Court File and Parties

COURT FILE NO.: CV-19-3766 (Milton) DATE: 2021 01 07

ONTARIO SUPERIOR COURT OF JUSTICE

B E T W E E N:

HALTON ELECTRIC CO. LIMITED, Plaintiff Julian Binavince, for the Plaintiff

- and -

BEAUCON BUILDING SERVICES INC., JOHN HOGAN and ALAIN BEAUCHAMP, Defendants Ondrej Sabo, for the Defendants

HEARD: January 6, 2021 via Video Conference

REASONS FOR JUDGMENT

Petersen J.

OVERVIEW

[1] This is a motion to set aside a default judgment. The underlying action in this matter is brought pursuant to the Construction Lien Act, R.S.O. 1990, c.C.30 (“CLA”).

[2] The plaintiff, Halton Electric Co. Ltd. (“Halton”) was a subcontractor of the defendant Beaucon Building Services (“BBS”) on a construction project in 2017 and 2018. The individual defendants, John Hogan and Alain Beauchamp, were principals of BBS, but they had a falling out. Few details of the falling out are in evidence, apart from some unreliable hearsay statements. The record establishes that Mr. Hogan resigned from his position at BBS in mid May 2018.

[3] BBS retained Halton as a sub-contractor in October 2017. Halton takes the position that it supplied labour and materials, completed its work, rendered multiple invoices to BBS, but was not fully paid.

[4] Halton brought an action against the defendants seeking payment of the unpaid balance of the invoices. The claims against BBS are based on breach of contract and breach of trust. The claim against Mr. Hogan is based on his personal liability, as a director of BBS, for the company’s breach of trust.

[5] Halton obtained a default judgment against all three the defendants. The judgment is dated February 5, 2020 and orders the defendants (jointly and severally) to pay Halton $59,577.32, plus $3,299.54 in costs.

[6] Mr. Hogan is the moving party in this motion. He is seeking an order to set aside the noting in default and the default judgment as against him.

CHRONOLOGY OF STEPS IN THE PROCEEDING

[7] The following facts are not in dispute.

[8] Halton served Mr. Hogan with its Statement of Claim on October 16, 2019.

[9] Mr. Hogan responded by serving and filing a Notice of Intent to Defend. Service was effected by faxing the Notice to Halton’s lawyer, Mr. Binavince, at Levy Zavet.

[10] Mr. Hogan deposed that he sent the fax on October 30, 2019. According to his affidavit, the fax included the Notice of Intent to Defend and a one-page cover letter addressed to Mr. Binavince dated October 29, 2019. Mr. Hogan swore an Affidavit of Service with respect to the Notice of Intent to Defend. The Affidavit attaches a copy of the fax confirmation sheet. The fax confirmation sheet confirms that 3 pages were successfully sent to the fax number of Levy Zavet. Levy Zavet’s file does not, however, contain the Notice of Intent to Defend or the letter dated October 29, 2019. Moreover, Ms. Burby, a lawyer at Levy Zavet, deposed that she searched the firm’s paper records and electronic records in both March 2020 and October 2020 and was unable to locate any record of a fax sent from Mr. Hogan on October 30, 2019. She believes that the fax was never received by the law firm.

[11] Neither Mr. Hogan nor Ms. Burby were cross-examined on their affidavits. I have no reason to disbelieve either of them. What happened to the fax remains a mystery. The documentary record shows that the fax was sent. The fax confirmation sheet confirms that 3 pages were successfully transmitted. Three pages is consistent with Mr. Hogan’s evidence that he sent the Notice as well as a one-page letter. If the documents were not transmitted successfully, Mr. Hogan could not have known, since his fax confirmation sheet indicated that the result was “ok”.

[12] The fact that the fax may not have been received by Levy Zavet does not change the fact that Mr. Hogan served the Notice of Intent to Defend in a timely fashion. I accept, however, that the lawyers at Levy Zavet had no knowledge of his Notice of Intent to Defend at the time.

[13] In his October 29, 2019 letter, Mr. Hogan advised Mr. Binavince that he needed time to obtain the documents required to defend the action. He asked that Halton not take steps to note him in default without further notice to him. I accept that Mr. Binavince did not receive this letter when it was faxed to his office in October 2019.

[14] Mr. Hogan deposed that he not only required time to obtain documents from BBS and Mr. Beauchamp, but also required time to save money to retain counsel so that he could defend the action.

[15] Mr. Hogan received no response from Mr. Binavince to his correspondence dated October 29, 2019, which is not surprising, since the fax went astray, and Mr. Binavince did not receive the letter.

[16] The parties had no further communications between them until February 26, 2020.

[17] Mr. Hogan did not file a Statement of Defence.

[18] Halton had the defendants noted in default, then brought a successful motion for default judgment. Ms. Burby wrote to Mr. Hogan, enclosing a copy of the judgment, on February 26, 2019.

[19] Mr. Hogan then wrote to Ms. Burby on March 10, 2020, noting that he had served a Notice of Intend to Defend on October 30, 2019 and had asked that no steps be taken to note him in default without providing him with notice. He expressed surprise that he was not granted the courtesy of receiving notice before being noted in default. His stated that he assumed the pleadings were still open because he did not receive any documents from Halton or from the other defendants. He expressed his intention to defend the action and asked Halton to consent to setting aside the default judgment against him.

[20] Mr. Hogan spoke with Ms. Burby and Mr. Binavince on March 11, 2020. They advised him that they had not received his Notice of Intent to Defend. They asked him to resend the Notice with a copy of the fax confirmation sheet.

[21] The parties had no further communication until October 22, 2020.

[22] Mr. Hogan did not resend the Notice or the fax confirmation sheet to Halton’s lawyers. Halton did not consent to an order setting aside the default judgment against Mr. Hogan.

[23] Mr. Hogan retained a lawyer (Mr. Sabo) on March 13, 2020 to bring a motion to set aside the default judgment. Neither Mr. Hogan nor Mr. Sabo advised the lawyers at Levy Zavet that Mr. Sabo had been retained.

[24] On October 22, 2020, Mr. Hogan served Halton with a Notice of Mr. Sabo’s Appointment and with his Motion Record.

ANALYSIS

[25] Just as the facts are not in dispute in this motion, the legal principles that apply to a motion to set aside default judgment are also undisputed. The parties do not agree on the application of the principles to the facts in this case.

Alleged Procedural Irregularity

[26] A defendant can obtain an order setting aside a default judgment “as of right” (i.e., without explaining the delay in filing a Statement of Defence or demonstrating a meritorious defence) if the judgment was obtained by a procedural irregularity: Teskey v. Peraan, [1999] O.J. No. 1801, at para. 28. Mr. Hogan relies on this principle to seek on order from the court setting aside the default judgment against him.

[27] Mr. Hogan submits that the irregularity in this case consists of the fact that the faxed Notice of Intent to Defend and October 29, 2019 letter mysteriously went astray and the plaintiff therefore acted on the incorrect but reasonable assumption that he had no intent to defend the action, while he incorrectly but reasonably assumed that the plaintiff was not taking steps to note him in default because it was granting him an indulgence of time to retain counsel and obtain documents to defend the action.

[28] This is not the type of procedural irregularity that is contemplated in the jurisprudence. Typically, the irregularity involves a plaintiff’s failure to effect proper service of its Statement of Claim, or some other non-compliance with the Rules of Civil Procedure, R.R.O. 1990, Reg.194 that results in the defendant not having been made aware that a lawsuit was initiated against him. Here, Mr. Hogan was clearly aware of the legal action by Halton. He was not aware that the plaintiff was taking steps to note him in default. Still, he had an obligation under the Rules to serve and file a Statement of Defence.

[29] Mr. Binavince and Ms. Burby did not receive Mr. Hogan’s October 29, 2019 letter and Notice of Intent to Defend. No one at Halton received any correspondence from Mr. Hogan suggesting that he intended to defend the action. Mr. Binavince acknowledges that, had his law firm received the fax, it would have been incumbent upon him, as a matter of professional civility and courtesy, to let Mr. Hogan know when Halton was going to take steps to have him noted in default. Mr. Binavince did not do so, but his failure to contact Mr. Hogan, in the circumstances, does not amount to improper conduct or procedural irregularity.

[30] I agree with Halton’s submission that their lawyers did not do anything “irregular” in taking steps to note Mr. Hogan in default after he failed to serve and file a Statement of Defence within the time limits stipulated in the Rules. The service of the Notice of Intent to Defend bought Mr. Hogan an extra 10 days (Rule 18.02(2)), but it did not absolve him of the requirement to file a Statement of Defence, which he did not do. In the circumstances, the procedure followed by the plaintiff to obtain default judgment was standard and in compliance with Rules 19.01 and 19.02(3). It was not irregular.

[31] I conclude that Mr. Hogan has no automatic entitlement to an order setting aside the default judgment against him.

Discretionary Order

[32] Even if a defendant is not entitled to an order setting aside a default judgment as of right, the Court has discretion, pursuant to Rule 19.08, to grant such an Order on terms and conditions that it deems just.

[33] The Court’s ultimate task on a motion to set aside a default judgment is to determine whether the interests of justice favour granting the order. In making this determination, the motions judge must consider five factors set out by the Court of Appeal for Ontario in Mountain View Farms Ltd. v. McQueen, 2014 ONCA 194, at paras.48-50. I will review each of those factors in turn.

(1) Was Mr. Hogan’s motion brought promptly after he learned of the default judgment?

[34] Mr. Hogan received a copy of the default judgment on February 26, 2020. He wrote to one of Halton’s lawyer on March 10, 2020 and asked whether Halton would consent to an order setting aside the judgment. He then spoke to Halton’s lawyers on March 11, 2020. He was unrepresented by counsel at the time. He has provided no explanation for why he had not yet retained counsel (having been served with the Statement of Claim on October 16, 2019), apart from his statement that he was saving money to pay a retainer.

[35] Mr. Hogan retained counsel on March 13, 2020 to bring this motion.

[36] The regular operations of the Ontario Superior Court were then suspended on March 16, 2020 due to the COVID-19 pandemic. Time to take any step in a civil proceeding was suspended from March 16, 2020 to September 14, 2020. Mr. Hogan submits that he took no further steps to bring his motion because of the pandemic.

[37] Halton argues that this is not an acceptable explanation, given Mr. Hogan’s complete failure to communicate during the period of suspension about the issue and the pending motion. Mr. Hogan did not respond to Mr. Binavince’s request to resend the Notice of Intent to Defend and fax confirmation sheet. The plaintiff’s lawyers were not even advised of Mr. Sabo’s retainer. There was no effort by Mr. Hogan to deal with the issue throughout the six-month period of suspension.

[38] Moreover, the motion to set aside the default judgment was not served until October 22, 2020, approximately five weeks after the court resumed full operations (albeit with practice changes due to the ongoing pandemic). Mr. Sabo stated that he was faced with a "tsunami of work” as soon as the court’s operations resumed in September 2020, which accounts for the additional period of delay before the motion was served and filed. Mr. Hogan submits that he acted promptly in bringing the motion, considering the extraordinary circumstances.

[39] I agree that Mr. Hogan acted promptly and appropriately in March 2020, after he learned of the default judgment. He contacted the plaintiff’s lawyer and asked Halton to consent to an order setting aside the judgment. However, he then dropped the ball. I agree with Halton’s submission that Mr. Hogan and his lawyer should have communicated further in the spring of 2020 about their intent to bring the motion, and should have taken further steps to try to resolve the issue (including resending the Notice of Intent to Defend and October 29, 2019 letter with fax confirmation sheet, as requested by Mr. Binavince).

[40] Given the highly unusual circumstances caused by the pandemic, I cannot fault Mr. Hogan for not bringing his motion during the period of suspension. There were no enforcement steps being taken by the plaintiff against Mr. Hogan, so there was no urgency to the motion. The Court likely would not have heard the motion even if Mr. Hogan had attempted to bring it.

[41] Despite the suspension of the Court’s regular operations, there was nothing preventing Mr. Hogan from communicating with Halton and, if necessary, instructing his lawyer to prepare his motion materials so that they would be ready to file as soon as the Court reopened. I am therefore not persuaded by Mr. Sabo’s submission about the “tsunami of work” that he faced in September 2020. I note, however, that the additional delay in the fall of 2020, after the court’s regular operations resumed, was relatively minor.

[42] I conclude that this factor does not clearly favour either party’s position on the motion.

(2) Is there a plausible excuse or explanation for Mr. Hogan’s default in complying with the Rules?

[43] Mr. Hogan was served with Halton’s Statement of Claim on October 16, 2019. He served a Notice of Intent to Defend on October 30, 2019 but did not serve a Statement of Defence thereafter. He therefore failed to comply with the Rules.

[44] His explanation for this default in compliance is that he reasonably believed that Levy Zavet had received his faxed Notice of Intent to Defend and letter dated October 29, 2019, which requested that no steps be taken to note him in default without further notice to him. He was self-represented at the time. He thought he was being granted an indulgence of time by the plaintiff based on his need to obtain documents from BBS (from which he had resigned) to defend the action. He had heard nothing further from any of the parties and therefore thought (incorrectly) that the pleadings were still open.

[45] In the unusual circumstances of this case, I find that this is a plausible explanation. This factor therefore favours setting aside the default judgment.

(3) Do the facts establish that Mr. Hogan has an arguable defence on the merits?

[46] Mr. Hogan, as the moving party, has the burden of proving that he has an arguable defence to the claim against him.

[47] As noted earlier, Halton’s claim against him is based on his personal liability, as a director of BBS, for BBS’s alleged breach of trust. Halton pleads and relies on ss. 8(1) (2) and 13(1) of the CLA. The Court of Appeal for Ontario helpfully summarized these statutory provisions as follows in Delco Automation Inc. v. Carlo’s Electric Ltd., 2016 ONCA 591:

43 Under s. 8(1) of the CLA, all amounts received by a contractor on account of the contract price of an improvement constitute a trust fund for the benefit of sub-contractors and other persons who have supplied services or materials to the improvement who are owed amounts by the contractor. Section 8(2) prohibits a trustee contractor from appropriating or converting any part of the fund to the contractor's own use, or to any use inconsistent with the trust, until all sub-contractors are paid all amounts owed to them by the contractor related to the improvement. Any officer, director or person who has effective control of a corporation is liable, under s. 13(1), for the corporation's breach of trust if the person "assents to, or acquiesces in, conduct that he or she knows or reasonably ought to know amounts to breach of trust."

46 A plaintiff alleging a breach of the s. 8 trust bears the initial onus of proving the existence of the trust by showing the contractor received monies on account of its contract for the project and the plaintiff supplied services or materials to the improvement. The onus then shifts to the contractor to show its payment of trust funds complied with the CLA: Emco Corp. v. Ontario Trenchless Construction Ltd. (2007), 65 C.L.R. (3d) 33 (Ont. S.C.J.), at para. 9. The party seeking to attach liability to the individual director or officer must demonstrate the elements required by s. 13(1): Belmont Concrete Finishing Co. v. Marshall, 2012 ONCA 585, 15 C.L.R. (4th) 1 (Ont. C.A.), at para. 10.

[48] Halton pleads in its Statement of Claim that the Defendant BBS appropriated or converted to its own use funds that it was holding in trust for the benefit of Halton, and that Mr. Hogan assented to or acquiesced in conduct that he knew or ought to have known would amount to a breach of trust by BBS. The latter pleading is not particularized.

[49] Halton argues, based on Delco Automation, that it has satisfied its preliminary onus of “proving the existence of the trust by showing the contractor [BBS] received monies on account of its contract for the project and the plaintiff [Halton] supplied services or materials to the improvement.” Halton submits that the evidentiary onus has now shifted onto Mr. Hogan to show that BBS’s payment of trust funds complied with the CLA. Halton submits that Mr. Hogan has adduced no evidence whatsoever to satisfy this burden and therefore has no viable defence.

[50] Mr. Hogan argues that Halton has led no evidence of his knowledge of a breach of trust or acquiescence to any purported breach by BBS, so he has a viable defence, namely that the plaintiff has not made out its case against him.

[51] Essentially, the parties are arguing over who has the burden of proof in respect of establishing the merits of Mr. Hogan’s defence.

[52] In my view, Halton’s position overlooks an important part of the Court of Appeal ruling in Delco Automation, namely the final sentence in paragraph 46 of that judgment: “The party seeking to attach liability to the individual director or officer must demonstrate the elements required by s. 13(1).” Notwithstanding the shift in the evidentiary burden of proof with respect to BBS’s disbursement of the trust funds in accordance with the CLA, Halton retains the evidentiary and legal burden of proving the elements of s. 13(1) of the CLA in order to succeed with its claim against Mr. Hogan.

[53] Halton is correct that Mr. Hogan has not established an arguable defence to the claim that BBS engaged in a breach of trust (because he has not satisfied the evidentiary burden of proof that shifted to him), but it does not necessarily follow that Mr. Hogan has no arguable defence to the claim against him under s. 13(1) of the CLA. To succeed in its claim against Mr. Hogan personally, Halton will need to establish not only that BBS failed to protect or pay to Halton trust funds relating to the construction project, but also that Mr. Hogan, as BBB’s principal, knew or reasonably ought to have known that BBS was withholding funds from Halton or was otherwise distributing funds in contravention of the CLA, that he knew or ought to have known that the BBS’s conduct amounted to a breach of trust, and that he assented to it or acquiesced in it.

[54] Mr. Hogan denies knowledge of or acquiescence to any conduct by BBS that amounted to a breach of trust. Without particulars of the plaintiff’s allegations against him personally, and prior to disclosure relating to the allegations, Mr. Hogan cannot do more than simply make a blanket denial and put Halton to the strict proof of the elements of s. 13(1). At this stage of the proceeding, it would not be reasonable to require him to adduce evidence of a negative (i.e., that he did not know, did not acquiesce, etc.) in order to establish a viable defence.

[55] A defendant in a motion to strike a default judgment is not, in any event, required to put his best foot forward (as in a summary judgment motion), or show that his defence is likely to succeed at trial: 40 Park Lane Circle v. Aiello, 2020 ONCA 33, [2020] O.J. 240 (ONCA) at para. 21. He is simply required to show that his defence has an air of reality. I find that there is an air of reality to Mr. Hogan’s defence in this case. Halton bears an evidentiary and legal burden to prove the elements of s. 13(1) of the CLA and it has yet to particularize or adduce evidence in support of that claim.

[56] I note that Mr. Hogan also has another arguable defence, in so far as two of the invoices in dispute are dated in June 2018, which post-dates his resignation from BBS. Even if Halton is able to satisfy its evidentiary and legal onus to prove Mr. Hogan’s liability for BBS’s breach of trust, he has a viable argument that he is not personally liable for damages relating to the later invoices.

[57] This factor therefore favours setting aside the default judgment.

(4) Is there potential prejudice to either party if the motion is dismissed or allowed?

[58] Clearly, Mr. Hogan will be prejudiced if his motion is denied. He will be deprived of an opportunity to defend the action on its merits.

[59] There is no evidence that Halton will suffer prejudice in respect of pursuing its claim if the motion is allowed. Given the impact of the pandemic on the Court’s operations, Halton’s action would not have been heard by now even if Mr. Hogan had filed his Statement of Defence in a timely manner. There is no suggestion that the passage of time has somehow prejudiced Halton’s ability to present evidence in support of its claim.

[60] This factor therefore also favours setting aside the default judgment.

(5) What effect would the court’s order have on the overall integrity of the administration of justice?

[61] Based on all the above, the interest of justice favour setting aside the default judgment.

Conditions

[62] Rule 19.08 authorizes the Court to set aside or vary a default judgment “on such terms as are just”.

[63] Halton argues that it would be unjust if the default judgment is set aside without any conditions. Halton expresses a concern that, if the action is reopened, Mr. Hogan may deplete his assets or otherwise render them “unreachable” by Halton in execution of any eventual judgment that may be obtained against him at trial. Halton therefore asks the court, if the motion is granted, to impose a term that Mr. Hogan be enjoined from transferring or encumbering any real property owned by him, or that he be required to post security for the amounts set out in the judgment.

[64] In support this request, Halton relies on Armdale Estates Inc. v. Falcon Group International Inc., 2013 ONSC 2218, in which Master Wiebe ordered that security be posted by the defendant as a condition of an order setting aside default judgment. In that case, Master Wiebe stated, at para.20:

A factor to consider in this regard as justifying a denial of the motion is whether other creditors are takings (sic) enforcement steps against the defendant, which would in that event raise the prospect that the plaintiff may not have assets to collect upon if forced to litigate its claim. That is certainly the case here, where the Dietz affidavit indicates that two other creditors of Falcon have obtained judgments against Falcon that total almost $85,000 and that have not been satisfied for over 13 months.

[65] There is no evidence in the case before me that other creditors are taking enforcement steps against Mr. Hogan. Nor is there evidence that Mr. Hogan has begun to deplete his assets or intends to transfer or encumber his property. The circumstances are not comparable to those in Armdale Estates. Halton also relies on David Bradshaw Holdings Inc. v. Esmail, 2009 CarswellOnt 2907, in support of its request for an order for security to be paid by Mr. Hogan. The facts of that case are also distinguishable.

[66] I see no basis for ordering the requested security in this case.

ORDERS

[67] The noting in default of the defendant Mr. Hogan is set aside, as is the default judgment as against him dated February 5, 2020.

[68] Mr. Hogan has 20 days to serve and file a Statement of Defence.

[69] Mr. Hogan seeks partial indemnity costs in the amount of $2,500 for this motion. I am not inclined to order costs, despite his success in the motion, because of his unreasonable conduct. Had he responded in March 2020 to Mr. Binavince’s request to resend the Notice of Intend to Defend and October 29, 2019 letter, with fax confirmation, Halton likely would have taken a different position and may have consented to have the default judgment set aside. Even if the motion were still required, had Mr. Hogan been more pro-active during the suspension of the Court’s regular operations to prepare his court materials, he could have brought his motion in September 2020.

[70] I therefore order no costs.

Petersen J.

Released: January 7, 2021