HSBC Securities (Canada) Inc. v. Firestar Capital Management Corporation, 2008 ONCA 894

CITATION: HSBC Securities (Canada) Inc. v. Firestar Capital Management Corporation, 2008 ONCA 894

DATE: 20081231

DOCKET: C48286

COURT OF APPEAL FOR ONTARIO

Cronk, Gillese and Epstein JJ.A.

BETWEEN

HSBC Securities (Canada) Inc.

Plaintiff (Respondent)

and

Firestar Capital Management Corporation, Firestar Investment Management Group, Michael Ciavarella, Kamposse Financial Corporation, Kalson Jang, Gwen Jang, Kalano Jang, Michael Lee Mitton, Karen Lam, Yu Hui Brian Luo, Jeffrey Hwee, Jasmine Yun, Frederick Ly, Matthew La, Jeffrey Lau, Man Ho Lam, Tsz Leung (Jacky) Soo, XYZ Company, ABC Company, John Doe and Jane Doe

Defendants (Appellants)

Brian N. Radnoff, for the appellants

John A. Fabello, for the respondent

Heard: December 4, 2008

On appeal from the order of Justice James M. Spence of the Superior Court of Justice dated December 17, 2007.

Epstein J.A.:

[1] The appellants, Firestar Capital Management Corporation, Firestar Investment Management Group, and Michael Ciavarella, appeal from the order of Spence J., dated December 17, 2007, dismissing a motion to set aside default judgments for $3.2 million obtained by the respondent, HSBC Securities (Canada) Inc. The default judgments arose from a claim commenced by HSBC for indebtedness related to purchases in brokerage accounts held by Ciavarella and Firestar Capital at HSBC and allegations of an unlawful stock manipulation scheme involving trading in shares of Pender International Inc., a public company. Before this court, the appellants filed fresh evidence in an attempt to demonstrate that they have a triable defence.

[2] For the reasons that follow, I would dismiss the appeal. I would also dismiss the appellants’ motion to adduce fresh evidence, as it does not meet the test set out in R. v. Palmer, 1979 CanLII 8 (SCC), [1980] 1 S.C.R. 759.

I. BACKGROUND

[3] HSBC carries on business in Ontario and throughout Canada as a securities broker and dealer.

[4] Firestar Capital is a private investment holding company incorporated in Ontario. It holds securities trading and bank accounts at various Canadian financial institutions, including at HSBC. Firestar Investment, a private company also incorporated in Ontario, is an affiliated company of Firestar Capital. Ciavarella is the sole shareholder, director and officer of both Firestar companies. Previously, he was an associate at Trillion Financial Group, a life insurance and financial services agency owned by Kalano Jang.

[5] In 2004, Jang organized a private investment group to purchase Pender. He engaged Firestar Capital to assist with the investment group purchasing Pender, and Michael Mitton as a consultant.

[6] Ciavarella was appointed President and Chief Executive Officer of Pender. Pender and the two Firestar companies operated out of the same offices in Thornhill, Ontario.

[7] In October 2004, once trading in Pender shares began, Ciavarella opened an account at HSBC in the name of Firestar Capital. Jason Ng, a relatively new investment advisor employed by HSBC, dealt with the necessary application forms. The documentation included a personal guarantee executed by Ciavarella in favour of HSBC for all indebtedness of Firestar Capital regarding the trading account.

[8] Ciavarella had sole trading authority over the Firestar Capital trading account. However, in October and November 2004, Ng accepted instructions from Mitton to purchase a series of Pender shares in the Firestar Capital account. After HSBC had advanced its own funds to the vendors of the Pender shares on behalf of Firestar Capital, the Firestar Capital cheques for the purchases failed to clear, leaving HSBC out of pocket approximately US $2.324 million. The debt owed to HSBC in relation to these share purchases was the subject of HSBC’s claim against the appellants. In addition, HSBC claimed that it had not been paid for other purchases of Pender shares, totalling approximately US $301,000.

[9] Various legal proceedings ensued. Ciavarella and Mitton were charged under the Criminal Code with conspiracy to commit fraud, fraud and laundering the proceeds of crime. Mitton pleaded guilty to some of the charges and is currently serving a lengthy jail sentence. Ciavarella is awaiting trial. Proceedings initiated by the Ontario Securities Commission against Ciavarella and the Firestar companies, which included cease trade and financial account freeze orders against Ciavarella and his Firestar companies, are ongoing. Additionally, the Investment Dealers’ Association of Canada brought regulatory proceedings against Ng. In a decision released in July 2007, Ng was found guilty of conduct unbecoming or detrimental to the public interest by accepting the trade orders of Pender stock, thereby facilitating the manipulation of that stock.

[10] By statement of claim issued October 12, 2006, HSBC commenced this action against the appellants, and others, claiming the alleged debt and damages suffered in connection with the unlawful stock market manipulation scheme.

[11] After a number of failed attempts at service, Firestar Capital was served on November 10, 2006, Ciavarella on December 19, 2006 and Firestar Investment on January 12, 2007. On January 30, 2007, HSBC obtained default judgments against Ciavarella and Firestar Capital, and on May 18, 2007 against Firestar Investment.

[12] Examinations in aid of execution of Ciavarella, personally and on behalf of Firestar Capital, were conducted on April 30, 2007, and May 14, 2007.

[13] On August 9, 2007, Ciavarella notified HSBC counsel for the first time that he would bring a motion to set aside the default judgments against him and the Firestar companies. Shortly thereafter, Ciavarella retained Joseph Maggisano to act on his behalf and on behalf of the companies.

[14] Ciavarella filed an affidavit, sworn September 6, 2007 in support of the motion to set aside the default judgments. He attempted to explain the delay in responding to both the claim and the default judgments, stating that until his attendance at the examination in aid of execution on April 30, 2007, he was not aware that the HSBC claim had proceeded without notice to him. He further stated that he was financially unable to retain counsel. In addressing the defence to the action, Ciavarella said that he intended to purchase only 200,000 Pender shares and that any additional Pender share purchases were unauthorized. He took the position that since the purchase of the impugned shares was not authorized, neither he nor the Firestar companies were liable in respect of the HSBC claim.

II. REASONS OF THE MOTION JUDGE

[15] The motion judge dismissed Ciavarella’s motion to set aside the default judgments for two main reasons.

[16] First, he held that the materials filed and the submissions made did not offer an adequate explanation for the delay from December 2006, when Ciavarella was served with the statement of claim, and August 2007 when he first responded to the default judgments. While Ciavarella claimed that he did not know about the judgments until April 2007, the statement of claim contained a clear warning that a failure to defend could result in judgment’s being granted in his absence, without further notice. Ciavarella also asserted that after he learned of the default judgments he could not afford a lawyer. However, the motion judge noted that Ciavarella had lawyers representing him and his companies in his other matters – lawyers who could have been asked to send a letter to HSBC advising that a motion to set aside would be brought.

[17] The motion judge concluded that the evidence relating to Ciavarella’s delay demonstrated “inattention and inaction” – an inadequate explanation for the purpose of a motion to set aside a default judgment.

[18] Second, the motion judge held that the materials filed and the submissions made did not show a triable defence on the basis, advanced by the appellants, that the impugned trades were unauthorized. He found that the evidence did not support Ciavarella’s position that the trades were unauthorized. In fact, there was significant evidence to the contrary including that:

a) Ciavarella orally authorized Ng to accept instructions from Mitton; the trades were immediately confirmed to Ciavarella;

b) the trading details were made available to Ciavarella through his online access to the accounts; and

c) Firestar Capital promptly delivered cheques to pay for the trades.

[19] Significantly, the motion judge noted that Ciavarella, after being notified of the impugned transactions on November 24, 2004, did not take the position they were unauthorized until September 6, 2007 when he swore his affidavit in support of the motion to set aside the default judgments.

[20] In the light of the motion judge’s conclusion that the two periods of delay – eight months from the time the statement of claim was served and five months from learning of the default judgments, to a response – had not been adequately explained, and that the record did not disclose a defence on the merits that raised a genuine issue for trial, the motion to set aside was dismissed.

III. ANALYSIS

[21] The motion judge’s discretionary decision whether to set aside a default judgment pursuant to rule 19.08 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, was governed by the following three-part test:

(a) Whether the motion was brought without delay after the defendant learned of the default judgment;

(b) Whether the circumstances giving rise to the default were adequately explained; and

(c) Whether the defendant has an arguable defence on the merits.

See Morgan v. Toronto (City) Police Services Board (2003), 2003 CanLII 14993 (ON CA), 34 C.P.C. (5th) 46 (Ont. C.A.), at para. 19.

[22] The motion judge is entitled to considerable deference in the exercise of his discretion. His decision should not be set aside absent an error in law or principle, a palpable and overriding error of fact, or unless the decision is so clearly wrong as to amount to an injustice: see e.g. Hill v. Forbes (2007), 2007 ONCA 443, 225 O.A.C. 74 (C.A.), at para. 4.

[23] The appellants allege that the motion judge conflated the first two parts of the test, and in applying the third, engaged in an analysis of the credibility of the appellants’ defence, rather than determining whether an arguable defence was established. In my view, the motion judge’s reasons demonstrate that he properly applied the three-part test.

[24] In considering the circumstances of the default, and the delay in moving to set aside the default judgments, the motion judge considered and rejected the appellants’ position that Ciavarella was distracted by other matters and financially unable to retain a lawyer to represent him and his companies. There was ample support in the record for his conclusion and I can see no reason to interfere.

[25] Ciavarella has clearly established that he is more than capable of managing his complicated affairs. In addition to his extensive professional experience, Ciavarella’s level of sophistication is evident from the materials filed in this proceeding that he prepared on his own behalf. It was against this background that Ciavarella was served with and had the opportunity to read the statement of claim, which contained clear notice of the consequences of the defendants’ failure to respond.

[26] Moreover, throughout the period of “inaction” after Ciavarella learned of the default judgments, he was represented by experienced lawyers who could have written a letter to HSBC advising that a motion would be brought to set aside the default judgments. The motion judge’s conclusion that Ciavarella’s legal and financial difficulties did not interfere with his ability to respond, in a timely manner, to the statement of claim, and to the judgments rendered in default, was well supported by the evidence before him.

[27] In considering whether the appellants had raised an arguable defence – that the impugned trades were unauthorized – the motion judge stated:

Mr. Ciavarella’s Affidavit stated [sic] that he did not authorize the trades is a self-serving statement. It is not supported by other evidence, the evidence to the contrary demands a response but none is given in the evidence before the court. On the basis of the record before the court, a court could not conclude that Mr. Ciavarella’s statement was reliable.

[28] The appellants submit that the motion judge’s reasoning demonstrates that he erred by assessing credibility. I disagree. In my view, the motion judge’s reasons make it clear that he did exactly what he was supposed to do – he took a “good hard look at the merits” and assessed whether the moving parties had established an arguable defence. As the motion judge observed, Ciavarella’s September 2007 affidavit was self-serving and devoid of detailed evidence supporting his key assertion that the trades were unauthorized. The appellants did not provide the motion judge with any independent evidence corroborating their position. I see no reason to interfere with the motion judge’s conclusion that a self-serving affidavit does not create a triable issue in the absence of detailed facts and supporting evidence. This is especially true where, as the motion judge noted, the assertions in the 2007 affidavit were inconsistent with Ciavarella’s own previous evidence and the evidence of his conduct in relation to the trades at issue.

[29] The appellants also advance an “interests of justice argument”. They submit that the motion judge failed to consider that they would be significantly prejudiced if the judgments are not set aside, whereas there would be no prejudice to HSBC if the claim were to proceed to trial.

[30] In Peterbilt of Ontario Inc. v. 1565627 Ontario Ltd. (2007), 2007 ONCA 333, 87 O.R. (3d) 479, at para. 2, this court indicated that on a motion to set aside a default judgment, the motion judge will be guided by the principles established by the authorities but must ultimately determine whether the interests of justice favour granting the order. The motion judge should consider the potential prejudice to the moving party if the motion were dismissed, the potential prejudice to the respondent if the motion were allowed, and the effect of any order on the overall integrity of the administration of justice.

[31] Read as a whole, the motion judge’s reasons demonstrate that he was alive to whether the interests of justice favoured granting the order to set aside the default judgments. He adverted to matters relevant to the interests of justice, such as his belief that Ciaravella was “gaming the process”, that Ciavarella’s delay in responding to both the claim and the default judgments reflected only “inattention and inaction”, and that his affidavit contained “self-serving” evidence in an effort to establish a defence.

[32] Given the motion judge’s unassailable conclusions that the appellants were unable to adequately explain the circumstances giving rise to the default or the delay once aware that judgments had been rendered in default, that they were unable to raise a triable defence on the merits, and further, that Ciavarella was effectively taking his chances with the process, it is not in the interests of justice to set aside the default judgments.

[33] In my view, the motion judge properly exercised his discretion in dismissing the motion to set aside the default judgments. His reasons do not reveal an error in principle, or a palpable and overriding factual error, and his decision does not amount to an injustice.

IV. FRESH EVIDENCE MOTION

[34] The question remaining is whether the proposed fresh evidence should be received and if so, what impact it would have had on the disposition of the motion.

[35] The proposed new evidence takes two forms. First, there is evidence Ciavarella relies upon in response to HSBC’s allegations that he had notice of the unauthorized share purchases. It relates primarily to the fax number HSBC used to send the trade confirmations and the extent to which Ciavarella was able to use his internet access to review the status of his and the Firestar Capital accounts. Ciavarella claims that this evidence was not before the motion judge because his lawyer, Maggisano, failed to follow his instructions to adduce it on the motion.

[36] Second, there is the transcript of Ng’s testimony at Ciavarella’s preliminary inquiry indicating that Ng accepted trading instructions from Mitton, without properly signed trading authorization. The appellants argue that this evidence was not in existence at the time the motion was argued.

[37] The appellants submit that the fresh evidence could have affected the motion judge’s determination given its relevance to the key issue whether the Pender share purchases were authorized and further, it would be unjust to permit the judgments to stand in the face of a meritorious defence centred on the fact that they did not authorize the impugned share purchases.

[38] The respondent opposes the admission of the new evidence arguing that it does not meet any aspect of the four-part test set out by the Supreme Court of Canada in R. v. Palmer at p. 775, for the receipt of fresh evidence:

(a) the evidence should generally not be admitted if, by due diligence, it could have been adduced at trial;

(b) the evidence must be relevant in the sense that it bears upon a decisive or potentially decisive issue in the trial;

(c) the evidence must be credible in the sense that it is reasonably capable of belief; and

(d) it must be such that if believed it could reasonably, when taken with the other evidence adduced at trial, be expected to have affected the result.

[39] In my view, the appellants’ motion fails each stage of the Palmer test – particularly the first and fourth components.

[40] The first form of proposed fresh evidence, relating to whether Ciavarella was notified of the Pender share purchases, existed at the time the motion was heard. There is nothing to indicate that it could not have been provided to the motion judge before he became functus officio, other than Ciaverella’s uncorroborated evidence that his lawyer failed to follow instructions. Further, it does not address the other evidence relating to confirmation – most significantly, the evidence that confirmations were mailed to Ciavarella’s address one day after each transaction, and that the transactions were confirmed to Ciavarella by telephone calls from HSBC at the end of each trading day. This proposed fresh evidence could not be expected to have affected the result on the motion.

[41] In my view, the second form of proposed fresh evidence, Ng’s testimony at Ciavarella’s preliminary inquiry, is not “fresh evidence”. Although this evidence was not in the form of testimony at Ciavarella’s preliminary inquiry until after the motion was heard, there is no suggestion that Ng was not accessible to the appellants earlier in the proceedings to give evidence about his interactions with them concerning the purchase of Pender shares.

[42] More significantly, this proposed fresh evidence relates only to whether Ciavarella gave Ng written authorization to take trading instructions from Mitton. It does not contradict Ng’s evidence that Ciavarella orally authorized him to take instructions from Mitton, which is the evidence upon which the motion judge relied. Accordingly, I am not convinced that this evidence would have affected the motion judge’s findings.

[43] The most significant problem the appellants face, which is not addressed by the proposed fresh evidence, is that their claim that they did not know about or authorize the impugned trades came late in the day. The first opportunity Ciaverella had to complain that he did not know about or authorize the trades was on November 24, 2004. Neither his correspondence that day, nor his 2005 affidavit in response to the OSC investigation, which put the trades in issue, makes any mention of this claim. In fact, everything Ciaverella was saying, until he swore his September 2007 affidavit, was consistent with his having known about and authorized the share purchases.

[44] I would therefore dismiss the motion to introduce fresh evidence.

V. DISPOSITION

[45] For the reasons given, I would dismiss both the appeal and the motion to introduce fresh evidence. In accordance with the agreement of counsel, HSBC is entitled to its costs of the appeal, fixed in the amount of $17,500, including disbursements and Goods and Services Tax.

RELEASED:

“DEC 31 2008” “G. Epstein J.A.”

“EES” “I agree E.E. Gillese J.A. signing for E.A. Cronk J.A.”

“I agree E.E. Gillese J.A.”