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Note: Regatta Plaza Ltd. (Borrower) borrowed money from Standard Trust Co. (Lender). As collateral, Borrower/Applicant obtained an LC from the Bank of Nova Scotia (Issuer) in favor of Lender/ Beneficiary. Acharya Holding Ltd. and P. J. Joshi (Guarantors) also undertook to reimburse Issuer if Applicant did not repay the loan.

Subsequently, Borrower/Applicant became insolvent. Lender/Beneficiary then drew on the LC for repayment of the loan, but the LC was insufficient to fully discharge Borrower/Applicant's debt. Under the terms of the guarantee, Issuer, who held a mortgage on realty belonging to Guarantors, sold the realty and discharged Borrower/Applicant's debt from the proceeds.

The proceeds of the sale were greater than the outstanding balance of the loan. Lender/Beneficiary, which held a second mortgage on the realty sold by Issuer, sued to quiet title to the funds obtained through the sale of the realty. One of the Guarantors intervened, claiming that the remainder of the proceeds should be returned to Guarantors.

The Trial Division of the Supreme Court of Newfoundland and Labrador found for Lender/ Beneficiary, ruling that a mortgage interest in property takes precedence over a surety's right to contribution. Guarantor appealed.

The Court of Appeal of the Supreme Court of Newfoundland and Labrador, Cameron, BG, Welsh and Rowe, JJ.A., reversed the decision of the Trial Division. The Court of Appeal ruled that Guarantors are entitled to a return of funds paid in excess of the debt they guaranteed to repay.

[JEB/dgd]

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