CITATION: Manchisi v. Geraldo, 2014 ONSC 3389
DIVISIONAL COURT FILE NO.: 111/14
DATE: 20140620
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
THEN, SWINTON AND LEDERER JJ.
B E T W E E N:
CYNTHIA MANCHISI, in her capacity as Executor and Trustee of the Last Will and Testament of GIACOMO MANCHISI, deceased, MILTON CURIOSITIES and J&K ELITE PROMOTIONS INC.
Plaintiffs (Appellants)
- and -
SIDNEI GERALDO, JULIANO D’LUCCA, MILTON TODAY MAGAZINE and MILTON TODAY TV LTD.
Defendants (Respondents)
Elena Mamay, for the Plaintiffs (Appellants)
Jeffrey W. Kramer, for the Defendant (Respondent) Juliano D’Lucca also known as Sidnei Geraldo
HEARD at Toronto: May 15, 2014
Swinton J.:
Overview
[1] The plaintiffs/appellants appeal from the order of D. Gray J. dated March 12, 2013, in which he set aside a number of orders and a noting in default made against the defendant/respondent Juliano D’Lucca, also known as Sidnei Geraldo (“the respondent”). The motions judge did so because of the failure of the appellants to serve the respondent, an undischarged bankrupt, with notice of various steps in the proceeding.
[2] The main issue in this appeal is whether the motions judge erred in law in holding that the respondent should have been given notice of the proceedings that led to the orders against him. For the reasons that follow, I conclude that the motions judge did not err in law, and that the appeal should be dismissed.
Background
[3] On August 12, 2010, the appellants commenced this action against the respondent and two corporations with which he was associated. The allegations included breach of fiduciary duty, breach of confidence and fraud. The respondent and the corporations filed statements of defence.
[4] The parties exchanged affidavits of documents, but the appellants were not satisfied with the disclosure provided by the defendants. On February 23, 2011, the appellants obtained an order from Murray J. against all the defendants requiring them to produce a further and better affidavit of documents.
[5] On June 7, 2011, the appellants served a notice of motion to strike the defendants’ pleadings for failure to comply with the order of Murray J. The defendants all made assignments in bankruptcy by mid-June of 2011.
[6] Pursuant to ss. 69 through 69.3 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the “BIA”), on the bankruptcy of a debtor, there is an automatic stay of proceedings brought by a creditor against the bankrupt or his property with respect to claims provable in bankruptcy. The appellants decided to bring a motion to lift the stay pursuant to s. 69.4 so that they could proceed with their action. They served the notice of motion on the Trustee in Bankruptcy (the “Trustee”), but not on the respondent.
[7] The Trustee did not oppose the motion or attend at the hearing, and the motion succeeded. The orders of the Bankruptcy Court made on July 19 and July 28, 2011 state that the stay was lifted “to prosecute an action asserted in fraud against the bankrupt”. This reference to fraud is significant, as s. 178(1) of the BIA provides that an award of damages in a civil proceeding in the courts in respect of liability arising from fraud is not absolved with the discharge of the bankrupt.
[8] The appellants then served a notice of return of the motion to strike pleadings on the Trustee. The respondent was not served with this notice of motion. The Trustee did not oppose the motion, and Miller J. granted an order to strike the defendants’ statements of defence on September 1, 2011.
[9] The appellants subsequently noted the defendants in default on November 2, 2011. On January 11, 2012, the appellants proceeded with an uncontested trial before Hourigan J. He gave judgment against the defendants in the amount of $1,132,078.48, including $50,000 in punitive damages and $180,000 in costs on a substantial indemnity basis.
[10] When the respondent learned of the judgment, he first served a notice of appeal. Subsequently, upon obtaining the assistance of legal counsel, he brought a motion to set aside the orders made without notice. Gray J. granted that motion on March 12, 2013, setting aside the orders of Miller J. and Hourigan J., as well as the noting in default. He also ordered the appellants to pay partial indemnity costs of $12,000 to the respondent.
[11] Leave to appeal this order was granted by Edwards J.
The Issues on Appeal
[12] The appellants raise a number of issues on this appeal. They argue that the respondent had no standing to pursue the motion before Gray J. because he needed leave under the BIA to do so. Second, they argue that the motions judge had no jurisdiction to determine the motion to set aside the final judgment, given that the striking of the statement of defence was a final order that could only be appealed to the Court of Appeal. Third, the motions judge erred in law in holding that the respondent should have been served with notice of the motions to lift the stay and to strike pleadings. Finally, they argue that the motions judge erred in ordering costs against them in an excessive amount, rather than awarding them costs thrown away.
Did the respondent lack standing to bring the motion to set aside?
[13] The appellants argue that because of s. 71 of the BIA, a bankrupt has no standing to prosecute or defend a civil proceeding, other than a personal action, such as an action for damages for personal injury or defamation. Accordingly, the respondent had no standing in the motions leading up to the judgment against him, and in particular the motion to set aside, without first obtaining leave from the Bankruptcy Court pursuant to s. 37 of the BIA. Section 37 allows a bankrupt who is aggrieved by an act or decision of a trustee in bankruptcy to apply to the Court for relief.
[14] The appellants also rely on s. 30(1) of the BIA, which sets out the powers that may be exercised by the trustee with the permission of the inspectors. Those powers include, in s. 30(1)(d), the power to “bring, institute or defend any action or other legal proceeding relating to the property of the bankrupt”.
[15] In my view, the respondent had standing to bring the motion to set aside, as he was not bringing a motion to deal with property vested in the Trustee.
[16] Section 71 of the BIA vests the property of the bankrupt in the trustee:
On a bankruptcy order being made or an assignment being filed with an official receiver, a bankrupt ceases to have any capacity to dispose of or otherwise deal with their property, which shall, subject to this Act and to the rights of secured creditors, immediately pass to and vest in the trustee named in the bankruptcy order or assignment, and in any case of change of trustee the property shall pass from trustee to trustee without any assignment or transfer.
“Property” is defined in s. 1 and s. 67 to include causes of action.
[17] All the cases relied on by the appellants are ones where a bankrupt has been held to lack the capacity to pursue a civil proceeding or an appeal in a civil proceeding because the proceeding relates to property vested in the trustee (see, for example, Assaf Estate (Re), [2000] O.J. No. 5358 (Div. Ct); Belham v. Strider Fishing Co., [1985] F.C.J. No. 950 (T.D.); 4028490 Canada Inc. v. Canada, 2005 TCC 50 at para. 13; McNamara v. Pagecorp Inc., [1988] O.J. No. 189 (H.C.J.) at p. 5 (Quicklaw); Alsask Farm & Ranch Supply Ltd. v. Texaco Canada Ltd. (1989), 1989 4528 (SK QB), 73 Sask. R. 154 (Q.B.); Watt v. Beallor Beallor Burns Inc., 2004 18877 (ON SC), [2004] O.J. No. 450 (S.C.J.) at para. 3; Tinant v. Tinant, 2003 ABCA 211 at para. 9; White v. True North Springs Ltd., 2004 NLCA 20). For example, in Watt, above, Farley J. stated, “If a bankrupt brings an action relating to ‘property’ which vests in the trustee, the action should be struck as an abuse of process of the Court…”.
[18] The respondent in the present case was not seeking to pursue a civil action or an appeal involving property that had vested in the Trustee. Rather, he was seeking to defend an action brought against him. In that action, the appellants were seeking a judgment for damages that would survive his discharge from bankruptcy because the appellants were alleging fraud. None of the cases relied on by the appellants dealt with the standing of a bankrupt to have proper notice and to defend a civil action in which a claim is made for damages that would, if successful, result in a judgment debt that would survive the discharge from bankruptcy.
[19] Moreover, nothing in the BIA prohibits a bankrupt from participating in the defence of such an action or from bringing a motion to set aside a default judgment of which he had no proper legal notice.
[20] While the appellants argue that the respondent should have brought a motion pursuant to s. 37 of the BIA before bringing his motion to set aside, that section is not applicable here, as the respondent is not seeking relief against the Trustee for some action or failure to take action.
[21] In summary, the respondent had standing to bring the motion to set aside the default judgment.
Did the motions judge have jurisdiction to set aside the default judgment?
[22] The appellants argue that the motions judge had no jurisdiction to set aside the order of Miller J. striking the statement of defence, as that was a final order. Accordingly, the motion to set aside the judgment of Hourigan J. was characterized as a collateral attack on the earlier order. The proper way to challenge the order striking the statement of defence was said to be by way of an appeal to the Court of Appeal.
[23] There is no merit to this argument. A default judgment is not a final order for the purposes of an appeal because, pursuant to rule 19.08 of the Rules of Civil Procedure, a judgment obtained against a defendant who has been noted in default may be set aside on such terms as are just. A default judgment does not become a final order unless the motion to set aside the judgment has been dismissed (Ketelaars v. Ketelaars, 2011 ONCA 349 at para. 5; Cherry Central Cooperative Inc. v. D’Angelo (2001), 2001 27940 (ON CA), 56 O.R. (3d) 655 (C.A.) at para. 7). Similarly, the order of Miller J., made without notice to the respondent, could be set aside on motion and was not a final order.
[24] Accordingly, the motions judge did have jurisdiction to set aside the default judgment.
Did the motions judge err in finding that the respondent was entitled to notice?
[25] The appellants argue that the respondent was not entitled to notice of their motion to lift the stay pursuant to s. 69.4 of the BIA. As authority for this proposition, counsel relied on an excerpt from Williston and Rolls Court Forms, which invokes an earlier version of Rule 13 of the Bankruptcy and Insolvency Rules (the “Bankruptcy Rules”).
[26] There is a problem with relying on Williston and Rolls because Rule 13, in the form those authors cite, is different from the current Rule 13. The present rule says nothing about the issue of service on the bankrupt when a motion to lift the stay is brought.
[27] In contrast, the respondent relies on two cases decided by Registrars in Bankruptcy stating that the bankrupt should be served with notice of such a motion: Ma (Re), 2000 CarswellOnt 2798 (S.C.J. in Bankruptcy) and Covey (Re), 2012 CarswellAlta 1585 (Q.B.).
[28] It is not necessary in this appeal to resolve the issue of notice with respect to the motion to lift the stay. Whether or not notice was required at that stage, notice of the subsequent steps in the civil proceeding was required in accordance with the Rules of Civil Procedure once the stay was lifted.
[29] Rule 3 of the Bankruptcy Rules provides that the rules of civil procedure in a province apply in cases not provided for in the BIA or its rules, provided there is no inconsistency with the BIA or its rules. As the BIA and its rules do not expressly deal with civil proceedings not subject to a stay, the Rules of Civil Procedure of Ontario will apply unless there is an inconsistency with the BIA regime.
[30] Accordingly, once the stay under the BIA was set aside, the present action should have proceeded in accordance with the Ontario rules. The respondent, as a defendant to the action, was entitled to proper notice of the motion before Miller J. to strike the statement of defence. Service on the Trustee did not constitute service on the respondent bankrupt.
Did the motions judge err in ordering the default judgment set aside?
[31] As the initial motion to strike was made without proper notice, the order to strike and the default judgment that followed were irregularly obtained. The motions judge had the authority to set them aside in accordance with Rule 37.14, which permits a party who is affected by an order that was obtained on a motion without notice to move to set aside that order on such terms as are just (see Royal Trust Corporation of Canada v. Dunn (1991), 1991 7227 (ON SC), 6 O.R. (3d) 468 (Gen. Div.) at para. 19).
[32] Thus, there was no error in setting aside the default judgment, the noting in default and the motion to strike, given the lack of proper notice.
Did the motions judge err in awarding costs against the appellants?
[33] Often when a default judgment is set aside, costs thrown away are awarded to the party who had obtained judgment. Here, the motions judge awarded costs of $12,000 on a partial indemnity basis to the respondent.
[34] Costs are in the discretion of the motions judge. I see no error in principle on his part in awarding costs to the respondent in the circumstances of this case, where the default judgment was obtained after the appellants failed to provide the required notice of the motion to strike the statement of defence.
[35] As to the quantum of the costs award, that is a matter within the discretion of the motions judge. The appellants have failed to identify any error in principle in the costs award, nor have they shown that the award was clearly wrong. Therefore, there is no basis to reduce the quantum.
Conclusion
[36] As the appellants have failed to identify any error in law or palpable and overriding error of fact, the appeal is dismissed.
[37] Costs to the respondent of the motion for leave to appeal and the appeal are fixed at $12,000, inclusive of HST and disbursements, an amount that is fair and reasonable in the circumstances.
Swinton J.
Then J.
Lederer J.
Released: June 20, 2014
CITATION: Manchisi v. Geraldo, 2014 ONSC 3389
DIVISIONAL COURT FILE NO.: 111/14
DATE: 20140620
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
then, swinton and lederer jj.
B E T W E E N:
CYNTHIA MANCHISI, in her capacity as Executor and Trustee of the Last Will and Testament of GIACOMO MANCHISI, deceased, MILTON CURIOSITIES and J&K ELITE PROMOTIONS INC.
Plaintiffs (Appellants)
- and -
SIDNEI GERALDO, JULIANO D’LUCCA, MILTON TODAY MAGAZINE and MILTON TODAY TV LTD.
Defendants (Respondents)
REASONS FOR JUDGMENT
Swinton J.
Released: June 20, 2014