Court File and Parties
COURT FILE NO.: CV-17-582364 MOTION HEARD: 20180509 SUPERIOR COURT OF JUSTICE - ONTARIO
RE: Long Term Recovery Limited, Plaintiff AND: David Ted Bolden and Antoinette Arian Bolden, Defendants
BEFORE: Master P.T. Sugunasiri
COUNSEL: Lederman, E., Counsel for the Defendants Blinick, J., Counsel for the Plaintiff and Morrison, S., student-at-law
HEARD: May 9, 2018
Reasons for Decision
Overview:
[1] The Defendants in this action seek to set aside default judgment and defend this action on the merits. The action relates to a promissory note executed by the Defendants in April of 2012 (“Note”). The Note was a promise to pay $800,000 Bermudian dollars (“BMD”) over five years in respect of fees owing to the firm of Mello, Jones & Martin (“MJM”) for legal services rendered. MJM had defended the Boldens in criminal proceedings in Bermuda.
[2] No formal action was taken on the note until September 8, 2017 when LTR issued its Statement of Claim (“Claim”). The Claim is for damages in breach of contract, unjust enrichment, quantum meruit, special and punitive damages. The Boldens delivered a Notice of Intent to Defend on September 26, 2017 but sought to retain Lenczner Slaght Royce Smith Griffin LLP as counsel going forward. Anticipated counsel, Mr. Lederman, advised counsel for LTR, Mr. Blinick, of his impending retainer and requested that no steps be taken without notice. LTR granted the Boldens two indulgences to deliver a defence by November 3, 2017 failing which LTR would move for default judgment without notice. The Boldens failed to deliver a defence or communicate with LTR with respect to the defence by November 3, 2017. As such, without further notice, LTR noted the Boldens in default on November 8, 2017 and obtained default judgment on November 22, 2017. On the very same day, Mr. Lederman wrote to Mr. Blinick to advise that he had been formally retained.
[3] The Boldens then moved to have the noting in default set aside. Following the delivery of their motion record, Mr. Blinick advised that LTR had already obtained default judgment against the Boldens. The Boldens amended their motion to include relief from default judgment.
[4] Despite Mr. Blinick’s able arguments, I grant the motion and set aside default judgment. In my view, it is in the interests of justice to allow this action to be resolved on its merits. My reasons follow.
Facts:
Relationship of the Parties
[5] MJM is a former law firm based in Bermuda. It was succeeded by the professional legal corporation MJM Limited. LTR is a holding company registered in Bermuda. LTR is owned exclusively by the eight former partners of MJM.
[6] Mr. Bolden is a Canadian citizen. Mrs. Bolden is Bermudian with permanent residency in Canada. Both completed university and moved to Bermuda in December of 1990. They resided in Bermuda until relocating to Canada in 2012.
[7] While in Bermuda, the Boldens owned and operated a number of investment businesses (collectively the “Emerald Group”). Mr. Bolden was president and CEO of the Emerald Group. Mrs. Bolden was manager and CFO.
[8] On July 1, 2009, the Boldens were criminally charged in Bermuda for theft, money laundering and providing false information to the Bermuda Monetary Authority. At that time, all of the Boldens’ personal assets as well as those of the Emerald Group were frozen by court order. A liquidator was also appointed.
[9] On November 30, 2010 the Boldens entered into a retainer agreement with MJM with Andrew Martin being lead counsel. The Boldens paid a retainer fee of $100,000 Bermudian dollars (“BMD”) to MJM which was paid by Mr. Bolden’s father. MJM also obtained a guarantee from Mr. Bolden’s father in law. Mr. Francis provided MJM a legal charge over a vacant lot at Cottage Hill Road West in Bermuda. The Retainer Agreement contemplated that any funds recovered from the Emerald Group’s insurance company would be used to pay for fees/expenses incurred by MJM.
[10] The Boldens’ trial began in May of 2011 and lasted five weeks. They were acquitted of all but one charge and sentenced to two hundred hours of community service. According to Mr. Martin, the legal fees incurred for the Boldens’ defence was $869,000 BMD.
[11] On July 4, 2011 Mr. Martin wrote to counsel for the liquidator to allow the Boldens access to their assets having been acquitted of all but one charge with respect to the provision of false information to the Bermuda Monetary Authority.
[12] Following the trial and the Boldens’ relocation to Ontario, Mr. Martin wrote to them to propose a structured payment arrangement for the outstanding legal fees. Mr. Martin provided the Boldens with a draft term sheet (“Term Sheet”) that set out the proposed arrangement. That arrangement included the debt reduction from $864,000 to $800,000 BMD, the assignment of the Francis mortgage to LTR, referred to at the time as “Holdco”, a five-year payment plan commencing December 31, 2012 secured by a Note in favour of LTR, and a second mortgage to LTR over the Boldens’ property at 64 Harington South Road (“Walsingham Lodge”) in Bermuda. The Boldens were also to maintain insurance on this property to a value of $1.6million during the term of the second mortgage.
[13] The Term Sheet also provided that the Boldens were to execute a deed confirming that they have sought independent legal advice (“ILA”) vis-à-vis MJM and each other, or waived their right to obtain such advice.
[14] Without executing the deed as required, the Boldens accepted the arrangement and executed the Note on April 17, 2012. After executing the Note, the Boldens continued to retain the services of Mr. Martin to recover legal fees from its insurer. Ultimately, the Boldens settled with the insurer for $100,000. Of that amount, $50,000 BMD was credited towards a capital payment on the Note, $24,000 BMD was directed towards interest on the Note calculated as 3% per annum, $14,172 BMD was applied to unbilled legal fees with respect to the insurance issue and $2750 BMD was paid as stamp duty on the second mortgage.
[15] Following the insurance settlement, the Boldens were unable to make payments under the Note except one payment of $74,000 BMD made on November 2, 2013. They also defaulted on their mortgage on Walsingham Lodge which the bank repossessed. On March 3, 2014, Mr. Martin wrote to the Boldens on behalf of LTR demanding payment under the Note. Concurrently, he wrote to Mr. Francis to demand payment under his Guarantee. Mr. Martin made a second demand for payment under the Note on January 13, 2015. The Boldens made a second payment of $3,000 BMD on May 19, 2016.
[16] After failed negotiations to address the debt in other ways, LTR issued its Claim on September 8, 2017 for damages in breach of contract, unjust enrichment and quantum meruit. LTR and special and punitive damages.
Default Judgment
[17] After receiving the Claim, the Boldens attempted to retain RV Law LLP who delivered a Notice of Intent to Defend on September 26, 2017 on behalf of them.
[18] The Boldens subsequently sought to retain Lenczner Slaght Royce Smith Griffin LLP as counsel going forward. Immediately after being contacted, anticipated counsel, Mr. Lederman, advised counsel for LTR, Mr. Blinick, of his impending retainer and requested that no steps be taken without notice.
[19] Mr. Blinick responded to Mr. Lederman on October 10, 2017 and granted the Boldens an indulgence to October 24, 2017. By October 24, 2017, Mr. Lederman had still not been retained. He advised Mr. Blinick that he expected to be retained shortly and that the Boldens were arranging for the funding needed for the retainer. That was the basis of the delay.
[20] LTR granted the Boldens another indulgence to deliver a defence by November 3, 2017 failing which LTR would move for default judgment without notice. The Boldens failed to deliver a defence or communicate with LTR with respect to the defence by November 3, 2017. As such, without further notice, LTR noted the Boldens in default on November 8, 2017 and obtained default judgment on November 22, 2017. On the very same day, Mr. Lederman wrote to Mr. Blinick to advise that he had been formally retained.
[21] The Boldens then took immediate steps to set aside the noting in default, not knowing about the default judgment. After serving their motion record, Mr. Blinick advised Mr. Lederman that LTR had in fact obtained default judgment against the Boldens. The Boldens immediately amended their motion to set aside default judgement and the noting in default.
Law and Analysis:
[22] The test for setting aside the noting in default is the same as the test for setting aside default judgment. Both parties agree that the test is as set out by the Court of Appeal in Mountain View Farms Ltd. v. McQueen, 2014 ONCA 194 (“Mountain View”). The court’s ultimate task is to determine whether the interests of justice favour granting the order. In doing so, it should consider by the following factors:
a. Whether the motion was brought promptly after the defendant learned of the default judgment; b. Whether there was a plausible excuse of explanation for the default in complying with the Rules; c. Whether the facts establish that the defendant has an arguable defence on the merits in that there is an air of reality to it; d. The potential prejudice to the defendant should the motion be dismissed; e. The potential prejudice to the plaintiff should the motion be allowed; and f. The effect of any order the court might make on the overall integrity of the administration of justice.
[23] The Court of Appeal cautions that these factors are not to be treated as rigid rules. Rather, the court must consider the particular circumstances of each case to decide whether it is just to relieve the defendant from the consequences of their default.
[24] The parties fundamentally disagree as to the level of scrutiny the court must apply in assessing whether or not the defendants have an arguable case on the merits. What does “air of reality” mean and how does one demonstrate it? In the succinct words of LTR at paragraph 31 of its factum:
On a motion to set aside default judgment, the moving party has the burden of demonstrating, on the basis of a hard look at the evidence, that their proposed defences raise a genuine issue for trial. The test to set aside a default judgment has been held to be similar to the test to obtain summary judgment. [2] A defendant cannot rest on mere allegations or denials in pleadings but must put its "best foot forward" or "lead with trump". [3] It is incumbent on a moving party defendant to adduce the evidence it intends to lead at trial, to demonstrate that it has an arguable defence on the merits. [4] A self-serving affidavit does not create a triable issue in the absence of detailed facts and supporting evidence. [5] As this Court has aptly held, "[d]efault judgment should not be set aside for the purpose of allowing a flimsy defence devoid of factual and legal foundation or worse, a defence which flies in the face of clear evidence." [6]
[25] LTR’s position as expressed above encompasses two different thresholds. One threshold is akin to that of a summary judgment motion. The other urges the Court to take a “hard look” at the evidence. In my view, the Boldens’ burden is less the former and more the latter. This very question was thoroughly analyzed by Justice Lederer in Canadian Pacific Railway Co. v. Cobra Drain & Development Corp.. The learned judge expressly rejected the conclusion in Helix that the test on a motion to set aside default judgment should be the same as in a summary judgment motion. On the contrary, the “air of reality” test is something less than the definitive demonstration of a genuine issue for trial. He echoed Justice Nordheimer’s comments in Xpress View Inc. v. Daco Manufacturing Ltd. when he said that he does not accept "that the court should, on a motion under rule 19 engage in a detailed examination of the merits of the defence proposed. That again only serves to turn a motion to set aside a default into a motion for summary judgment."
[26] To the extent that there are two lines of authority on this point, I agree with the approach of Justices Lederer and Nordheimer. To put it simply, the difference between the test for setting aside default judgment and the test for summary judgment is the difference between snorkelling and scuba diving – one involves looking beneath the surface and the other involves a deep dive. In that sense the test for default judgment test is closer to the test for adding new causes of action or new defences to a pleading than it is to summary judgment.
[27] To meet the “air of reality” test, the defence must be tenable in law and the defendant must lead some evidence to demonstrate that it is not devoid of factual and/or legal foundation. The policy reason underlying this approach aligns with the goals reflected in Rule 1.04 of the Rules of Civil Procedure to ensure the most expeditious and efficient resolution of a case on its merits. There is no economy in allowing unmeritorious defences to proceed even if the defaulting defendant had a plausible explanation for her default and took immediate steps. On the other hand, it is inimical to the administration of justice that cases are decided on a technical application of the rules rather than on their merits, however novel or creative a defence may be. A creative defence may be questionable but still arguable for the purposes of allowing a defendant to deliver a defence and move beyond the pleadings stage.
Application of the Law to Within Motion
[28] LTR concedes that the Boldens acted quickly upon learning of the noting in default and default judgment.
[29] It disputes that the Boldens have met any of the other factors.
Was there a plausible excuse for the Boldens’ default?
[30] The Boldens assert that the delay was caused by their financial difficulty in obtaining sufficient funds to retain Mr. Lederman. Gathering the funds took time, as indicated by Mr. Lederman in his correspondence to Mr. Blinick.
[31] LTR argues that this is not believable because only days before the Boldens were served with the Claim, they were engaged in ongoing negotiations with LTR and Bennett Jones LLP to restructure their debt obligations owed to LTR under the Note. At this point they had legal counsel actively engaged on their behalf.
[32] As an answer to an undertaken given on Mrs. Bolden’s cross-examination in this motion, she advised that counsel who was negotiating with LTR was retained on a pro-bono basis for the narrow purpose of the negotiations.
[33] I conclude based on the record before me that needing time to gather funds to retain counsel of choice, Mr. Lederman, is a plausible explanation for their two month delay. The fact that Mrs. Bolden admitted that in August of 2017, they had cash flow in their companies and the means to retain counsel does not mean that some time was not needed in in September of 2017 to arrange their financial affairs to retain counsel. I might also add that cash flow in their companies is not necessarily equivalent to cash flow in their individual pockets.
Is there an Arguable Defence on the Merits?
[34] The three defences advanced by the Boldens are:
a) The Boldens entered into the Note without the requisite independent legal advice of express waiver thereof and under the undue influence of Mr. Martin; b) MJM failed to give the Boldens prudent advice with respect to the Emerald Group’s insurance policy and pursuit of the liquidator for their legal fees which would have decreased the amount due under the Note; and c) LTR is not entitled to enforce the Note in Ontario because the Note is governed by Bermuda Law and LTR is not registered as a collection agency as required by the Collection and Debt Settlement Services Act, R.S.O. 1990, c. C.14.
[35] LTR asserts that all three defences are fanciful red herrings designed to distract the Court from the reality that the Boldens are simply trying to further delay the payment of the Note. In support of this contention, LTR points to evidence in the record that since signing the Note, the Boldens have never questioned its validity nor the adequacy of Mr. Martin’s representation on the insurance issue, and repeatedly acknowledged the debt owing under the Note. In other words, the Boldens have now found counsel who has concocted defences in a last ditch attempt to avoid their debt.
[36] LTR makes a powerful argument that may, in the end, rule the day. However, for the purposes of this motion, the Boldens have demonstrated an arguable defence that ought to be adjudicated on the merits.
Undue Influence
[37] LTR argues that the Boldens were not unduly influenced to enter into the Note because they cannot meet the test for undue influence and because they acquiesced to the Note as sophisticated and well educated business people.
[38] The Boldens view the jurisprudence on undue influence differently and submit that this is an issue to be resolved at trial. Further, they suggest that to the extent that there was acquiescence, it was in the absence of legal advice. They now have legal advice and are in a position to challenge the Note. The fact that they are sophisticated business people does not mean that they know the legal impact of the failure to have obtained ILA prior to signing the Note nor does it mean they know all of their legal rights. They should be permitted to advance the defence of undue influence.
[39] Finally, there appears to be a material dispute as to whether or not obtaining legal advice was a condition precedent to the Note. LTR states that there is no evidence on the record to suggest that it was a condition precedent nor any case law to support the contention. The Boldens’ conduct clearly indicates that they waived their right to ILA.
[40] In essence, the Boldens and LTR disagree as to the legal effect of the established fact that the Boldens did not sign a deed confirming ILA or waiver of it, nor did they seek legal advice before signing the Note. These differing views support the submission that there is at least an arguable defence that ought to be decided on a full record at a later date. The argument that obtaining ILA was a condition precedent to the enforceability of the Note is a tenable legal position. “Tenable” does not mean “successful” or even “strong”. It means that it is a position based on recognized legal principles. Even if the proposed defence is weak, that does not mean it is not arguable. It should be allowed to be advanced. I am fortified in my view by the comments of Mr. Justice Borins in Dawson v. Rexcraft Storage and Warehouse Inc., 164 DLR (4th) 257 at 272 (OCA):
However, at the end of the day, it is clear that the courts accord significant deference to trial process as the final arbiter of the dispute which is brought the parties to litigation. If there is a genuine issue with respect to material facts, then no matter how weak, or how strong, may appear the claim, or defence, which has been attacked by the moving party, the case must be sent to trial…”
[41] These comments are made in the context of a summary judgment motion, pre-2010 reforms. If in that context a weak defence ought to proceed to trial, then even more the reason that a weak defence be considered “arguable” for the purposes of a default judgment motion.
[42] Having found this defence to be arguable, I need not address the other defences. I will comment on them however in the event that I am incorrect in my analysis of this defence.
Poor Advice on Insurance Claim
[43] The Boldens propose that another defence to the enforceability of the Note is the improvident insurance settlement. They allege that Mr. Martin failed to adequately represent them in those negotiations. If they had received a higher amount, less would be owing on the Note.
[44] LTR states that even if the Boldens could demonstrate improvidence, it has nothing to do with the validity or enforceability of the Note. I agree with LTR. It might however, speak to the quantum of the Note. As the action on the Note relates to quantum and validity, this is an arguable defence.
LTR’s Status as a Collection Agency and Ontario’s Jurisdiction
[45] The parties disagree on the applicability of the Collection and Debt Settlement Services Act. Subsection 4(1) of the Act states:
No person shall carry on business of a collection agency unless the person is registered by the Registrar under this Act.
[46] In the definitions section, “collection agency” means:
(a) A person, other than a collector, who obtains or arranges for payment of money owing to another person or who holds oneself out to the public as providing such service, (b) Any person who sells or offers to sell forms or letters represented to be a collection system or scheme, (c) A person, other than a collector, who provides debt settlement services, or (d) A person who purchases debts that are in arrears and collects them.
[47] The Boldens argue that LTR’s sole purpose was to collect MJM’s legal fees and is not entitled to collect the debt in Ontario without meeting the terms of the Act.
[48] LTR argues that this is not an arguable defence because LTR is not required to register as a collection agency. It did not purchase anybody’s debt that was in arrears. Rather, it is a contracting party to the Note to whom the debt is owed directly. Even though the debt arises from legal services provided by MJM, the eight partners of MJM wholly own LTR. Finally, LTR submits that in any event, the Boldens have pointed to no legal authority that supports their position.
[49] The Boldens contend in response that the record shows that MJM’s debt was assigned to LTR and that it is arguable that the assignment is captured by the Act.
[50] I agree with the Boldens that this is an arguable defence. I decline the invitation from LTR to conclude with definity that this Act is inapplicable to the Note. To do so would venture into the realm of summary judgment or a determination of an issue of law. At this stage there is an argument to be made. LTR may be correct in the final result but that ought not to be decided on a motion to set aside default judgment.
[51] It is also an arguable defence that Ontario may lack jurisdiction to enforce the Note. The record clearly shows that the Note was formed in Bermuda. LTR purports to apply the Van Breda v. Village Resorts, 2010 ONCA 84 factors to persuade me that Ontario could assume jurisdiction were Ontario is the convenient forum. This is beside the point. It is not for me to decide one way or another at this juncture. Rather, I must only determine if the position is arguable. The fact that the contract was formed in Bermuda makes it arguable that it cannot or ought not to be enforced in Ontario.
Potential Prejudice to the Parties and Effects on the Integrity of the Administration of Justice
[52] Needless to say, both parties claim that prejudice is greater to them if unsuccessful on this motion. For the Boldens, they run the risk of being liable for a Note that they have no obligation to pay in law. LTR’s claims that it would suffer “significant” prejudice because the Boldens have made it clear that a court order is the only way in which they can be compelled to pay. They cannot be trusted to pay on their own.
[53] In my view, there is little to no prejudice to LTR if default judgment were set aside. Having left collection of the debt in abeyance for six years, it is difficult to accept that there would be significant prejudice, let alone any prejudice in allowing the Boldens to defend.
[54] Further, I am guided by the Ontario Court of Appeal in Kisel v. Intact Insurance Co. where the Court found that a relevant consideration on the question of prejudice is the short time between service of the Claim and default judgment. In the present case, the time between service of the Claim and the noting in default was a mere two months. I also consider that LTR noted the Boldens in default AFTER they had already delivered their Notice of Intent to Defend, clearly flagging that they intended to defend the action. Of additional relevance is the fact that default judgment was obtained in the face of active discussions between counsel that Mr. Lederman’s engagement was contemplated and imminent.
[55] This leads me to a consideration of whether setting aside default judgment and the noting in default will damage the integrity of the administration of justice. In light of the discussions between counsel, it would not. In fact, the integrity of the administration of justice is threatened if the Boldens were not permitted to proceed. In the normal course, when counsel are involved in active discussions, it can be considered sharp practice to take default proceeding without notice. In this case, Mr. Blinick gave notice in the sense that if the November 3, 2017 deadline was not met, his client would move without notice. However, this still means that the active step of taking default proceedings was in fact done without notice notwithstanding Mr. Lederman’s involvement. It may be that those were the instructions Mr. Blinick had. If so, when LTR gave those instructions, it took the risk that taking steps without notice in the face of a Notice of Intent to Defend and a lawyer acting for the Boldens in anticipation of being retained might have negative repercussions.
The Overall Interests of Justice Favour Setting Aside Default Judgment
[56] As noted by the Ontario Court of Appeal in Mountain View, supra, the overriding consideration in these motions is whether or not the interests of justice are served. In the present case, even if my analysis is incorrect on one or some of the enumerated factors, it is in the interests of justice to relieve the Boldens from their default. As soon as they were served they took active steps to defend. Had LTR not hastily exercised its right to default proceeding, the Boldens might have delivered the proposed defence now attached to the motion materials or at least had the assistance of Mr. Lederman to further negotiate the delivery of a defence with Mr. Blinick. While the rules do stipulate timelines for the delivery of pleadings, it is often the case that they are altered through mutual consent of the parties, especially when both sides are represented.
[57] I do not find on the record that this is a disingenuous attempt to abuse the court process to delay payment of a debt. It is equally likely that this is the first time the Boldens are receiving legal advice on the Note and now have defences to raise against payment of it. Further, contrary to what LTR suggests, I do not automatically discount their evidence on the record because they have been convicted of falsifying statements to a governmental authority. The Boldens were thoroughly cross-examined in these proceedings and I rely on the totality of their evidence in making my determination. Having reviewed the totality of their evidence, I find it is in the interests of justice to allow them to proceed.
Disposition:
[58] For all of the above reasons, I allow the motion and set aside default judgment and the noting in default against the Boldens. They shall serve and file their Statement of Defence within 14 days of today’s date. I am grateful to Mr. Blinick and Mr. Lederman who were of tremendous assistance with their materials and submissions.
Costs:
[59] I strongly encourage the parties to agree on costs. If they are unable, they shall adhere to the following timetable for written submissions:
a. The Boldens shall serve and file his submissions of no more than five pages double-spaced along with his costs outline within 14 days of today’s date; b. LTR shall serve and file responding submissions of no more than five pages double-spaced along with his costs outline within 14 days of service of the Boldens’ submissions; and c. The Boldens may deliver reply submissions of no more than three pages double-spaced within 3 days of service of LTR’s responding submissions.
[60] All submission may be emailed to my assistant trial coordinator at Christine.Meditskos@ontario.ca. Hard copies are not required.
Original Signed Master P.T. Sugunasiri Date: August 17, 2018
Footnotes:
[1] Mountain View Farms Ltd. v. McQueen, 2014 ONCA 194 (“Mountain View”). [2] Valente v. Personal Insurance Co., 2010 ONSC 975 at paras 22-23 [hereinafter “Valente”]. [3] Helix Interactive Production Ltd v. 2030123 Ontario Ltd. at para. 18 (SC) [hereinafter “Helix”]. [4] Ibid. [5] Tran v. Zaharias, 2010 ONSC 6338 at paras. 20-21 [hereinafter “Tran”]. [6] Teskey v. Paz at para. 6 (SC) [hereinafter “Teskey”]. [7] Canadian Pacific Railway Co. v. Cobra Drain & Development Corp. at paras. 10-11. [8] Xpress View Inc. v. Daco Manufacturing Ltd., [2002] O.J. No. 4078, 36 C.C.E.L. (3d) 78) at para. 11. [9] Van Breda v. Village Resorts, 2010 ONCA 84.