Court of Appeal for Ontario
Date: 2022-04-21 Docket: C69398
Before: Fairburn A.C.J.O., Paciocco and Sossin JJ.A.
Between:
Morris Waxman as assignee of the Estate of I. Waxman & Sons Limited, Morris Waxman, and Solid Waste Reclamation Inc. Plaintiffs (Appellants)
And:
Chester Waxman, Warren Waxman, Sheldon Kumer, Dynamic Metal Trading Inc., Wayne Linton, Aaron Waxman, Waxman Industrial Services Corp., Waxman Realty Company Inc., Scrapcares Corporation, c.o.b. Scrap Cares, Elko Industrial Trading Corp. , and Ahmed (Albert) Samee Defendants (Respondents)
Counsel:
Earl Cherniak, William Pepall, Richard Swan, and Gideon Forrest, for the appellants Morris Waxman as assignee of the Estate of I. Waxman & Sons Limited, Morris Waxman, and Solid Waste Reclamation Inc. Gordon Capern, Jean-Claude Killey, and Hailey Bruckner, for the respondents Elko Industrial Trading Corp., and Ahmed (Albert) Samee
Heard: March 18, 2022 by video conference
On appeal from the order of Justice Markus Koehnen of the Superior Court of Justice, dated March 23, 2021, with reasons reported at 2021 ONSC 2180.
1This is an appeal from the order of the motion judge dismissing the appellants’ motion for summary judgment, and instead granting summary judgment to the respondents dismissing the action as against them, as well as granting the respondents’ motion for a permanent stay of the action as against them.
A. Overview
2The decisions on appeal arose out of two judgments of approximately $10,000,000 each that the appellant, the late Morris Waxman (here represented by his estate), obtained against his late brother Chester Waxman and the Waxman family company, I. Waxman & Sons Ltd. (“the first Waxman company”). After the judgment against him, Chester [1] entered into a scheme with his son Warren Waxman, grandson Aaron Waxman, and brother-in-law Sheldon Kumer to direct business away from the first Waxman company and towards a company started by Aaron known as Waxman Industrial Services Corp. (“the second Waxman company”). This scheme was intended to deprive Morris of the benefit of the judgment against Chester and the first Waxman company.
3The appellants commenced an action in 2007 against Chester, Warren, Aaron, Mr. Kumer, and others and amended their statement of claim in 2012 to name the respondents Elko Industrial Trading Corp. (“Elko”) and Elko’s principal, the late Ahmed (Albert) Samee, as parties.
4After the respondents’ discoveries were completed in early 2015, the action appeared, from the respondents’ point of view, to have gone dormant. They heard nothing from the appellants until November 2018, when the appellants advised Elko of having resolved their claims with several parties and provided a draft notice of motion for summary judgment. The draft notice referred to settlements the appellants had reached with Warren, Aaron, and Mr. Kumer. The settlements came as news to the respondents.
5In December 2019, the respondents brought a motion to stay the action as against them for the appellants’ failure to disclose the settlements, which were alleged to have changed the landscape of the litigation so as to require immediate disclosure as set out in Handley Estate v. DTE Industries Limited, 2018 ONCA 324, 421 D.L.R. (4th) 636, at paras. 39, 45. In April 2019, the appellants moved for a summary judgment against the respondents. The motions were heard together, at which time the respondents, in turn, also requested a summary judgment against the appellants.
6The appellants argue that the motion judge erred in granting summary judgment in favour of the respondents and in granting the respondents’ motion to stay the action. For reasons that follow, I would dismiss this appeal.
B. Background
(1) Facts
7The relevant background facts may be briefly summarized.
8Morris and Chester were for many years each 50 percent shareholders and principals of the first Waxman company, a Hamilton-based scrap metal and recycling firm started by their father. After bringing his adult sons into the business, Chester arranged for large bonuses to be paid to himself and his sons without Morris’s approval and authorized related-party transactions between the first Waxman company and companies owned by his sons.
9Subsequently, as Morris was preparing for open-heart surgery, Chester got Morris to sign documents, the effect of which was to transfer Morris’s interest in the company to Chester, and to enter into an unconscionable long-term property lease in favour of the first Waxman company, all without Morris’s understanding or consent. Once Morris made it through his surgery, he sought to have Chester undo the effect of the documents. By the judgment of Sanderson J. in June 2002, Morris was restored as a 50 percent shareholder of the company and awarded damages, along with a constructive trust and tracing orders.
10After the judgment was rendered, Chester, Warren, Aaron, and Mr. Kumer devised the scheme to divert business away from the first Waxman company, thereby decreasing its value and in turn decreasing the value of the judgment. The scheme involved having Chester’s grandson Aaron start his own business, the second Waxman company, and having the suppliers stop selling to the first Waxman company and sell to the second company instead.
11Elko is a scrap and metals broker that acted as a supplier to and a customer of the first Waxman company. Ahmed (Albert) Samee was the sole owner and director of Elko until his death in August 2017. The appellants alleged that Elko and Mr. Samee participated in the unlawful scheme to transfer the first Waxman company’s supplier accounts to the second Waxman company and should therefore be liable under the principles of knowing receipt and knowing assistance. The respondents disputed the extent of Mr. Samee’s knowledge and participation in the scheme.
(2) The action and the settlements
12The chronology of events in the underlying action is as follows:
- The appellants commenced this action in 2007, initially against Chester, Warren, Aaron, Mr. Kumer, Wayne Linton, and the second Waxman company.
- The appellants settled with Chester in December 2008, just before his death.
- After further information about the scheme came to light, the appellants amended their statement of claim in March 2012 to name Elko and Mr. Samee as defendants.
- Elko and Mr. Samee filed their defence in June 2012.
- Between September 2013 and February 2014, the appellants conducted additional discoveries of Aaron and Mr. Kumer and a discovery of Mr. Samee. Undertakings were then completed by August 2014.
- From the respondents’ perspective, the action lay dormant from early 2015 until November 2018.
- Meanwhile, in 2015, the appellants concluded settlement letters with Aaron, Warren, and Mr. Kumer. Each of Aaron, Warren, and Mr. Kumer accepted the terms of settlement shortly after receiving their respective settlement letters. The appellants argue that these acceptances led to only conditional settlement which they did not accept with Aaron until December 2017, with Warren until January 2018, and with Mr. Kumer until June 2018.
- In November 2018, the respondents first discovered the existence of these agreements when the appellants notified the respondents by email of “having resolved claims over the last number of months against several other parties” and provided them with a draft notice of motion for summary judgment, which referred to settlements the appellants had reached with Warren, Aaron, and Mr. Kumer.
- The appellants did not give the respondents actual copies of the settlement agreements until December 20, 2019, by court order.
13The terms of the settlement agreements were as follows:
a) Warren would pay $1,000,000 to the appellants. Aaron would pay $900,000. Mr. Kumer would pay $300,000. [2] In exchange, each was released from any claims in the underlying action and Warren was, in addition, also released from any claims arising from Sanderson J.’s 2002 judgment. b) Warren and Mr. Kumer agreed to provide evidence to the appellants by way of affidavits, examinations, and cross-examinations on the substance of the action. c) Although Aaron's settlement agreement did not, on its face, require evidence, he was nevertheless cross-examined as part of the settlement. d) Each of the settling defendants would provide an affidavit containing a statement of assets and would agree to an examination by the appellants in aid of execution. e) The agreements also allowed the appellants to withdraw unilaterally from the settlements if they were not satisfied with the disclosure based on its content.
14The settlements proceeded as follows:
a) Mr. Kumer’s settlement letter is dated March 20, 2015. He swore an affidavit on April 20, 2015. b) Warren’s settlement letter is dated May 20, 2015. He swore an affidavit on September 16, 2015, and was examined on June 27, 2016. c) Aaron’s settlement letter is dated April 6, 2015. He was examined on May 29, 2017.
15The trial judge found that Mr. Kumer, Warren, and Aaron accepted the terms of settlement shortly after receiving their respective settlement agreements. The appellants have maintained that acceptance by the settling defendants led only to conditional settlements, which the appellants did not accept until December 2017 with respect to Aaron, January 2018 with respect to Warren, and June 2018 with respect to Mr. Kumer. According to the appellants, it is only when the settlements were accepted by them that the agreements became operative.
16The appellants did not give the respondents actual copies of the settlement agreements until December 20, 2019, when they were ordered to do so by Hainey J. of the Superior Court of Justice.
C. Analysis
(1) Issues
17The appellants raise two main grounds of appeal. First, they argue that the motion judge erred in granting summary judgment in favour of the respondents. Second, they argue that the motion judge erred in granting a stay of the action against the respondents.
18As I am of the view that the analysis of the stay resolves the appeal, I turn to that question first. For the reasons that follow, I would dismiss the appeal of the stay. In light of this result, there is no need to examine the motion judge’s summary judgment decision.
(2) The motion judge did not err in applying Handley Estate
19The appellants argue that the motion judge erred in interpreting and applying this court’s decision in Handley Estate.
20The motion judge’s imposition of a stay of proceedings in relation to the respondents indeed turned on his application of Handley Estate and the requirement that any agreement which changes the landscape of the litigation by altering the adversarial position of the litigants must be disclosed immediately: at paras. 39, 45.
21Handley Estate arose from a subrogated claim brought by the plaintiff’s insurer (Aviva) for damages arising from a leaking oil tank at the plaintiff’s home. The statement of claim named four defendants: H&M (which sold and installed the tank), DTE (which manufactured the tank), Williamson (which supplied the fuel) and Ultramar (the fuel wholesaler). The statement of claim alleged negligence and breach of contract and disclosed that H&M had been dissolved. The wholesaler of the tank, Kawartha HVAC, was not named as a defendant. Aviva then transferred the file to another law firm. The firm that assumed carriage learned that Kawartha HVAC had not been named as a defendant, and, by this time, the limitation period for doing so had expired. In light of that, Aviva, H&M, and H&M’s principal prior to its dissolution entered into a litigation funding agreement: Aviva would pay a lump sum to counsel for H&M to commence and prosecute a third-party claim against Kawartha HVAC through discoveries. Aviva agreed to contribute $5,000 to the cost of prosecuting the third-party claim. The former principal of H&M agreed to revive H&M if necessary, and all communications between the plaintiff and H&M pertaining to the prosecution of the third-party claim would be subject to common-interest privilege. This agreement was not disclosed.
22The motion judge in Handley Estate had rejected Aviva’s argument that the litigation agreement did not alter the adversarial orientation in the lawsuit between it and H&M. In affirming this finding, Brown J.A. applied the principles set out by this court in the earlier case of Aecon Buildings v. Stephenson Engineering Limited, 2010 ONCA 898, 328 D.L.R. (4th) 488, leave to appeal refused, [2011] S.C.C.A. No. 84.
23Importantly, Brown J.A. concluded, at para. 41, that while the agreement at issue in Handley Estate was not a Mary Carter agreement, or otherwise the same as the agreement at issue in Aecon, in both cases, they shared the same “essential element”: they changed the relationship between two parties from an adversarial one into a co-operative one. For this reason, Brown J.A. concluded that the litigation landscape had been changed and the duty of immediate disclosure triggered.
24In the course of his analysis in Handley Estate, Brown J.A. set out the key principles of this kind of abuse of process that arises from a failure to disclose an agreement which changes entirely the litigation landscape, at para. 45:
By contrast, Aecon squarely addressed the consequences that should flow from a specific kind of abuse of process – a party’s failure to disclose immediately an agreement that alters the adversarial posture of the litigation. Several clear messages emanate from Aecon:
(i) The obligation of immediate disclosure of agreements that “change entirely the landscape of the litigation” is “clear and unequivocal” – they must be produced immediately upon their completion: at paras. 13 and 16;
(ii) The absence of prejudice does not excuse the late disclosure of such an agreement: at para. 16;
(iii) “Any failure of compliance amounts to abuse of process and must result in consequences of the most serious nature for the defaulting party”: at para. 16; and
(iv) The only remedy to redress the wrong of the abuse of process is to stay the claim asserted by the defaulting, non-disclosing party. Why? Because sound policy reasons support such an approach: Only by imposing consequences of the most serious nature on the defaulting party is the court able to enforce and control its own process and ensure that justice is done between and among the parties. To permit the litigation to proceed without disclosure of agreements such as the one in issue renders the process a sham and amounts to a failure of justice: at para. 16.
25In applying these principles as set out in Handley Estate to this case, the motion judge stated, at para. 29:
What must be disclosed are agreements that alter the relationship among the parties from those set out in the pleadings. The agreements at issue here does [sic] so. The settlement clearly changed the relationship between the plaintiffs and the settling defendants from parties adverse in interest to parties who were cooperating. That cooperation extended to providing affidavits and subjecting themselves to cross examinations. [Footnote omitted.] [Emphasis added.]
26Subsequently, the motion judge returned to the question of how the settlement agreements at issue in this case changed the litigation landscape, at para. 49:
There is no doubt that the settlement here would have had a material impact on the litigation strategy employed by Elko going forward. At a minimum it might have considered a crossclaim against the settling defendants, sought the right to examine them for discovery and sought documentary production from them. While those rights might still be available to them, the failure to disclose information before Albert’s death has seriously impaired Elko’s ability to defend itself.
27The motion judge’s finding with respect to the change to the litigation landscape was a question of mixed fact and law and is entitled to deference: Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, at paras. 36-37.
28The motion judge further found that the appellants had failed to provide a sufficient explanation for the delay in disclosure. While observing that it is not necessary to establish prejudice in order to enforce the rule in Handley Estate, the motion judge nonetheless made findings of prejudice in these circumstances given the disadvantage to the respondents caused by the appellants’ settlement agreements and the long delay between when the evidence from the settling defendants was gathered by the appellants and when it was eventually disclosed in this litigation.
29In arguing that the motion judge erred in applying Handley Estate to the settlement agreements in this case, the appellants highlight the contingent nature of the agreements in this case, which set out that the settlements would only be confirmed once the defendants, Aaron, Warren, and Mr. Kumer, disclosed their assets and submitted to examination on their statement of assets to the satisfaction of the appellants. Warren and Mr. Kumer also agreed to submit to examinations under oath on their knowledge of the substance of the litigation, and, again, the settlements would take effect only if the appellants were satisfied by their evidence.
30While the evidence from Warren and Mr. Kumer was taken in 2015, the appellants assert that the settlements were concluded only in 2017 for Aaron and 2018 for Warren and Mr. Kumer, the points in time when the appellants accepted that the conditions attaching to the settlement agreements had been met. At that point, those defendants were released from the action.
31The appellants contend that a contingent settlement agreement is very different than the litigation agreement at issue in Handley Estate, as is the fact that the result of the settlement here was the settling parties’ removal from the action, as opposed to remaining in the action and cooperating with the plaintiffs.
32The appellants rely on Caroti v. Vuletic, 2021 ONSC 2778, as an example where a settlement agreement was held not to change the litigation landscape sufficiently to warrant the application of Handley Estate. In Caroti, Ricchetti R.S.J. stated, at paras. 53-54, that all settlement agreements change the litigation landscape to some extent, but only those that change the litigation landscape entirely fall within the rule from Handley Estate requiring immediate disclosure. Ricchetti R.S.J. concluded that the settlement agreement before him did not engage the rule in Handley Estate because the settling party agreed only to be a witness and provide truthful evidence in the ongoing litigation. He concluded, at para. 99, “I am not persuaded that when a plaintiff discontinues against a co-defendant and then calls upon that co-defendant to be witness for the plaintiff changes the adversarial landscape.”
33In this case, by contrast, the settling defendants did not simply agree to be witnesses for the plaintiffs. Rather, they agreed to provide evidence in private to the appellants, in circumstances where the settlement would only be operative if the appellants were satisfied with the evidence. In my view, this agreement put in place financial incentives for the settling defendants to align themselves with the appellants by providing evidence that the appellants would judge to be helpful in continuing to prosecute the action against the respondents, and in doing so, changed the adversarial landscape. For this reason, Caroti is of little assistance.
34The appellants also seek to distinguish this case from Handley Estate as the confidentiality clauses in the settlement agreements themselves precluded the disclosure of the agreements by any parties to it until and unless ordered by a court.
35While the settling parties were free to agree to any terms they wished, including a private, parallel process to obtaining evidence from the settling defendants, such terms in no way derogate from the requirement of immediate disclosure confirmed in Handley Estate.
36In sum, I do not accept the appellants’ submissions distinguishing this case from Handley Estate.
37The rule from Handley Estate does not turn on contingencies in an agreement that must be met to fulfill the terms of that agreement or the confidential nature of the agreement. Rather, the key question for the court in applying Handley Estate is whether the agreement, at the time it was entered into, changed the litigation landscape and, in so doing, altered the adversarial position of the parties to one of cooperation. As indicated above, the motion judge found in this case that it did. I see no error in this finding.
38Finally, even if the appellants were successful in arguing that the agreements only changed the litigation landscape once all the conditions of the settlement agreements were fulfilled, this would still have left an unacceptable delay in disclosing the agreements to the respondents.
39This court made clear in Handley Estate and subsequent cases that the duty to disclose is immediate. That the respondents may have been alive to the settlement agreements at some earlier point – in this case, the appellants allege that a letter dated November 2, 2018, advised the respondents of the settlements – is of no assistance. The obligation is to disclose immediately, not simply to provide notice of the agreement, information about the agreement or what has been referred to as “functional disclosure”: see Tallman Truck Centre Limited v. K.S.P. Holdings Inc., 2022 ONCA 66, at paras. 18-19.
40In this case, disclosure of the terms of the settlement agreements, and evidence obtained as part of the settlement process, occurred on December 20, 2019, pursuant to an endorsement by Hainey J. Taking this date as the date of disclosure, the delay in disclosing the agreement was 1.5 years for Mr. Kumer, and almost 2 years for Warren and Aaron. Even if the earlier date of November 2018 were used, the delay still amounted to 5 months for Mr. Kumer and approximately 10 months for Warren and Aaron. On this record, there is no question that the appellants failed to immediately disclose the agreements.
(3) The motion judge did not err in granting a stay
41I turn now to the remedy.
42The appellants argue that an automatic stay is a “draconian” remedy for abuse of process in a case such as this and that the motion judge should have exercised his discretion to redress the failure to disclose through other means.
43The appellants further submit that while an automatic stay may be justified in the face of Mary Carter agreements that are not disclosed, in this case, “the plaintiffs did nothing wrong and did not deceive or mislead anyone.” They argue the motion judge erred by applying an automatic stay in these circumstances without considering the alternatives.
44I disagree.
45In Aecon, MacFarland J.A. stated, at para. 16:
The obligation of immediate disclosure is clear and unequivocal. It is not optional. Any failure of compliance amounts to abuse of process and must result in consequences of the most serious nature for the defaulting party. Where, as here, the failure amounts to abuse of process, the only remedy to redress the wrong is to stay the Third Party proceedings and of course, by necessary implication, the Fourth Party proceedings commenced at the instance of the Third Party. Only by imposing consequences of the most serious nature on the defaulting party is the court able to enforce and control its own process and ensure that justice is done between and among the parties. To permit the litigation to proceed without disclosure of agreements such as the one in issue renders the process a sham and amounts to a failure of justice. [Emphasis added.]
46Citing Aecon, the motion judge reiterated, at para. 44, “The Court of Appeal described the obligation to disclose as clear and unequivocal and noted that its breach constituted an abuse of process. Only by imposing a stay is the court able to control and enforce its own process to ensure that justice is done.”
47I see no basis on the facts of this case to depart from the clear consequences for a breach of this principle set out by this court in Aecon and affirmed a number of times since then, including in Handley Estate, at para. 45, and most recently in Tallman, at para. 28. In Tallman, after imposing the automatic stay as the only remedy appropriate for an undisclosed settlement agreement, the court added, at para. 28, “This remedy is designed to achieve justice between the parties. But it does more than that – it also enables the court to enforce and control its own process by deterring future breaches of this well-established rule.”
D. Disposition
48For these reasons, I would dismiss the appeal.
49Having reviewed the costs submission of the parties, I would award $60,000, all-inclusive, to the respondents.
Released: April 21, 2022 “J.M.F.” “L. Sossin J.A.” “I agree. Fairburn A.C.J.O.” “I agree. David M. Paciocco J.A.”
1For ease of reference, I will be referring to the Waxman parties by their first names.
2Mr. Kumer and his company Dynamic Metal Trading Inc. ended up paying $1 million in 2018 rather than the $300,000 amount contemplated in the 2015 settlement letter.
