COURT FILE NO.: Divisional Court 397/02
02-CV-223309CM1
DATE: 20030219
SUPERIOR COURT OF JUSTICE – ONTARIO
DIVISIONAL COURT
RE: Marilyn Benlolo, Plaintiff; Respondent;
and
Yuval Barzakay, Yapalot Communications Holdings Inc.,
and Yapalot Communications Inc., Defendants; Appellants
HEARD: February 5, 2003
BEFORE: Lane, J.
COUNSEL: Mark Hartman, for the Defendants, Appellants;
David M. Golden, for the Plaintiff, Respondent;
Julian N. Falconer for Barry Plant, Intervenor;
A. A. Sanfilippo for Costa & Associates, Intervenor.
E N D O R S E M E N T
[1] This an appeal from the decision of Master J. Haberman dated June 6, 2002, refusing to set aside a default judgment against the defendants signed by the registrar on March 1, 2002 for a part of the claim made by the plaintiff.
[2] The plaintiff/respondent commenced this action against the defendants by Statement of Claim issued January 15, 2002. The claim is for damages and related remedies for fraudulent misrepresentation, breach of contract, breach of fiduciary duty, misappropriation of funds and oppression under the Ontario Business Corporations Act.
[3] The defendants were noted in default on March 1, 2002, and default judgment dated March 1, 2002 was obtained against them for the amount of $437,939.73 plus interest. This amount was calculated based on the amount of the plaintiff’s direct investment in the defendant companies ($400,000) together with interest on the said investment.
The Default Judgment:
[4] The principles upon which the court acts in deciding whether to relieve a party from a default judgment are well known. They are concisely set out in the reasons of Borins J., then of this court, in Royal Trust Corp. of Canada v. Dunn (1991), 6 O.R. (3d) 468:
It is well established that there are two situations in which the court is able to set aside a default judgment. One of the leading authorities on the subject is Anlaby v. Praetorius (1888), 20 Q.B. 765 (C.A.), per Fry L.J. at p. 769. The first is when a defendant is able to establish that the judgment was irregularly obtained. If the defendant can establish that correct procedures have not been followed either in obtaining the judgment or in relation to some step taken by the plaintiff in the commencement of the proceedings, such as in failing to serve the statement of claim in a proper manner, then normally the defendant can have the judgment set aside as of right without the requirement of establishing a defence to the plaintiff's claim. The second is when the judgment has been regularly obtained and where the defendant asks the court to exercise its discretion to set aside the default judgment and to permit him or her to defend the claim. It is in the second situation that the defendant is required to satisfy a number of conditions, including establishing a defence to the action on the merits, before the court will exercise its discretion in the defendant's favour, and then usually on the imposition of terms, such as payment into court of the amount claimed and the costs thrown away.
[5] The learned Master approached the matter as being in the second category described by Borins J., that is, as a default judgment regularly obtained. She found that the default and any delay were not the responsibility of the clients, but of their solicitor, and should not be visited upon the clients to prevent them from asserting their defence. However, she found that no viable defence having an air of reality had been put forward and so dismissed the motion to set the judgment aside.
[6] The appellant submits that the case is actually in the first category described by Borins J.; that is, the default judgment was obtained irregularly and therefore ought to be set aside as of right, without the need to show a defence. The registrar had no jurisdiction to sign the judgment because the claim was not for a liquidated demand in money. This point does not appear to have been brought to the attention of the learned Master.
[7] The jurisdiction of the registrar is set out in Rule 19.04 (1):
19.04 (1) Where a defendant has been noted in default, the plaintiff may require the registrar to sign judgment against the defendant in respect of a claim for,
(a) a debt or liquidated demand in money, including interest if claimed in the statement of claim.
[8] The central issue is whether the claim made by the plaintiff, as set out in the Statement of Claim, was within the description in the Rule: a debt or liquidated demand in money. The passages from the Statement of Claim which bear on this issue are:
The Plaintiff claims:
1 (a) damages for fraudulent misrepresentation, breach of contract, breach of fiduciary duty and misappropriation in the amount of $500,000;
[there follow paragraphs (b) through (o) claiming a variety of declarations and orders for relief pursuant to the oppression jurisdiction of the court pursuant to the Business Corporations Act; aggravated, exemplary and punitive damages, interest, costs and other relief, as to which judgment was not signed.]
- Barzakay and Benlolo expressly agreed that Benlolo would invest $400,000 and in return receive a 40 per cent interest in the business enterprise. Barzakay, on the other hand, would invest $250,000 and would receive a 60 per cent interest in the business enterprise to reflect the fact of his experience in the business and the fact that he was going to be running the operations on a day-to-day basis. The parties agreed that the monies advanced by each of them would be treated as shareholder advances, without accrual of interest for one year, and repayable after one year or when the company achieved profitability.
[there follow paragraphs in which the plaintiff says that Barzakay did not make the promised investment from his own money, but pledged the credit of the business to receive a loan; in effect investing the company’s money as if it were his own.]
- Benlolo states and the fact is that she would not have entered the agreement or agreed to invest in the affairs of Yapalot had she been aware that Barzakay was not investing $250,000 of his own money. Benlolo therefore seeks rescission of the agreement and repayment of her loan in the amount of $400,000 together with all financing charges associated therewith.
[9] The plaintiff has thus characterized the transaction variously as an investment in return for shares and as a shareholder advance or loan repayable after a year or when the company achieved profitability. She has claimed damages for the fraud, repayment of her loan and rescission. The learned Master dealt with the nature of the claim supporting the judgment in paragraphs 6 and 45 of her Reasons. She held that the judgment derived from the claims for rescission and the return of the loan. The respondent submitted that it could also be supported by the pleading of the claim for damages because the claim was a liquidated sum as it could be calculated with reference to the amount of the loan.
[10] In my view, the registrar had no jurisdiction to sign the judgment no matter which of the characterizations of the transaction is adopted.
[11] Viewing the transaction as a shareholder loan which might be repayable, there is no pleading of any facts to make it repayable within the loan terms pleaded. There is no pleading that the company is profitable; indeed the pleading is that its net worth has been substantially, if not completely destroyed. The pleading in paragraph 10 as to the repayment is ambiguous: after one year or when the company is profitable. Hence, even if the loan characterization were accepted, the right to a repayment at this time is not one of the facts admitted by reason of the default because there is no actual plea of such a right, and the ambiguity prevents any inference. Further, viewing the transaction as a shareholder loan makes it a loan to the company and not to the individual defendant. There is thus no basis at all for a judgment against him for repayment of a loan made to the company.
[12] Viewing the transaction as an investment induced by fraud and therefore rescindable at the option of the plaintiff does not improve the plaintiff’s position. Rescission is an equitable remedy which is discretionary: Fridman: The Law of Contracts 3rd ed. Carswell, Toronto; 1994; page 301. If there are equitable grounds for refusing the relief, the court will exercise its discretion to do so.
[13] Thus, even though a case for rescission of a contract may be made out by proof of inducement by fraud to enter the transaction, the relief may yet be refused for a number of equitable reasons. These include the principle of restitutio in integrum, the restoration of the parties to their original positions; laches; and affirmation of the contract after knowledge of the fraud, for example: Fridman, supra, page 302. The existence of the discretion removes rescission cases from the province of the registrar. Only a Superior Court judge can exercise the discretionary authority of the court.
[14] In this very case, on an earlier motion to stay the judgment pending this hearing, Swinton J. issued the stay, saying:
The Registrar has jurisdiction to order default judgment if the claim was for a debt or liquidated demand in money. The relief of rescission was not explicitly included in the prayer for relief, which refers in paragraph 1(a) to damages for fraudulent misrepresentation, breach of fiduciary duty and breach of contract. Rescission is an equitable remedy that only a judge has jurisdiction to order. If granted, it requires restitutio in integrum, sometimes with compensation. Here the plaintiff has judgment for the loan and financing charges against all 3 defendants without any order concerning the return of the share certificates. Clearly, the issues of rescission and damages are for a judge to determine. There is a serious question whether this is a liquidated claim.
[15] In Westerman v Ontario Paralegal Ltd. [1993] O.J. No. 1696, the plaintiff sued for damages for breach of contract and for return of her deposit in a contract to acquire a franchise, all based on allegations of misrepresentation. Default judgment was signed. Noble J. set aside the judgment, but upon terms. Pardu J. granted leave to appeal on the issue of the terms, saying at paragraph 3: “I agree that the judgment was irregularly obtained, in that damages for breach of contract and misrepresentation do not constitute a debt or liquidated demand entitling the plaintiff to sign default judgment.” To the same effect is the judgment of Master Funduk in Waylor Contracting Ltd. v. Kipp Scott Pontiac Buick Ltd. [1998] A.J. No.1139 where, at paragraph 20 he said:
Whatever the case may be, default judgment cannot be available for a rescission claim or an unliquidated damages claim. The plaintiff got the result of a rescission claim without the mandatory judgment for rescission. Rule 148 is not wide enough to get default judgment for rescission. A rescission claim is not a “debt or liquidated demand”.
[16] Finally, in Schill & Beninger Plumbing & Heating Ltd. v. Gallagher Estate, [2001] O.J. No. 260, the Court of Appeal dealt with an appeal from an order dismissing a motion by the defendants to set aside a default judgment and permit them to defend. The action was for damages for conversion and fraud alleging that the defendant had stolen money from her employer, the plaintiff, over a period of time. On appeal, the appellant raised the issue of the jurisdiction of the Registrar to sign judgment in such a case because the Registrar was not a s.96 judge [s.96 Constitution Act] and could not make judicial decisions. The Registrar had acted solely on the basis of the Statement of Claim, presumably regarding it as an administrative act. The Court pointed out that the Statement of Claim used the expression “approximately $450,000”, so it was not clear how much had actually been stolen.
[17] The Court determined, at paragraph 9, that:
In other circumstances we would not tolerate the conduct of the administrators in raising this issue at this stage of a long tactical chess game, and even now presenting no defence to the claim. However, we cannot turn away from a jurisdictional issue. Upon analysis, and even without the word “approximately” [emphasis added] the claim was one that required examination by a judge to assure that the amount could be justified. It was not a liquidated claim within the meaning of the authorities decided under Rule 19.04 and former Rule 33, which dealt with specially endorsed writs. Adjudication was required to determine that the allegation had substance in respect of the amount claimed.
[18] On these authorities, it is plain that the claim for damages is not a liquidated claim as that term is used in the Rule. There is no basis upon which the Registrar could properly have signed the judgment under review. The appeal is therefore allowed and the judgment is set aside.
The Noting in Default:
[19] This does not end the matter. The noting of pleadings closed still remains, even though the judgment is gone. Should it also be set aside and the defendants given leave to defend? There is nothing irregular about the noting of pleadings closed. The Master found that the default and the delay should not be visited upon the clients. There is no cross-appeal against this finding. The issue raised by the respondent is whether the defendants are bound to show as well that they have some defence before being allowed to defend.
[20] The moving parties submit that, except in extreme situations, a defendant who establishes an intention to defend, explains the delay and has moved promptly for relief from the noting in default need not show a defence to the claim before being allowed to defend.
[21] The plaintiff submitted that, because this is an appeal, the court has the discretion under s. 134 (1) of the CJA and Rules 19.08(1) and (3) of the Rules of Civil Procedure to refuse to set aside the noting in default in this case, even though the default judgment has been set aside. In exercising this discretion, the court is not limited to the standard tests enunciated by the courts surrounding the setting aside of a noting in default. The plaintiff concedes that, in general, the court will set aside a noting in default of a defendant who shows that it intended to defend the case at all times, adequately explains the reasons for the failure to defend, and moves expeditiously: see Metropolitan Toronto Condominium Corporation No. 706 v. Bardmore Developments Ltd. (1991), 3 O.R. (3d) 278 (Ont. C.A., per McKinlay J.A.).
[22] However, the plaintiff submitted that the application of this test should not be rigid or automatic; the court retains a broad discretion which should take into account a number of factors, including the behaviour of the defendant. Although the court will not typically inquire into the merits of the proposed defence, the court retains the discretion to do so if the circumstances of the case are exceptional: Bardmore, supra. The court should ensure that no injustice is done to the plaintiff: Dealers Supply (Agriculture) Ltd. v. Tweed Farm & Garden Supplies Ltd., [1987] O.J. No. 2346 (Ont. D.C., per Misener D.C.J.).
[23] In the present case, the plaintiff submitted, the court should not ignore the fact that the defendant had presented an affidavit setting out the defence and the Master had found it wanting, internally inconsistent and unlikely to succeed. The plaintiff referred me to Schill, supra, where the Court of Appeal set aside a default judgment on the basis of a jurisdictional error by the Registrar but refused to set aside the noting in default on the basis that no defence on the merits was presented to the court at any time. The present plaintiff submitted that there was no reason to draw a distinction between the situation where no defence was presented, as in Schill, and where the Court below found that the defence presented was without merit, as in the case at bar.
[24] It must be noted that the court in Schill, while referring to the absence of a defence, noted that the default had been deliberate which was a bar to setting aside the noting in default. As well, the court did not refer to its own decision in Bardmore, supra. In my view, Schill is, because of the deliberate nature of the default and the court’s view that the defendant was playing a tactical chess game, an example of the extreme case envisaged by the court in Bardmore (see page 285 letter a) where the court would require an affidavit as to the merits of a defence as a condition to setting aside a noting in default.
[25] For these reasons, I am of the view that there is no general requirement that the defendant show a defence in order to have the noting in default set aside. Nor is this case an extreme one: the delay was not long; the default was not deliberate; indeed it has been held below not to be properly laid upon the client; the jurisdictional error was raised as soon as it came to the attention of the defendant, albeit not until after the Master’s ruling.
[26] The fact remains, however, that an affidavit was filed by the defendant in connection with the motion to set aside the default judgment, in the reasonable belief that it was necessary. As it turned out, the Master found it raised no defence. The plaintiff submits that the principle underlying each of the cited decisions, supra, is that the court has an obligation to take into account all the circumstances of the case in order to ensure that matters are dealt with in a just and expeditious manner. Therefore, it is submitted, I am bound to consider her finding in exercising the discretion whether to set aside the noting in default. There is no justice for the plaintiff if the defendant is permitted to put in a hopeless defence.
[27] The defendants point out, and I agree, that the Master found that they had met the test which the cases establish for setting aside a noting in default. They further submit that, since there is no need to show a good defence for that purpose, the finding that they did not do so for the different purpose of setting aside the default judgment should not weigh against them. Even where the court is asked to set aside a default judgment, where a defence must be shown, the Court of Appeal has said that, where the delay is a short one, “.. it is not appropriate for the court to weigh the defence to see if it has a good chance of succeeding. It is sufficient if the defendant shows a matter which could afford a defence.”: Earl v. Koloszar [1991] O.J. No.45 (C.A.). Coincidentally, the delay in that case was 13 days, exactly the delay here.
[28] In Bardmore, supra, the Court of Appeal adopted the reasoning of Granger J. in Hart v Kowall (1990), 75 O.R. (2nd) 306, where, at page 308, he said:
… a defendant within the prescribed time for filing a statement of defence can always serve and file a statement of defence regardless of the merits of his defence. In my view, if the omission to file a statement of defence within the required time can be explained, the defendant should not be in a different position than a defendant who serves and files a statement of defence within the prescribed time. The plaintiff’s proper course of action if there is a lack of merit in the statement of defence is to move for summary judgment. A default judgment is different as the plaintiff has recovered a formal judgment and the defendant in seeking a discretionary order of the court is required to show that there is a meritorious reason for setting aside the default judgment.
[29] These references establish that the defendant, having explained the default as the Master found, is entitled to defend without establishing that he has a defence. If he has none, the plaintiff will move for summary judgment, at a time when the court is much better positioned to determine if there is a triable defence available than it is at the pleadings stage. In other circumstances at the pleadings stage, an action is dismissed only if it is plain and obvious that it cannot succeed. A similar approach to a defendant’s proposed defence is called for in Earl, supra. The court is always cautious about preventing a party from having a day in court.
[30] In the present case, the only basis left for refusing the defendant leave to file a defence is that he filed an unnecessary affidavit to address an issue that, in the end he did not need to address. It was argued, in effect, that because it exists I should consider it and the Master’s findings about it. Not to do so would be unjust to the plaintiff. I do not agree. It would be wrong to permit the plaintiff to use this unnecessary affidavit and the Master’s equally unnecessary findings (had the lack of jurisdiction been drawn to her attention) to the defendant’s detriment when it was the plaintiff who wrongly invoked a jurisdiction which the Registrar did not have. The plaintiff’s error should not be permitted to create an additional barrier for the defendant.
[31] In any event, the proposed Statement of Defence does contain material allegations which, if believed (and they must be accepted for present purposes) might constitute a possible defence to the rescission claim. There is a denial that it was part of the agreement that the defendant would use his own funds and a claim that the plaintiff was aware of the loan at material times, in effect acquiescing. The Master analyzed these and other assertions and clearly did not believe them. With respect, that was not her function. Weighing the merit of the defence is for the trier of fact at a later stage and not for the court at the very outset of the case.
[32] For these reasons, the appeal is allowed. The default judgment and the noting of the defendants in default are both set aside. The defendants will have twenty days in which to file a defence. Costs of the appeal and below may be addressed in written submissions within twenty days.
Lane, J.
DATE: February 19, 2003