Use of Line of Credit has Implications for Banker- Customer Relationship

A decision of the Superior Court of Justice in Ontario released April 27, 2000 will have far-reaching applications to the banker-customer relationship and will likely be of interest to the banking community at large. Madam Justice Gloria Klowak ordered that indebtedness owing to the Toronto-Dominion Bank under a $75,000 line of credit issued to Margaret and Peter Valentine, husband and wife, was discharged, along with a collateral mortgage on the matrimonial home, by the Bank’s improper handling of the line of credit and the life insurance on that line of credit. Justice Klowak found that that the Bank had used the line of credit to shore up unsecured debts owed by the husband, but had not disclosed its intention to do so to the wife.

While the wife delivered a Certificate of Independent Legal Advice to the Bank in respect of the line of credit, the lawyer who signed the Certificate had required the Bank to ensure that the Bank would not release funds from the line of credit without the signatures of both the husband and the wife, who were undergoing marital difficulties at the time and had executed a marriage contract specifically requiring joint signing authority on a $75,000 line of credit to be issued by the Bank. The court found that the Bank never advised the lawyer that joint standing authority could not be accomodated by the Bank and proceeded to allow the husband to unilaterally withdraw funds from the line of credit, in large part to re-pay the Bank on previous unsecured debts, which was in violation of the condition imposed by the lawyer for the wife.

The Bank was instrumental in placing life insurance on the line of credit with premiums being automatically deducted from the line of credit. It was a specific term of the insurance contract that the coverage would automatically be cancelled as a consequence of the Bank calling the loan, a term which was found not to have been brought to the attention of the customers by the bank.

The court, in considering what duties flowed from such an arrangement, applied the principles laid down in Ronald Elwyn Lister Ltd. v Dunlop Canada Ltd. (SCC) and Mister Broadloom Corp. (1968) Ltd. v Bank of Montreal (Ont. C.A.) to find that the Bank had a duty to give reasonable notice of its intention to call the loan in light of the automatic termination of the life insurance upon doing so and the limited risk to the Bank if it gave such reasonable notice. In failing to do so, the Bank breached its duty to the customers and was responsible for the loss of such insurance on the line of credit when the husband died shortly after demand was made.

Counsel for Margaret Valentine and the Estate of Peter Valentine was Robert B. Cohen of Cassels Brock & Blackwell LLP. Counsel for the Bank was Leonard Siegel of Siegel, Alexander in Lindsay, Ontario.