COURT FILE NO.: CV-17-585893 DATE: 20180725 SUPERIOR COURT OF JUSTICE - ONTARIO
RE: GIUSEPPE (“JOE”) NATALE and ARIANNA NATALE, Plaintiffs/Respondents – AND – JOHN TESTA and DEBBIE TESTA, Defendants/Appellants
BEFORE: E.M. Morgan J.
COUNSEL: Damien Buntsma and Stephanie Garraway, for the Plaintiffs/Respondents David O’Connor and Tamara Markovic, for the Defendants/Appellants
HEARD: July 20, 2018
ENDORSEMENT
I. The Appeal
[1] The Defendants/Appellants, John Testa and Debbie Testa, appeal a decision of Master Short dated May 8, 2018.
[2] In his decision, the Master dismissed a motion to set aside a Certificate of Pending Litigation (“CPL”) that had been ordered on November 14, 2017 in respect of a claim brought by the Plaintiffs/Respondents, Giuseppe Natale and Arianna Natale (together “Natale”), in which they asserted an interest in the Testa home located at 41 Treelawn Parkway, Toronto (I understand that the home is actually owned by Mr. Testa only, but for syntactical convenience I will refer to the Defendants/Appellants together as “Testa”).
[3] The Master also confirmed that the $600,000 that Testa had paid into court pursuant to a consent Order of Master Abrams dated November 20, 2017 must remain in court pending the outcome of the action on its merits. The Master found that this amount represented a specific fund comprising security for Natale’s claim pursuant to Rule 45.02 of the Rules of Civil Procedure.
II. The ex parte motion and non-disclosure
[4] The Statement of Claim herein was issued on November 6, 2017 and served on Testa shortly after that date. On November 9, 2017, Robert Makilaw, a lawyer who introduced himself as representing Testa, wrote an email to Natale’s counsel, Damien Buntsma, advising him that he was on board for Testa. Mr. Makilaw stated in his email that Testa would be opposing any attempt to obtain a CPL with respect to Testa’s property, and indicated that in any case Mr. Buntsma should not proceed in obtaining a CPL on an ex parte basis.
[5] Mr. Buntsma confirmed at the hearing before me that he did receive the email from Mr. Makilaw, but that he did not respond. Instead, he attended at court the following day, November 10, 2017, without notice to Testa or Mr. Makilaw, in an attempt to obtain a CPL. The Master’s endorsement of that day indicates that the matter was spoken to briefly and adjourned for several days, to November 14, 2017, to be heard in full.
[6] Mr. Buntsma returned to court on November 14th and argued the motion. He did so again on an ex parte basis, never having answered Mr. Makilaw or having advised him or Testa that he was proceeding with a motion. The Master’s endorsement from November 14th confirms that Mr. Buntsma was the only person in attendance.
[7] At the hearing before me I asked Mr. Buntsma whether he advised the Master that he had heard from a lawyer on Testa’s behalf. He responded that he did tell the Master that the certificate of pending litigation would be opposed. After some pressing by me on the question, he explained that what he told the Master is that the CPL would eventually be opposed. He did not mention to the Master that he had actually heard from a lawyer for the other side. He certainly did not advise the Master that a lawyer representing Testa had written to him asking that he not proceed without notice.
[8] When I asked Mr. Buntsma why he had proceeded this way in the face of a request by a lawyer for the opposing party to be given notice, he indicated that he was afraid that the property would be quickly sold. I repeated my question to him, pointing out that we are talking about real estate – not the most liquid of assets even in Toronto’s notoriously hot market. The evidence in the record is that the Testa house ultimately sold for over $1 million; no one could unload a piece of real property like that in secret and without giving a purchaser some time to close. In any case, it could give rise to a new cause of action if Testa were to surreptitiously dispose of his assets after being served with a claim against him, and no doubt Mr. Makilaw would advise him not to do so.
[9] Nevertheless, Mr. Buntsma remained adamant in his oral submissions that there was a danger that Testa would quickly sell his house and that the proceeds of sale would then vanish. He apparently calculated that he could not take the risk of revealing his plan to a lawyer for the opposing party.
[10] Mr. Buntsma’s explanation strains credulity to the breaking point. He heard from Mr. Makilaw on November 9th and was in court on November 10th. A house does not sell, and the proceeds do not vanish, overnight. Mr. Buntsma was in court again 4 days later and still did not provide any form of notice as requested by a colleague at the bar. It is obvious that he was anxious to have no opponent when he went before the Master, thereby vastly increasing the chances of tying up Testa’s property even in the face of a paucity of evidence.
III. The “close call” CPL motion
[11] I say that the evidence supporting any claim to Testa’s house was sparse because the Master said so himself. Even without an opponent, Natale’s motion for a CPL was not an easy one. The ex parte motion returned to be argued in full by Mr. Buntsma on November 14, 2017. The Master’s endorsement of that date states:
This is a close call on an ex parte application for a certificate of pending litigation. There is no doubt based upon the evidence filed that the plaintiffs intended to purchase land in Muskoka and lost those invested funds when the co-venturer defendant John Testa failed to make the contributions to the project, such that substantial deposits were lost.
Paragraphs 29 through 33 set out circumstances that I believe raise at least a degree of a constructive trust against the defendants’ residence which is about to be sold. Allegations of improvements made to subject land when funds were to go to Muskoka lands suggests this may well be enough of a constructive trust to justify CPL.
If there is evidence to refute those claims, the defendants will have an opportunity to present it on a motion to set aside this Order…
[12] The matter was a “close call” for the Master without knowing that counsel for the moving party concealed from him a direct communication he had received from a lawyer for the opposing party asking to be put on notice; it doubtless would have been an impossible call had the Master been appropriately informed. I am confident that the Master, as an experienced jurist, would have refused to hear the matter on an ex parte basis had Mr. Makilaw’s email to Mr. Buntsma been brought to his attention. Rather, the Master would have adjourned the matter again so that it could be brought with notice to the lawyer who had requested it on Testa’s behalf.
[13] Adjourning the motion so that it could be brought with proper notice would have changed the complexion of the entire CPL request. Testa’s side of the story would have been presented as a counterweight to Natale’s side. In his November 14th endorsement, the Master already sensed that there was likely a substantive side to the story that he had not yet heard, and wisely went out of his way to indicate that “the defendants will have an opportunity to present it on a motion to set aside this Order.”
[14] This court has consistently held that, “It is well established that the failure of a moving party to make full and fair disclosure may result in the dissolution of an ex parte injunction”: Two-Tyme Recycling Inc. v Woods, at para 20 (SCJ). The same is true of a CPL obtained on an ex parte basis, since it has a similarly injunctive effect on the property owner. Sharpe J. (as he then was) explained the policy behind this point in United States of America v Friedland, at para 16, as follows:
The Judge hearing an ex parte motion and the absent party are literally at the mercy of the party seeking injunctive relief. The ordinary checks and balances of the adversary system are not operative. The opposite party is deprived of the opportunity to challenge the factual and legal contentions advanced by the moving party in support of the injunction. The situation is rife with the danger that an injustice will be done to the absent party. As a British Columbia judge noted recently:
There is no situation more fraught with potential injustice and abuse of the Court's powers than an application for an ex parte injunction. (Watson v. Slavik, August 23rd, 1996, paragraph 10.)
IV. Consequences of non-disclosure
[15] The test for setting aside an ex-parte order because of the moving party’s non-disclosure is whether the undisclosed facts are material in the sense that their disclosure would likely have had an impact on the order that was made. In general, “all material facts must be disclosed whether or not the moving party believes these matters are of material consequence”: McBean v Amsen, at para 130.
[16] Non-disclosure of material facts can come in any number of guises. “This failure [to disclose] can take multiple forms, including, but not limited to: non-disclosure of material facts in support of the defendant's position; misstatement of the then current state of affairs and law; overstatement of the position in support of the moving party; selective exclusion of relevant information; extensive use of exhibits without detailed reference to relevant material in the body of an affidavit”: United States v Yemec, at para. 35. It can also take the form of a failure to disclose that opposing counsel has specifically asked to be notified so that he can put a full record before the court.
[17] Under the circumstances, Mr. Buntsma could have replied to Mr. Makilaw’s email by giving what was by then short notice of the forthcoming motion. Mr. Makilaw could then have appeared in court to make whatever point he was prepared to make, turning the proceeding into what the High Court in England has termed an “opposed ex parte motion”, which the Court of Appeal has characterized as a “modern and very sensible practice to assist the court”: Pickwick International Inc. (GB) Limited v Multiple Sound Distributors Limited, [1972] RPC 786, 791 (per Megarry J), 790 (per Russell LJ). In view of Mr. Makilaw’s specific request for notice of any CPL motion, proceeding in this way would not only have been the sensible thing for Mr. Buntsma to do, it would have been the appropriate thing to do.
[18] The matter next came to court on November 20, 2017 for a consent order. Mr. Buntsma and Sean Grayson, who took the matter over for Testa in place of Mr. Makilaw, appeared before Master Abrams and advised her that Testa’s motion to vacate the CPL was to be adjourned, and that in the meantime the CPL was to be discharged upon the sale of Testa’s property and Testa’s payment into court of $600,000 from the proceeds of such sale. Master Abrams’ endorsement of November 20th states that since Master Short had made the initial ex parte Order, the motion to set the Order aside should properly be heard by him as well.
V. The return of the CPL motion and the Rule 45.02 security
[19] By the time the motion returned to Master Short on December 20, 2017, the Testa home had sold, the CPL had been discharged, and the $600,000 had been paid into court as security replacing the CPL. This time, of course, the motion proceeded with notice and so the Master had a full evidentiary record to consider, including evidence adduced by Testa in opposition to the CPL. This included affidavit evidence filed by counsel for Testa and cross-examinations of all affiants. The record filed for the December 20th motion provided a complete response to the assertions that had been made by Natale in the materials filed in support of the ex parte Order granted the month before.
[20] The affidavit evidence that had been put before the Master at the ex parte motion gave two reasons why Natale was suspicious that funds had been diverted from Testa from the Muskoka commercial property in which Natale had invested to Testa’s house. Natale had deposed that he thought that Testa had paid down his home mortgage with the funds he had collected for the Muskoka investment. Natale had also sworn that he saw the roof being repaired on Testa’s home and suspected that these repairs were paid for by misappropriated investment funds.
[21] Neither of these allegations turns out to have been accurate. What’s more, their inaccuracy was easily established by evidence brought forward in Testa’s December 20th motion record. It turns out that Testa did not pay off his home mortgage with any funds other than his own. The evidence showed that the line of credit secured against his home, which Natale had mistakenly called a mortgage, was paid off on closing of the sale of the house with the proceeds of sale above and beyond the $600,000 that was paid into court. The closing documents showed that nothing was paid off before that, either with misappropriated or any other funds.
[22] In addition, Testa’s motion record contained an affidavit of the real estate agent with whom Testa had listed his house for sale. The agent said that the house was in need of minor roof repairs when he inspected it, and that in order to facilitate a sale the agent paid for the roof repairs himself. Again, the evidence brought forward by Testa provided a readily available answer to Natale’s allegations that had led to the CPL being ordered at the ex parte motion. Had Testa’s counsel been given notice of that motion as he had requested, the Master would have had evidence that clearly countered Natale’s evidence. He would not have ordered the CPL.
[23] The weakness of Natale’s evidence which in the first place led the Master to refer to the CPL request as a “close call”, combined with the ready availability of evidence to counter Natale’s motion, goes a long way toward explaining why Mr. Buntsma was not anxious to have Mr. Makilaw or anyone else appear on Testa’s behalf at the original motion before the Master. It also demonstrates the merit in the English approach in providing short notice to opposing counsel so that he or she can at least attend at the initial hearing of the ex parte motion and explain what the responding side’s position will be. If that had been done for the motion on November 10th, Testa would have had the proper evidence before the Master by the time the motion returned for full argument on November 14th.
[24] There is no doubt that the failure to disclose to the Master that a lawyer had written to Mr. Buntsma asking for notice of any CPL motion adversely and materially impacted on the Master’s ruling. But for this non-disclosure, there would be no CPL. Further, given the terms of Master Abrams’ subsequent Order, if there were no CPL there would be no $600,000 fund paid into court by Testa.
[25] At the December 20, 2017 hearing, Mr. Buntsma argued that the $600,000 paid into court by Testa represents a “specific fund” as required by Rule 45.02, and that it should remain in court on that basis as security for Natale’s claim. The Master accepted this argument, finding that the requirement that there be a claim against a “specific fund” had been met: 3Genius Corporation v Locationary Inc., 2016 ONSC 4092, at para 1. He further found that security was required for this claim, based largely on Testa’s record of personal debts that were paid off at the closing of the sale of his house. The Master reasoned that since Natale had an expectation of being eventually compensated by the equity in Testa’s home, and the balance of convenience favored retaining in court the funds already paid in on the discharge of the CPL, a specific fund had been created.
[26] This reasoning may or may not have accurately applied the Rule 45.02 criteria for the posting of security. What is certain, however, is that were it not for the initial failure to disclose material information to the Master, there would be no specific fund at all. The only reason the $600,000 was available to potentially meet that part of the Rule 45.02 test was that a CPL had been ordered on November 14, 2017 in circumstances in which it would not have been ordered if proper disclosure had been made.
VI. Palpable and overriding error
[27] In Adams v Adams, 2016 ONSC 2646, at para 32, Dunphy J. set out the standard of review of a Master’s decision on a matter such as this: “A Master’s decision will be interfered with on appeal only if the Master made an error of law, exercised her discretion on wrong principles or misapprehended the evidence to the point of committing a palpable and overriding error in appreciating it.” Here, the decision of the Master reflects a misapprehension of the evidence and a palpable and overriding error. I hasten to state what should by now be obvious – although reversible error did occur, it was not exactly the learned Master’s fault.
[28] As outlined above, the Master was led down the path of misapprehension by counsel for Natale’s failure to disclose information that should have been disclosed. But for the non-disclosure of material facts there would have been no CPL; and but for the CPL there would have been no $600,000 payment into court; and but for the payment into court there would be no specific fund for the purposes of security under Rule 45.02. This chain of events culminated in a palpable and overriding error in the Master’s endorsement of May 8, 2018.
VII. Disposition
[29] The appeal by Testa is allowed. Natale’s motion under Rule 45.02 is dismissed and Testa’s motion to discharge the CPL is granted.
[30] The $600,000 paid into court pursuant to the Order of Master Abrams dated November 20, 2017 is to be released from court and paid to Testa.
VIII. Costs
[31] Testa is entitled to his costs of this appeal and of the proceeding below.
[32] The fact that the proceeding before the Master went awry due to the non-disclosure of a material fact by Natale’s counsel calls for substantial indemnity costs of that proceeding. In coming to that conclusion, I rely on Rule 57.01(1)(e), “the conduct of any party that tended to shorten or to lengthen unnecessarily the duration of the proceeding”, as well as Rule 5.01(1)(g), “a party’s denial of or refusal to admit anything that should have been admitted”.
[33] Testa’s counsel has produced a Costs Outline seeking just over $20,000 for this appeal. That is somewhat more than the approximately $13,500 sought by Natale’s lawyer, but the difference is understandable. As appellant, Testa was fighting an uphill battle that required his counsel to do a particularly thorough job of researching the relevant case law. In my view, Natale should not be taken by surprise by the slightly greater amount sought by Testa: Rule 57.01(1)(0.b).
[34] As for the costs of the proceedings below, these encompass the full argument of the motion before Master Short on December 20, 2017, as well as the appearance before Master Abrams on November 20, 2017. The appearance before Master Abrams was a direct outgrowth and effectively a continuation (or, for Testa’s counsel, a commencement) of the proceedings before Master Short.
[35] Counsel for Testa presents a Costs Outline for those proceedings in which he seeks $38,944.80 on a substantial indemnity scale or $31,384.55 on a partial indemnity scale. Here, I will take into account the principle of indemnity which underlies the granting of costs (Rule 57.01(1)(0.a)), the significance of the issues for Testa (Rule 57.01(1)(d)), and the fact that the non-disclosure of material facts on the ex parte motion constitutes an improper step in the proceeding (Rule 57.01(1)(f)(i)).
[36] All of the above factors lead me to the conclusion that the amount sought by Testa’s counsel on a substantial indemnity basis is warranted. Indeed, if anything this costs request is rather modest given the circumstances.
[37] Natale shall pay Testa the costs of this appeal in the amount of $20,000, inclusive of disbursements and HST. Natale shall also pay Testa the costs of the proceedings before the Master in the amount of $38,900, also inclusive of disbursements and HST.
Morgan J.