2023 ONSC 2742
COURT FILE NO.: CV-17-00061805 & CV-19-00068169 DATE: 2023-05-09
SUPERIOR COURT OF JUSTICE – ONTARIO
RE: Bennington Financial Corp. (formerly Equirex Leasing Corp.), Plaintiff (Responding Party) AND: Medcap Real Estate Holdings Inc., Defendant (Moving Party) AND RE: Heffner Investments Limited, Plaintiff (Responding Party) AND: Medcap Real Estate Holding Inc., Defendant (Moving Party)
BEFORE: The Honourable Justice M. Bordin
COUNSEL: Ivan Lavrence for the plaintiff Bennington Financial Corp. Darrell Hawreliak for the plaintiff Heffner Investments Limited Scott Turton for the defendant Medcap Real Estate Holding Inc.
HEARD: April 27, 2023
REASONS FOR DECISION
Overview
[1] The defendant, Medcap Real Estate Holding Inc. (“Medcap”), moves to dismiss or stay the following actions:
a. this action (CV-17-00061805) and eight other actions brought by Bennington Financial Corp. (formerly Equirex Leasing Corp.) (“Bennington”) against Medcap in CV-17-00062436, CV-17-00062210, CV-17-00062437, CV-17-00062438, CV-17-00063058, CV-17-00063059, CV-17-00063060, and CV- 17-00061806; and
b. this action brought against it by Heffner Investments Limited (“Heffner”) in CV-19-00068169.
[2] These motions have been brought in the actions by Bennington in CV-17-00061805 and by Heffner in CV-19-00068169.
[3] Medcap asserts that Bennington, Heffner, and other non-parties to these actions entered into an agreement that they would not settle with Medcap individually and would require any settlement to include all of them and that Bennington and Heffner failed to immediately disclose that agreement. Medcap says that this is an abuse of process which requires the actions to be stayed or dismissed.
[4] Medcap relies on the principal that it is an abuse of process for a plaintiff to settle with one party and not immediately disclose the settlement to the non-settling parties where the settlement agreement changes entirely the landscape of the litigation in a way that significantly alters the adversarial relationship among the parties to the litigation or the dynamics of the litigation. In Ontario, the sole remedy the court will impose for such a failure to disclose is a stay of the proceedings.
[5] This motion raises the following issues:
a. Was there a settlement agreement?
b. If there was, did it entirely change the landscape of the litigation in a way that significantly alters the adversarial relationship among the parties to the litigation or the dynamics of the litigation?
c. If the answer to b. is yes, was the agreement immediately disclosed?
[6] Medcap filed affidavits from John Cardillo on behalf of all the defendants in the various actions sought to be dismissed. Bennington filed an affidavit from Leann Goodall and Scott Wilson. Heffner filed the affidavit of Willy Heffner.
[7] The parties have not produced to the court the pleadings in any of the actions.
Facts
[8] Bennington alleges that it leased fitness equipment and made advances to a fitness club chain owned and operated by Mr. Cardillo called Premier Fitness (“Premier”). Medcap is related to Premier, as Mr. Cardillo is its sole officer and director. Bennington asserts that by 2017 Premier and Medcap had defaulted under the leases and under collateral mortgages granted by Medcap to Bennington and says that Medcap owes Bennington more than $13 million.
[9] In 2017, Bennington commenced seven actions against lessees (CV-17-00062436, CV-17-00062210, CV-17-00062437, CV-17- 00062438, CV-17-00063058, CV-17-00063059, CV-17-00063060), most of whom it alleges are related to Premier. Bennington also commenced this and another action in CV-17-00061806 against Medcap on the leases and collateral mortgages. Medcap’s position was that Bennington was owed nothing.
[10] Heffner alleges it leased equipment and advanced loans to Medcap. Heffner commenced its action (CV-19-00068169) against Medcap in 2019. Medcap disputes the amount owing to Heffner.
[11] Physiomed Health Holdings Inc. (“Physiomed”) and Scott Wilson (“Wilson”) commenced a claim against Medcap in 2019 on a loan agreement and collateral mortgage.
[12] Medcap owns a property known as 653 Upper Wentworth Road, Hamilton, Ontario (“Wentworth”). The following mortgages are registered against title to Wentworth:
a. 2503866 Ontario Inc. (“250 Inc.”) a corporation alleged to be an entity controlled by Mr. Cardillo holds the first mortgage;
b. Heffner holds the second mortgage;
c. Physiomed holds third and fourth mortgages; and
d. Bennington holds the fifth mortgage.
[13] Medcap disputes the validity of the mortgages.
[14] In 2014, Heffner and Physiomed signed a Loan and Priorities Agreement (the “Priorities Agreement”) in which they agreed to share any recovery from their Wentworth mortgages equally until the secured amounts were paid in full. Medcap was a signatory to the Priorities Agreement. The Priorities Agreement also provided that if Medcap failed to pay the whole amount owed to each of Heffner, Physiomed and Wilson, then the shortfall would be shared between those parties.
[15] Bennington and Physiomed had a dispute over equipment leases which was settled in 2017. A portion of the settlement was payable when Physiomed recovered on the mortgage it held on Wentworth. The settlement was disclosed to Medcap’s counsel in 2017.
[16] In 2019, Bennington brought summary judgment motions in its three most comprehensive actions against Medcap. The motions were dismissed in November 2019.
[17] Heffner brought a summary judgment motion in its action before March 2020.
[18] By March of 2020, Physiomed and Wilson had commenced a summary judgment motion in their action.
[19] In March 2020, the property taxes on Wentworth were in arrears. In order to avoid a tax sale, Heffner, Physiomed, and Bennington jointly paid tax arrears of over $900,000. The transfer of the tax lien was registered on title to the Wentworth property in March 2020.
[20] A group of creditors that included Bennington, Ann Wilson, Physiomed, and another Heffner entity jointly commenced a bankruptcy (receivership) application against Medcap on September 16, 2020.
[21] Heffner’s motion for summary judgment was dismissed in March 2021.
[22] In March 2021, Heffner contacted Medcap about negotiating a settlement. Heffner wanted to inform Bennington and Physiomed that settlement discussions were occurring. Medcap declined and wanted settlement discussions to remain confidential. As a result, on March 22, 2021, Heffner advised Medcap that it would not proceed with settlement discussions. According to Mr. Cardillo, Heffner advised that it had agreements with Bennington and Physiomed. According to Heffner, the agreements referred to were the Priorities Agreement and the agreement to pay the property taxes for Wentworth.
[23] Monetary judgments on Physiomed and Wilson’s summary judgment motion were awarded in the spring of 2021 and were paid by Medcap by May 2021. It was revealed in the cross-examination of Wilson on the motion that although Physiomed and Wilson received just over $2,000,000, they have not paid any of those funds to Heffner.
[24] In May 2021, before the bankruptcy hearing, there were settlement exchanges between Medcap and Bennington, Wilson, Physiomed and Heffner (collectively referred to as “the creditors”). Mr. Cardillo says that while a settlement with all the creditors was preferable, he was willing to settle with only some of the creditors. However, the position of Bennington, Wilson, Physiomed and Heffner was that there could be no settlement with any of them unless there was a settlement with all of them.
[25] The bankruptcy application was allowed in part in December 2021. Medcap appealed. The appeal was dismissed in April 2022.
[26] In late summer of 2022, Medcap says that acceptable terms of settlement were reached with Bennington, but Bennington communicated to Medcap that there could be no settlement with Bennington unless there was also a settlement with Wilson, Physiomed and Heffner. Medcap’s position was that Wilson and Physiomed had already been overpaid and as a result no settlement was possible.
[27] On August 16, 2022, Bennington obtained an order lifting the stay of proceedings in its two actions against Medcap.
[28] Medcap commenced a third-party claim for contribution and indemnity against Wilson and Physiomed in the two Bennington actions against Medcap (CV-17-00061805 and CV-17-00061806) in the event that Medcap is found liable to Bennington. Physiomed and Wilson did not defend the main action.
[29] An order to continue the action by Heffner against Medcap was obtained on January 23, 2023.
The Rule
[30] Settlement agreements reached between some parties, but not others, must be immediately disclosed to non-settling parties if they entirely change the litigation landscape: Skymark Finance Corporation v. Ontario, 2023 ONCA 234, at paragraph 46.
[31] A summary of how this rule operates is found in CHU de Québec–Université Laval v. Tree of Knowledge International Corp., 2022 ONCA 467, at paragraph 55 (internal citations omitted):
The following principles can be drawn from this court’s decisions on the abuse of process that arises from a failure to immediately disclose an agreement which changes the litigation landscape:
a) There is a “clear and unequivocal” obligation of immediate disclosure of agreements that “change entirely the landscape of the litigation”. They must be produced immediately upon their completion;
b) The disclosure obligation is not limited to pure Mary Carter or Pierringer agreements. The obligation extends to any agreement between or amongst the parties “that has the effect of changing the adversarial position of the parties into a co-operative one ” and thus changes the litigation landscape;
c) The obligation is to immediately disclose information about the agreement, not simply to provide notice of the agreement, or “functional disclosure”;
d) Both the existence of the settlement and the terms of the settlement that change the adversarial orientation of the proceeding must be disclosed;
e) Confidentiality clauses in the agreements in no way derogate from the requirement of immediate disclosure;
f) The standard is “immediate”, not “eventually” or “when it is convenient”;
g) The absence of prejudice does not excuse a breach of the obligation of immediate disclosure; and
h) Any failure to comply with the obligation of immediate disclosure amounts to an abuse of process and must result in serious consequences. The only remedy to redress the abuse of process is to stay the claim brought by the defaulting, non-disclosing party. This remedy is necessary to ensure the court is able to enforce and control its own processes and ensure justice is done between the parties.
Was there a settlement agreement
[32] Heffner says there was never a written settlement agreement. Heffner understood the creditors were free to make their own deal and there was no obligation to the others to disclose the details of any agreement with Medcap. The only obligation Heffner says it had to Bennington, Physiomed and Wilson was to negotiate with Medcap in good faith, keeping in mind that all parties had a common interest in achieving a settlement acceptable to all and that, because the conduct of one would affect the others, the only reasonable option was to check with the others before agreeing to a settlement.
[33] Bennington took the position that there was never a true agreement and that it was at best an understanding that each of the parties came to independently where they realized that they were better off working together, but they could each negotiate their own settlement.
[34] Wilson denied that there was an agreement.
[35] To the extent that there is an agreement, it is disclosed by the evidence of Bennington’s affiant, Ms. Goodall, in cross-examination. In essence, the agreement was that Bennington, Heffner and Physiomed agreed to have a united front and to take the position that settlement with Medcap required settlement with all of them; settle with one, settle with all. The agreement was verbal and was entered into sometime before the bankruptcy application or no later than the time of the bankruptcy pretrial in March 2021.
[36] I find that there was an agreement on the terms outlined in the evidence of Ms. Goodall (the “Agreement”).
[37] Medcap suggests that there is more to the Agreement which has not been disclosed but gives no indication of what more there might be. I cannot speculate what more there might be and do not, on the evidence, draw such an inference.
[38] In submissions, Bennington and Heffner conceded that if there was an agreement as outlined by the evidence of Ms. Goodall that it constituted an agreement that could potentially engage the disclosure requirements, subject to the balance of the requirements being established. For the purposes of this motion, I accept that position.
Was the agreement required to be disclosed
[39] Not all settlements must be immediately disclosed: see iPRO Realty Ltd. v. George Sokkar, 2022 ONSC 6825, and GH Asset Management Services Inc. v. Lo, 2022 ONSC 7218, at paragraph 26.
[40] The Court of Appeal in Skymark considered the meaning of the expression “to change the entirety of the litigation landscape” and held that “the determination is fact-specific, based on the configuration of the litigation and the various claims among the parties”. The Court of Appeal in Laudon v. Roberts, 2009 ONCA 383, at paragraph 39, MacFarland J.A. described such an agreement as one that “significantly alters the relationship among the parties to the litigation”.
[41] More recently, in Crestwood Preparatory College Inc. v. Smith, 2022 ONCA 743, at paragraph 57, the Court of Appeal referred to agreements that have “the effect of changing entirely the landscape of the litigation in a way that significantly alters the dynamics of the litigation”. The Court of Appeal in Skymark, at paragraph 53, adopted this more specific language.
[42] The Court in Skymark specifically declined to adopt an interpretation that unless all parties are impacted by a settlement agreement the landscape has not been changed entirely.
[43] The Court in Skymark at paragraph 55 commented on the values that the rule is meant to advance:
The necessary magnitude of the change to the litigation landscape must be informed by the values that the rule is meant to advance. This court has repeatedly held that the rule is meant to preserve fairness to the parties. It is also designed to preserve the integrity of the court process. That is why the failure to observe the immediate disclosure rule is considered to be an abuse of the court’s process, which can only be remedied by a stay of proceedings: see Handley, at para. 45. In Tallman, this court said, at para. 28: “This remedy is designed to achieve justice between the parties. But it does more than that – it also enables the court to enforce and control its own process by deterring future breaches of this well-established rule.”
[44] Maintaining fairness in the litigation process requires the court to know the “reality of the adversity between the parties” and whether an agreement changes either “the dynamics of the litigation” or the “adversarial orientation”, such as changing the relationship between two parties from an adversarial one into a co-operative one: Handley Estate v. DTE Industries Limited, 2018 ONCA 324, at paragraphs 39-41.
[45] The rule typically arises where there is a settlement between A and B who were formerly adverse in interest such that A and B are now aligned in interest and cooperating and B is now adverse in interest to C where B and C had been aligned in interest prior to the settlement (A, B and C may be multiple or single parties).
[46] Whether disclosure is required depends on the facts of the case. A review of the cases suggests that the factors which assist in determining whether the agreement is one that was required to be immediately disclosed include:
a. the configuration of the litigation;
b. the claims between the parties;
c. the relationship between the parties and their orientation in the litigation;
d. the terms of the agreement;
e. whether the agreement is inconsistent with the pleadings or with the position taken during litigation;
f. whether the terms of the agreement alter the apparent relationships between the parties to the litigation that would otherwise be assumed from the pleadings or expected in the conduct of the litigation;
g. whether the agreement changes the adversarial position of the parties into a cooperative one whereby the party is incentivized to cooperate with a former adversary;
h. whether the agreement impacts litigation strategy of the non-settling party; and
i. the values the rule is meant to advance:
i. preserving fairness to the parties;
ii. preserving the integrity of the court process; and
iii. allowing the court to know the reality of the adversity between the parties.
[47] Medcap faced claims by the plaintiffs in different actions. On the limited information before me, the actions are creditor claims against an alleged debtor. The actions do not appear to have been consolidated.
[48] Heffner and Bennington argue that the Agreement was not required to be disclosed because they are not parties in each others’ actions. Medcap asserts that this is addressed by the conclusion in Skymark that settlement between the plaintiff and defendant in one action was required to be disclosed by the plaintiff to non-settling defendants in a second action in which the plaintiff’s claims against the settling defendant in that second action were also settled. For the reasons that follow, I do not find it necessary to determine this issue.
[49] Medcap’s complaint as I understand it from submissions and its materials is that as a result of the Agreement it cannot settle the various actions with individual plaintiffs but is required to settle the actions with all the plaintiffs which is less advantageous to Medcap.
[50] Medcap does not rely on a change to the relationships reflected in the pleadings. It asserts that, in the language of Feldman J.A. in Crestwood, the agreement changed entirely the landscape of the litigation in a way that significantly altered the “dynamics of the litigation”. In any event, the parties have not produced or relied on the pleadings, so an analysis of the position of the parties in the pleadings is not possible.
[51] Medcap’s position is that the dynamics of the litigation indicates that there was an adversarial orientation among the parties to the Agreement. Mr. Cardillo’s evidence that Bennington, Heffner and Physiomed are adverse in interest is as follows: “Bennington holds the registered fifth collateral mortgage on [Wentworth]. As a result of Medcap’s success in reducing or eliminating any debt to Heffner and Wilson would logically be to the benefit of Bennington. The normal expectation of Medcap would be the adversity of interest as between these parties.”
[52] Medcap does not in its own evidence assert an adversity of interest between Heffner and Physiomed, nor could it do so as it was a signatory to the Priorities Agreement which aligned Heffner and Physiomed’s positions. Medcap does not explain how Bennington would act adversely to the interests of Heffner and Physiomed to improve its fifth position priority as mortgagee. This appears to be wishful thinking on the part of Medcap.
[53] Medcap points to three additional facts to support its position. First, it says that Wilson did not pay to Heffner money it received from Medcap as required by the Priorities Agreement. There is little evidence before me of what this money was paid for or whether there were any obligations tied to the payment of this money by Medcap. However, if Medcap is correct that the money should have been paid to Heffner pursuant to the Priorities Agreement, it appears that Heffner and Wilson continued to work together for their own reasons, not that they became adversaries.
[54] Medcap also says that Bennington and Physiomed were in an adverse relationship because Physiomed owed money to Bennington pursuant to a settlement between them. Medcap says that Physiomed did not pay Bennington from money it received from Medcap in payment of judgments. In my view, this suggests that Bennington and Physiomed are working together and are not adverse in interest.
[55] Finally, Medcap says that it has a third-party claim for contribution and indemnity against Wilson and Physiomed in the Bennington actions against Medcap. It says the normal expectation would be that Wilson would therefore support Medcap in this motion to dismiss the claim by Bennington. Instead, Wilson "opposed" the motion in his affidavit filed in Bennington’s responding materials. The evidence is that Physiomed and Wilson did not file a defence to the main action. There is no evidence that they implicated Bennington in their defence of the third-party claim. Medcap may have sought to create adversity between Bennington and Physiomed/Wilson by way of the third-party claim, but that does not necessarily mean there was adversity between them. On the evidence, it appears that despite the third-party claim, Bennington and Physiomed/Wilson were not adverse in interest.
[56] Bennington, Heffner and Physiomed were not adverse in any real sense. Apart from the fact that the plaintiffs might be competing for a limited pool of assets against which to recover their judgment, there is nothing to suggest they were adverse in interest to each other.
[57] It is evident that Heffner and Physiomed are not adverse in interest. This is disclosed by the Priorities Agreement which was signed by Mr. Cardillo. The communications from Heffner in May 2021 were consistent with this position. On the evidence before me, Heffner and Physiomed had no claims against each other.
[58] Bennington denies it was adverse in interest to Heffner and Physiomed on the Wentworth mortgage. Bennington and Physiomed settled their dispute in 2017. Bennington’s claims were commenced in 2017. The settlement between Bennington and Physiomed which required payment to Bennington from money recovered by Physiomed on its mortgage on Wentworth was disclosed to Medcap’s counsel in 2017.
[59] Bennington, Physiomed and Heffner have no claims against each other. Bennington ranked last in mortgage priority. Its interest was to bind itself to those in priority to it – Heffner and Physiomed – in order to maximize any potential recovery on the mortgage. This has been the case from the outset of the litigation.
[60] That the creditors were not adverse in interest should have been evident to Medcap from the Priorities Agreement and the agreement between Bennington and Physiomed, both of which occurred prior to or at the time of the actions against Medcap. Subsequently, the creditors’ joint bankruptcy application and joint payment of tax arrears, and the consistent message communicated to Medcap during settlement discussions in March and May 2021 and late summer 2022 reiterated their ongoing cooperation.
[61] There was no adversarial orientation between Bennington, Heffner and Physiomed which was altered. The Agreement did not entirely change the landscape of the litigation in a way that significantly altered the adversarial relationship among the parties or the dynamics of the litigation.
[62] It was clear that Medcap was facing claims by each of the plaintiffs and that the plaintiffs were working together before the claims were issued as well as after. That was the litigation landscape Medcap faced – actions by multiple plaintiffs vigorously pursuing their claims and working together to maximize their recovery. The plaintiffs did in fact pursue their full claims by way of motions for summary judgment.
[63] The Agreement does not require the plaintiffs to cooperate or assist each other in any way beyond consultation with respect to settlement and a united front in settlement discussions. It is not alleged that the plaintiffs are providing evidence against Medcap that differs from what would have occurred in the ordinary course of the litigation. There are no shifting sands of evidence or cooperation amongst the parties. No plaintiff has changed its position from assisting Medcap against the other plaintiffs to cooperating with the other creditors and providing evidence against Medcap. There has been no substantive change in positions or switching of sides. Medcap’s defences to the claims are not compromised or altered by the Agreement.
[64] As noted in GH Asset Management at paragraph 43:
… [C]ooperation between litigants does not necessarily fundamentally alter that litigation landscape or the adversarial orientation of litigation: Poirier v. Logan, 2021 ONSC 1633 at para. 57 (aff’d 2022 ONCA 350).
[65] Medcap complains that the agreement between the plaintiffs effectively requires it to negotiate with all the plaintiffs and reach a global settlement. It says it would not expect that settlement would require the approval of non-parties to the litigation it is seeking to settle. Even if this is true, it does not change the reality that a plaintiff is not required to settle or compromise its claim. The court cannot force plaintiffs to settle or compromise their claims. While lawyers should encourage settlement where appropriate, they cannot force their clients to settle. There is simply no assurance or requirement that a party, whether influenced by a non-party or not, will settle until all terms of settlement have been agreed upon.
[66] Medcap says that the Agreement is contrary to public policy to encourage settlement and is a clog on the court system.
[67] There is no doubt that promoting settlement is sound judicial policy that contributes to the effective administration of justice: see Sable Offshore Energy Inc. v. Ameron International Corp., 2013 SCC 37.
[68] The creditors believe it is advantageous to them to negotiate as a group. Medcan believes it is to its advantage to negotiate individually with the creditors. Medcap is essentially arguing that its interest in negotiating and obtaining individual settlements favourable to Medcap outweighs the interest of the creditors in a global settlement favourable to the creditors. In short, Medcap wants to settle the claims its way and it wants the court to take its side. In my view, it is not appropriate to tread on the discretionary and strategic decisions that parties may make toward settling their litigation.
[69] In my view, on these facts, it is not unfair in the sense contemplated by the rule for Medcap to have to negotiate with the creditors together rather than individually. It does not impact the integrity of the court process in litigation or mislead the court as to the reality of the adversity of the parties before it.
Was the agreement immediately disclosed
[70] Medcap says the Agreement must be disclosed and that it was not disclosed until cross-examinations on this motion. Bennington and Heffner say that Medcap should have known about the Agreement from their past conduct.
[71] The Agreement was reached in September 2020, or by no later than March 2021. It was disclosed in the response to settlement discussions on March 22, 2021 and May 2021 at the latest.
[72] An agreement which changes entirely the landscape of the litigation in a way that significantly alters the dynamics of the litigation is required to be immediately disclosed. Counsel should not be required to divine the nature of the settlement agreement instead of being told of it forthrightly. A party is not required to discover the agreement from hints or conduct which suggests that there may be an agreement: Tallman Truck Centre Limited v. K.S.P. Holdings Inc., 2022 ONCA 66, at paragraphs 18-21.
[73] Were this the type of agreement that was required to be disclosed, I would find that it was not disclosed immediately as it was disclosed by conduct, rather than directly, and it does not appear to have been immediately disclosed.
Conclusion
[74] I find that the Agreement was not an agreement which was required to be disclosed. Accordingly, the motions are dismissed.
[75] The parties are encouraged to resolve the issue of costs of the motions themselves. If they are unable to do so, they may submit a bill of costs and make written submissions consisting of not more than two double-spaced pages in length, together with excerpts of any legal authorities referenced, according to the following timetable:
a. Medcap shall serve its bill of costs and submissions, if any, by no later than May 29, 2023.
b. The plaintiffs shall serve their bill of costs and submissions, if any, by no later than June 12, 2023.
[76] All submissions are to be filed with the court, with a copy also provided to the judicial assistants at: St.Catharines.SCJJA@ontario.ca, by end of day June 12, 2023.
[77] If no submissions or written consent to a reasonable extension are received by the court by June 12, 2023, the matter of costs will be deemed to have been settled.
M. Bordin, J.
Date: May 9, 2023
