Article

Note: The Issuer, Bank of Montreal, sued Corporate Applicant Harp Homes, Inc. and its individual shareholders, Anthony Falasca, Mark Zizzo, E. Martin Mazza, and Angelo Modica (Individual Applicants) to recover for payment on an LC which was made to the City of Hamilton in Ontario, Canada (Beneficiary). Applicants had applied for a standby LC for CA$187,450.50 in 1997 and had guaranteed reimbursement of a payment under it. The LC allowed for automatic renewal each year unless Issuer gave notice that it would not renew the LC for the upcoming year, which it chose to do in 2002. Beneficiary then drew on the LC for the amount of CA$42,450.50 and Issuer honored. When Applicant failed to reimburse Issuer, it brought this action against Applicants and guarantors. The Ontario Superior Court of Justice, Siegel, J., granted Issuer's motion for summary judgment, holding all Applicants jointly and severally liable for reimbursement to Issuer for the final 2002 drawing on the LC.

Corporate Applicant argued that it was not liable because its name did not appear on the promissory note guaranteeing reimbursement on the LC. The court rejected this argument, noting that "there is no doubt that a debt of the [C]orporate [Applicant] arose when the [LC] was honoured," and that because "the promissory note was one of several executed in blank by the [C]orporate [Applicant] ... it was through inadvertence that the corporate name was not added to the cheque." The court also noted that the Corporate Applicant conceded that the note was not intended to evidence personal liability of the Individual Applicants who did sign it.

Individual Applicant Modica asserted that he should not be obligated to reimburse Issuer for a drawing which occurred when he was no longer a shareholder of the corporation because he had an "understanding with [Issuer] that his liability was to be restricted to indebtedness which was incurred while he was a shareholder of the [C]orporate [Applicant] and that [Issuer] knew he had ceased to be a shareholder at the time it advanced funds on the last draw under the letter of credit." The court rejected this argument, noting that Individual Applicant's liability on his guarantee to reimburse Issuer for payment on an LC arose upon issuance of the LC, not upon later drawings. Further, the Individual Applicant produced no evidence that Issuer had agreed to restrict Individual Applicant's liability to the period in which he was a shareholder of the Corporate Applicant.

Individual Applicant Modica also argued that Issuer had a fiduciary duty to inform him of his continuing liability no later than the time of the last draw on the LC. The court rejected this argument, noting that Individual Applicant's guarantee to reimburse on the LC accompanied Issuer's obligation to pay on the LC, beginning when the LC was issued, saying, "[e]ven if [Issuer] knew that [Individual Applicant] was no longer a shareholder, it was entitled to rely on its security package given at the time the financing arrangements were put in place and the letter of credit issued."

[JEB/llh]

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