Dispute Over Business Loan Repayment Creates Disagreement Between Friends

written on behalf of Feigenbaum Law

An old saying says “you shouldn’t mix business with pleasure.” While some can marry the two worlds, others can find themselves in trouble after mixing business and social relationships. Despite the appeal to enter into business with a friend because of the pre-established trusting relationship, it can lead to problems down the road. 

A recent Ontario Superior Court of Justice decision dealt with a dispute between two business partners who were also friends. The parties were involved in a storage business together, however, when one of the parties sought repayment of a loan, there was disagreement as to the amount to be repaid.

Plaintiff loans funds to friend to assist with a new business

In Maltby v. Morrow, the plaintiff and the defendant were friends and business partners. In 2004, the defendant, Morrow, had conceived the idea of opening a self-storage facility north of Toronto. However, because the defendant had no money to invest in the project at the time, he approached the plaintiff, Maltby, who agreed to invest $100,000 in the business. The plaintiff further loaned the defendant $100,000 to assist with start-up costs. 

Later that year, the defendant incorporated a company which owned and operated the business. In total, six investors were involved in the project, each of whom invested $100,000 into the business. The business was a success and each investment was worth $500,000 at the time of the hearing. 

Over time, the parties encountered disagreements regarding exactly how much money was owed to the plaintiff and how much interest would be paid. It was unclear whether the defendant owed the plaintiff $90,000 or $100,000 and, making matters worse, then parties could not locate the promissory note supporting the loan. 

Defendant relies on draft promissory note 

The plaintiff claimed that the interest rate on the loan was 8% annually, while the defendant believed that the parties had agreed to a 12% interest rate. Additionally, the plaintiff believed the defendant’s wife also signed the note, however, the defendant denied this. 

The defendant produced what he stated was a draft of the promissory note, which was dated September 14, 2004, and was signed by him. This draft note set the principal amount at $100,000 with an interest rate of 12%. The note also indicated the loan was repayable within 45 days of the defendant receiving “written notice of demands.” 

Uncertainty regarding actual amount of loan 

The defendant claimed that the actual amount of money he received for the loan was $90,000, although the draft note that he produced stated the principal amount as $100,000, which supported the plaintiff’s recollection. 

The Court noted that the primary piece of evidence the defendant relied on to support his position that the loan was only for $90,000 was a deposit slip from the bank, dated September 16, 2004, in that amount. 

Draft promissory note not sufficient evidence

The Court pointed out the fact that this was not aligned with the investments made by other parties, all of which equaled $100,000. The Court wrote, “It strikes me as highly likely that the $90,000 shown on the deposit slip was the $90,000 tranche only, and that the total investment in each case was $100,000 as various other pieces of evidence confirm.” 

The Court did not give any weight to the draft promissory note provided by the defendant, since it was never intended to represent the actual final contract between the parties. Therefore, the Court concluded that the plaintiff had loaned $100,000 to the defendant.

Defendant claims that plaintiff’s limitation period to bring claim has expired

On May 15, 2012, the plaintiff sent the below email to the defendant:

“Guys, I need to ask the question of when we might settle our accounts as it will be 7 years as of Sept. 1/12. I am looking for $125k if paid by year end and a larger figure if not. Please talk it over and let me know what can be done. I retire at the end of the year and need to put my house in order as I probably will be leaving the area…”

The defendant believed that the email constituted a “clear and unequivocal demand” which triggered the running of a limitation period relative to the loan. Therefore, he claimed that the plaintiff’s two year limitation period to bring this action has since passed.

Court finds plaintiff entitled to $100,00 loan repayment plus interest

The Court found that the plaintiff’s email did not constitute a clear and unequivocal demand for repayment, therefore, this did not trigger the limitation period. The Court explained that the email proposed repayment by the end of 2012 but left open the possibility that payment could be made at a later for an unspecified “larger” amount. 

The Court ordered the defendant to repay to the plaintiff the principal loan amount of $100,000 in addition to interest running from September 1, 2004 to February 21, 2023.

The Commercial Lawyers at Feigenbaum Consulting Help Clients Resolve Complex Business Disputes

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