failure to pay any
    income tax on the taxable spousal support she received from 2006 to 2013, when
    she declared bankruptcy (para.184).

[32]

Moreover, the trial judge found that both
    parties failed to provide adequate disclosure and noted that Ms. Ballangers
    budget included $2000 per month in income tax, tax she had not in fact been
    paying because she had declared bankruptcy. As for security for the support,
    the trial judge considered the issue of insurance coverage in Mr. Ballangers
    situation. After considering that Mr. Ballanger already had life insurance
    in the amount of $150,000 which the trial judge held was adequate security for
    the support payments, his income and his ability to pay, he imputed income of
    $225,000 to Mr. Ballanger. His decision was reasonable and we see no cause to
    interfere.

[33]

Lastly, Ms. Ballanger provides no basis for her
    assertion that the trial judge erred in awarding her only $15,000 in trial
    costs and should have awarded her more. We see no reason to interfere with that
    decision either.

[34]

In short, we see no basis that would allow us to
    interfere with the trial judges decision. The appeal is dismissed.

[35]

If the parties are unable to agree on costs of
    this appeal, brief written submissions of no more than three pages may be submitted
    by no later than October 8, 2020.

R.G.
    Juriansz J.A.

C.W.
    Hourigan J.A.

J.A.
    Thorburn J.A.