Court File and Parties

COURT FILE NO.: CV-18-67460 DATE: 20190418 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Merchant Advance Capital Ltd., Plaintiff AND: 2200816 Ontario Inc. o/a Hasty Market and Sandeep Prabakhar, Defendants

BEFORE: Master P. T. Sugunasiri

COUNSEL: Sharma, V., Counsel for the Prabakhar, the Defendant/Moving Party Wouters, S., Counsel for the Plaintiff/Responding Party

HEARD: April 18, 2019 (Hamilton)

Reasons for Decision

[1] The Defendant Sandeep Prabhakar brings a motion to set aside default judgment, the noting in default and a writ of seizure and sale. For the reasons that follow, I allow the motion with each party bearing their own costs.

Background

[2] The action arises out of an Agreement for the Purchase and Sale of Future Receivables (“Agreement”) between Merchant Advance Capital Ltd. (“Merchant”) and Hasty Market. Along with the main agreement was a personal guarantee (“Guarantee”) purportedly signed by Sandeep Prabakhar (“Prabakhar”) for joint and several liability with Hasty Market for amounts owing under the Agreement. In consideration for the purchase price, Hasty Market was to remit daily amounts to Merchant.

[3] Merchant alleges that by August 30, 2018, an event of default had occurred thereby triggering the default clause of the Agreement and a demand for payment. Merchant demanded payment from Hasty Market and Prabakhar but alleges that no payment was received.

[4] Merchant commenced an action on November 14, 2018 to recover funds alleged to be owing under the Agreement. It served Prabakhar personally in November 16, 2018. Having not received a Notice of Intent to Defend, a Defence or a phone call seeking to toll the time to deliver a defence, Merchant noted Prabakhar in default. Merchant obtained default judgment on December 11, 2018. On December 12, 2018, Merchant filed a writ of execution against Prabakhar in the regional municipality of Peel.

[5] On December 27, 2018 Prabakhar’s counsel (Mr. Sharma) served a Notice of Intent to Defend.

[6] On December 28, 2018, Plaintiff’s counsel (Ms. Dalziel) advised Mr. Sharma of the default judgment.

[7] On January 2, 2019, Mr. Sharma advised Ms. Dalziel that his client intended to bring a motion to set aside default judgment and served a Demand for Particulars.

[8] On February 12, 2019 Mr. Sharma delivered the proposed Statement of Defence and Counterclaim and asked for Merchant’s consent to the motion to set aside default judgment. The essence of the defence is that Prabakhar is a victim of fraud and never executed the Agreement nor the personal Guarantee. He seeks to allege that he was assisting his friend Shah with his Hasty Market operation and lent his name and credentials to help secure the franchise opportunity.

Law and Analysis

[9] The parties agree that 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.

[10] Merchant argues that all three factors a), b) and c) of the test must be met in order to have default judgment set aside. With respect, I disagree. The Court of Appeal in Mountain View 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 its default. Mountain View, supra at paras. 50, 51.

[11] In determining whether there is an arguable defence on the merits, the defendant must demonstrate with evidence that there is an air of reality to the defence. I explain the evolution of this test in Long Term Recovery Ltd. v. Bolden, 2018 ONSC 4918 at paras. 25-27:

This very question was thoroughly analyzed by Justice Lederer in Canadian Pacific Railway Co. v. Cobra Drain & Development Corp. at paras. 10-11. 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., [2002] O.J. No. 4078, 36 C.C.E.L. (3d) 78) at para. 11.

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.

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 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.

[12] In resisting the motion, Merchant argues that there is no plausible explanation for the default and that Prabakhar’s has no defence on the merits. I find that Prabakhar meets both of these tests.

There is a plausible explanation for the default

[13] According to Prabakhar, he provided the Statement of Claim in the within action to counsel that Shah retained to deal with this and two other actions. He attests that he believed that Joshi lawyers was handling the case. He then came to find out that the lawyer was out of the country between November 15, 2018 and December 9, 2018. At that time he searched for a new lawyer and retained Mr. Sharma on or around December 20, 2018 to represent him in all three actions.

[14] Merchant has not provided any evidence to the contrary and I accept Prabakhar’s explanation.

The Defence has an air of reality

[15] The essence of Prabakhar’s defence is that he is the victim of fraud. He denies liability under the Agreement and the Guarantee because he did not sign either document. The issue is whether or not this defence is tenable in law and is supported by a factual foundation. In my view, it is tenable in law and is supported by Prabakhar’s affidavit evidence. He categorically states in his affidavit that he did not sign those documents and knew nothing of the obligation until he was sent the demand letter. Whether or not this is accepted at the end of the day, this evidence is sufficient to support his defence.

[16] Merchant also suggests that Prabakhar’s defence is not tenable because he admits that he has participated in deceiving third parties to assist Shah to obtain the right to operate a Hasty Market franchise. As such, he cannot now claim to be the victim of fraud having been a fraudster in part of the transactions. This is an issue for the trier of fact and not for the decision-maker on an interlocutory motion.

[17] Finally, tied to the defence is a counterclaim against Merchant for negligence. Merchant argues that at the very least this counterclaim should be struck because there is no tenable cause of action pleaded against Merchant. The main pleading against Merchant is at paragraph 33 of the Counterclaim which asserts that Merchant was negligent, reckless or wilfully blind with regard to the losses that its actions or inactions will cause to Prabakhar. He is referring here to the circumstances leading to his signature appearing on the Agreement and Guarantee. Though perhaps inelegantly drafted, I am not prepared to preclude Prabakhar from pursuing this allegation at this early stage. Mr. Sharma argues that the pleading can be better particularized once default judgment is set aside and he can obtain further particulars from Merchant on its claim. I accept this submission for the time being.

The Overall Justice of the case favours Prabakhar

[18] Neither party spent much time on the issue of prejudice. Based on the record before me, I see no prejudice to the Plaintiff in setting aside default judgment. Further, even if I am incorrect in my analysis of any of the other factors, the overall justice of the case favours relieving Prabakhar from his default. It was just over one month between the time he was served and counsel served a Notice of Intent to Defend. Clearly Prabakhar intends to defend the claim and it would be unjust to prevent him from doing so through a technical applications of the Rules.

The Writ of Seizure should be removed

[19] Rule 19.08 states that a court may set aside default judgment on such terms as are just. In some cases, this can include maintaining any writs filed against the defendant. See Canadian Imperial Bank of Commerce v. Sheahen, 1978 CarswellOnt 373. Merchant asks that its writ against Prabakhar be stayed instead of removed. This will allow it to maintain its priority should it be successful in the litigation.

[20] In the circumstances of this case, I see no reason to allow Merchant to essentially obtain security for its potential judgment. No other plaintiff enjoys this opportunity except through a motion for security for costs. In the absence of Merchant taking any steps to warn Prabakhar of its intention to take default proceedings, it is not in my view just to maintain the writ. There is no prejudice to Merchant other than losing the privilege of having protection for its judgment. I have been provided with no evidence that such protection is needed or warranted. There is no evidence that Prabakhar will do anything with the property or that he does not have assets exceeding the value of the claim to satisfy a judgment. There is no evidence to explain why maintaining the priority established by the writ is particularly important other than the general desire for all creditors to establish the best collection position it can. I also find that Merchant’s rush to judgment and enforcement without warning is a factor that militates against allowing it to maintain its writ.

[21] On the other hand, there is prejudice to Prabakhar in having his property encumbered by a writ, even if the collection on it is stayed. It is still an encumbrance against his property for a judgment that may never come to fruition.

[22] Overall, the justice of this particular case does not support maintaining the writ.

Disposition

[23] For the foregoing reasons, I allow the motion and order as follows:

a. I set aside default judgment and the noting in default;

b. Merchant shall vacate its writ forthwith; and

c. Prabakhar shall deliver a Defence and Counterclaim within 30 days of today’s date.

Costs

[24] Prabakhar has been successful on this motion. However, he did not bring a costs outline to the hearing as required to claim costs. Prabakhar did provide evidence of an early offer to settle the motion which was rejected by Merchant.

[25] Merchant argues that the motion is an indulgence and costs should be awarded to it. Those costs, Merchant argues, should be on a full indemnity scale because the Agreement and Guarantee contemplate the payment of legal fees incurred for enforcement. Merchant has provided a costs outline.

[26] In my view, the parties should bear their own costs. Prabakhar was in default of his obligations under the rules and seeks the court’s indulgence in allowing him to proceed. Merchant on the other hand is not only the unsuccessful party but might have avoided the entire motion if it had simply afforded Prabakhar the courtesy of a warning that default proceedings were in the horizon. Merchant also failed to accept Prabakhar’s offer to proceed by way of consent motion – an offer made long before the bulk of the costs were incurred. I also decline to reimburse Merchant for the cost of the writ. It chose to take aggressive steps to collect its debt without any warning to Prabakhar. It should now bear the cost of taking that risk.

Original signed Master P. Tamara Sugunasiri Date: April 18, 2019