CITATION: Royal Bank of Canada v. Korman, 2010 ONCA 63
DATE: 20100127
DOCKET: C50433
COURT OF APPEAL FOR ONTARIO
Cronk, Blair and Rouleau JJ.A.
BETWEEN
Royal Bank of Canada
Plaintiff (Respondent)
and
Futurecom Inc., Ian Korman aka Ian Israel Korman and Jeffrey Essebag
Defendants (Appellant)
Avrum D. Slodovnick, for the appellant Ian Korman
Shawna M. Sosnovich, for the respondent
Heard: November 3, 2009
On appeal from the order of Justice Michael G. Quigley of the Superior Court of Justice dated April 2, 2009.
Rouleau J.A.:
[1] Ian Korman appeals from the order of the motion judge, dated April 2, 2009, dismissing his motion to set aside the consent order of Miller J., dated February 27, 2008. The Royal Bank of Canada had obtained a default judgment against the appellant for $52,730.85 pursuant to the appellant’s guarantee of Futurecom Inc.’s debt to the bank. Justice Miller’s order amended that judgment by adding the alias “Ian Israel Korman” to the title of proceedings and adding to the judgment declarations that the judgment and a subsequently obtained cost award were in fraud. For the reasons that follow, I would allow the appeal, set aside the motion judge’s order and substitute therefor an order in its place setting aside the declaratory parts of the consent order of Miller J.
FACTS
[2] The appellant was one of two principals of Futurecom, a corporation registered in Ontario. In late 2005 and January 2006, Futurecom incurred debt with the bank by way of overdraft. In April 2006, after the bulk of this debt had been incurred, the appellant agreed to guarantee Futurecom’s debt personally. When Futurecom defaulted, the bank issued a claim against the appellant pursuant to his guarantee. The appellant did not defend and on April 12, 2007, the bank obtained default judgment in the amount of $52,730.85, together with costs fixed in the amount of $543.00.
[3] On September 12, 2007, the bank obtained an order compelling the appellant to attend an examination-in-aid-of-execution and to pay $1,432.48 in costs thrown away.
[4] In the course of the examination-in-aid-of-execution, the bank became aware that some of the statements made by the appellant in the personal statement of affairs he had provided to the bank were false. The bank also learned that the appellant’s correct name was Israel Ian Korman rather than Ian Israel Korman as the bank had previously understood.
[5] As a result of obtaining this information, the bank brought a motion seeking an order under r. 59.06(2)(a) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 to amend the judgment previously obtained by correcting the appellant’s name and adding declarations that the judgment and subsequent cost order were sums owing in fraud. The bank sought this relief even though the statement of claim pursuant to which the default judgment had been obtained had not alleged fraud, nor sought any form of declaratory relief.
[6] Notice of the motion was served on the appellant’s solicitor. The solicitor clearly misunderstood the nature and scope of the relief sought. He understood only that the bank alleged that the appellant had fraudulently used the name Ian Israel Korman on certain loan documents and therefore sought to add the name Israel Ian Korman to the judgment. He did not notice that the bank also sought declarations of fraud. He therefore said nothing to the appellant concerning these declarations or the impact that they would have on him. Rather, he advised the appellant that, because he would suffer no prejudice, he should consent to the motion and avoid incurring unnecessary costs. The appellant was never provided with a copy of the motion materials and, based on his solicitor’s advice, authorized his solicitor to consent to the bank’s motion. Justice Miller then issued the consent order on February 27, 2008. I note that Miller J.’s order amending the judgment added the alias Ian Israel Korman and not Israel Ian Korman as requested in the motion. Nothing in this appeal turns on this apparent error.
[7] In April 2008, the appellant made a proposal under the Bankruptcy and Insolvency Act, R.S.C. 1992, c. 27. The bank took the position that, because its judgment was for money owing in fraud, it would survive the bankruptcy. The appellant then became aware of the declarations he had purportedly consented to, as well as the impact of the amended judgment. He then brought a motion before Quigley J. pursuant to r. 59.06 seeking to amend or set aside the consent order of Miller J. on the bases of error and facts discovered after it was made. He maintained that there had been no fraud, fraud had not been pleaded by the bank in the original claim, and his consent had been given pursuant to erroneous information supplied to him by his solicitor.
[8] In support of his motion, the appellant filed an affidavit in which he provided an explanation for the alleged misstatements in his personal statement of affairs. He also pointed out that his personal statement of affairs had not been provided to the bank in order to secure a loan from the bank. The debt had been incurred by Futurecom and virtually all of the funds had been advanced before the appellant signed the personal guarantee of Futurecom’s obligations. It followed, therefore, that the bank could not have made the advances to Futurecom in reliance on his personal statement of affairs. The appellant also filed an affidavit from his previous solicitor in which the solicitor confirmed his misunderstanding of what had been sought in the motion before Miller J., as well as his failure to advise the appellant of the declarations and of the impact of consent to them.
[9] In response, the bank filed affidavit evidence explaining the relationship among the bank, Futurecom and the appellant and challenging a number of the allegations contained in the appellant’s affidavit. The bank did not, however, contradict the acknowledgment by the appellant’s former solicitor that he had not advised the appellant of the impact of the consent. Nor did the bank contradict the appellant’s assertion that most of the funds advanced to Futurecom were unsecured until the appellant’s personal guarantee was provided sometime later.
[10] The motion judge dismissed the appellant’s motion.
ISSUES
[11] The appeal raises three issues:
Whether the motion judge made palpable and overriding factual errors based on a misapprehension of the evidence,
The propriety of using r. 59.06 to amend a judgment to obtain relief not sought in the moving party’s pleading, and
Whether the appellant’s consent remedies any procedural defects in the order of Miller J.
ANALYSIS
[12] The appellant argues that the motion judge made palpable and overriding errors in his factual findings and erred in his interpretation of r. 59.06. The respondent submits that even if such errors were made, the appellant consented to the order of Miller J. and that consent cannot now be withdrawn. I will deal with each of these submissions in turn.
Factual Findings
[13] The motion judge found that the appellant had produced no credible evidence to support his allegation that the funds had not been obtained by fraud and that he had consented to Miller J.’s order based on his solicitor’s mistake. The appellant submits that the motion judge misapprehended the evidence in reaching both of these conclusions.
[14] With respect to the bank’s reliance on the appellant’s representations, the motion judge found that the appellant “opened the accounts in October 2005, that he provided the personal statement of affairs at the same time” and “that the bank advanced him $50,000 of overdraft funding on the accounts he opened as evidenced in his own bank statements”. He then concluded that the advance of funds to the appellant was made by the bank in reliance on his personal statement of affairs. The records, however, do not show any advances to the appellant in 2005. Rather, the advances were originally made by way of overdraft to Futurecom in the October 2005 to January 2006 period. At the time of the advances to Futurecom, the appellant does not appear to have been personally liable for their repayment. The appellant’s liability did not come about until some six months later when, on April 10, 2006, the overdrafts were converted to a loan to Futurecom and the appellant signed a guarantee of Futurecom’s debt. It is apparent, therefore, that no funds were advanced to the appellant. When the bank made the original advances to Futurecom by way of overdraft, it could not have been relying on the appellant’s personal statement of affairs as the bank had no recourse against the appellant’s personal assets.
[15] The motion judge also rejected the appellant’s contention that the consent to the motion was based on incorrect or incomplete advice from his solicitor. In doing so, he stated that the appellant’s “protestations that the solicitor has admitted his mistake are of little value when there is no corroborative evidence before the court that would add any reliability or weight to [the appellant’s] assertion and his complaint.” It is apparent, however, that the motion judge did not consider the affidavit filed by the appellant’s former solicitor in which that solicitor confirmed that he advised the appellant to consent, that he did so “under the misunderstanding that the bank was simply seeking to add ‘Israel Ian Korman’ to the default judgment”, that he had “misunderstood the full nature and scope of the relief the bank sought” and that he recommended to the appellant that he consent to the motion as he “did not believe that any prejudice would result” to the appellant. This affidavit, on which the respondent did not cross-examine, substantially corroborated the appellant’s position.
[16] In my view, therefore, the motion judge erred in finding that there was no basis for disputing the bank’s claim that the funds were obtained by fraud, and in rejecting the appellant’s submission that he consented to Miller J.’s order based on an error committed by his solicitor. Both these findings were based on a misapprehension of the evidence and cannot stand.
Interpretation of r. 59.06
[17] Rule 59.06 reads as follows:
Amending
59.06 (1) An order that contains an error arising from an accidental slip or omission or requires amendment in any particular on which the court did not adjudicate may be amended on a motion in the proceeding. R.R.O. 1990, Reg. 194, r. 59.06 (1).
Setting Aside or Varying
(2) A party who seeks to,
(a) have an order set aside or varied on the ground of fraud or of facts arising or discovered after it was made;
(b) suspend the operation of an order;
(c) carry an order into operation; or
(d) obtain other relief than that originally awarded,
may make a motion in the proceeding for the relief claimed. R.R.O. 1990, Reg. 194, r. 59.06 (2).
Modification
59.06 (1) L’ordonnance qui comporte une erreur d’écriture découlant d’un lapsus ou d’une omission ou qui doit être modifiée relativement à un point sur lequel le tribunal n’a pas statué peut être modifiée par voie de motion dans l’instance. R.R.O. 1990, Règl. 194, par. 59.06 (1).
Annulation ou modification d’une ordonnance
(2) Une partie peut demander, par voie de motion dans l’instance, selon le cas :
a) l’annulation ou la modification d’une ordonnance en raison d’une fraude ou de faits survenus ou découverts après qu’elle a été rendue;
b) un sursis d’exécution d’une ordonnance;
c) l’exécution d’une ordonnance;
d) une mesure de redressement différente de celle qui a déjà été accordée. R.R.O. 1990, Règl. 194, par. 59.06 (2).
[18] The appellant submitted to the motion judge and again to this court that rule 59.06(2)(a) allows a party to apply, by motion, to set aside or vary a judgment when, after judgment is obtained, it is determined that the judgment was procured by fraud. It was not, in the appellant’s submission, intended to apply to convert a judgment otherwise obtained into a judgment in fraud, particularly where fraud was not pleaded in the statement of claim. In other words, as applicable in this case, a judgment obtained in contract for a debt cannot be declared to be in fraud after judgment and absent the appropriate pleadings.
[19] The motion judge appears to have accepted the proposition that the normal course would be for the bank to amend its pleading in order to seek a judgment in fraud. However, he ultimately rejected the appellant’s submission finding that “post-judgment, the notice of motion contents are allegations in this matter that effectively amount to new pleadings – they assert fraud clearly on their face. … I have no doubt that it was open to the bank to obtain the order that it did and it was open to Miller J. to grant that order, turning the default into a judgment in fraud under r. 59.06 based on the after-discovered facts. That is exactly one of the reasons why the rule is there.” Thus, in the view of the motion judge, a motion under r. 59.06 pertaining to a fresh cause of action obviates the need to have pleaded the cause of action.
[20] In my view, the motion judge erred in rejecting the appellant’s submission in this regard. Rule 59.06(2)(a) allows for the amendment, setting aside or varying of orders “on the ground of fraud or of facts arising or discovered after it was made.” There are, therefore, two separate and distinct bases for applying r. 59.06(2)(a). The first is fraud. Read in the context of the rule as a whole, it is clear that the reference to fraud is a fraud perpetrated in the way the judgment or order was obtained. There is no suggestion that this occurred in the present case.
[21] The second basis is broader. It provides that a judgment or order may be amended, set aside or varied because of facts that arose or were discovered after the order or judgment was obtained.
[22] In the present case, the respondent argues that the facts it relies on to prove the alleged fraudulent misrepresentations were discovered by it after the judgment was obtained. Assuming that the statements in the appellant’s personal statement of affairs were indeed fraudulent, the bank submits that this places it within the rule.
[23] I disagree. The difficulty with the respondent’s position is that it had never claimed fraud in the statement of claim. The claim was simply for recovery of a debt based on the guarantee. The claim contained no allegation of fraud nor was declaratory relief of the nature ordered by Miller J. sought. In my view, this placed the relief requested by the bank beyond the scope of that available under r. 59.06.
[24] The rule does not contemplate altering a judgment or order to provide for relief never sought in the moving party’s pleading. In order to come within the rule, the motion must be one brought “in the proceeding”. As a general rule, pleadings lay out the four corners of the dispute and parties are bound by their pleadings: See Kalkinis (Litigation Guardian of) v. Allstate Insurance Co. of Canada (1998), 1998 CanLII 6879 (ON CA), 41 O.R. (3d) 528 (C.A.); leave to appeal refused, [1999] SCCA No. 253 (S.C.C.). The proceeding continues to be defined by the pleadings even after judgment is obtained. For the motion to be “in the proceeding”, therefore, it must be a motion that, even before judgment, was available to the moving party to bring. In this case, even on a generous reading, a motion for judgment declaring the sums to be owing in fraud could not have been brought or succeeded before judgment based on the pleadings as they stand. Rather, the respondent’s pleading would have to have been amended to request such relief.
Does the appellant’s consent to the order of Miller J. cure any procedural defects?
[25] The bank argues that the appellant’s consent to Miller J.’s order cannot now be withdrawn and, in effect, operates so as to waive or cure any defects in procedure. Assuming that this court has the discretion to dismiss the appeal on this basis, I do not consider this to be an appropriate case for granting such relief and would decline to do so. Given the seriousness of the allegation, fraud must normally be pleaded and proved with particularity and the defendant ought generally to be entitled to defend. Here, fraud was neither pleaded nor proved and the materials filed raise a serious issue as to whether fraud was involved in the advancing of the funds owing to the bank. Further, it is apparent from the affidavit filed by the appellant’s former solicitor that the appellant’s consent was based on a misunderstanding of the nature of the relief being sought.
[26] I am not persuaded that the fact that Mr. Korman consented to the order of Miller J. on the basis of mistaken advice from his solicitor should preclude him from setting aside the impugned parts of the order. It is neither just nor equitable in the circumstances to allow the order to stand and I would set it aside.
DISPOSITION
[27] I would therefore allow the appeal, set aside the motion judge’s order and substitute an order setting aside the declaratory parts of the order of Miller J. dated February 27, 2008. I would award the appellant his costs of the appeal, including the costs of the motion in this court for security for costs, fixed at $8,000, inclusive of disbursements and GST. I would award no costs of the motion that is the subject of the appeal to either party.
RELEASED: Jan. 27, 2010 “Paul Rouleau J.A.”
“EAC” “I agree E.A. Cronk J.A.”
“I agree R.A. Blair J.A.”