COURT FILE NO.: 07-CV-342974PD3

DATE: 20121001

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Sydney Charendoff and Marla Charendoff, Plaintiffs/Responding Parties

AND:

Alec McLennan and 124155 Canada Inc., Defendants, Moving Parties

BEFORE: MacDonnell, J.

COUNSEL: Gerald Matlofsky, for the Plaintiffs/Responding Parties:

Alec McLennan appearing for himself and as counsel for 124155 Canada Inc., Defendants, Moving Parties:

HEARD: August 15, 2012

ENDORSEMENT

[ 1 ] This is a motion by the defendants Alec McLennan and 124155 Canada Inc. under sub-rules 19.08(2) and (3) of the Rules of Civil Procedure (i) for an order setting aside the default judgment granted by Roberts J. on September 2, 2008 and (ii) for an order setting aside the noting in default on which that judgment was based.

[ 2 ] In the course of the hearing of the motion, Mr. Matlofsky acknowledged that the requisition filed for the noting in default referred only to the defendant Alec McLennan. There is nothing in the record to indicate that 124155 Canada Inc. has ever been noted in default. Mr. Matlofsky conceded that in the circumstances the default judgment as against 124155 Canada Inc. cannot stand.

[ 3 ] For the reasons that follow, I conclude that the default judgment as against the defendant McLennan must also be set aside. It was based on a noting in default that Mr. Matlofsky requisitioned both prematurely and in the face of a notice of intention to defend and a notice of motion to strike the statement of claim or to stay the action. It was also requisitioned without the courtesy of a warning. Mr. McLennan moved to set aside the noting in default immediately upon learning of it. In all the circumstances, he is entitled to have both it and the default judgment that followed set aside.

A. The Relevant Chronology

[ 4 ] Sydney Charendoff is a retired pharmacist. Marla Charendoff is his daughter. Mr. Charendoff’s wife passed away in September 2004. In his capacity as estate trustee, Mr. Charendoff sought payment of benefits under a life insurance policy issued to his wife by the TD Life Insurance Company (“TD”). TD refused to pay the benefits on the basis that Mr. Charendoff’s wife had made untrue statements about her health at the time she applied for the policy.

[ 5 ] Alec McLennan is a lawyer. 124155 Canada Inc (“124155”) is a company incorporated by him to administer his law practice. Mr. Charendoff retained Mr. McLennan to commence an action against TD, and on October 30, 2006 a statement of claim was issued.

[ 6 ] At the time, Mr. Charendoff was looking for investment opportunities and he asked Mr. McLennan for suggestions. Mr. McLennan had another client, The Sales Game.Com.Ltd. (“TSG”), which was looking for funding, and he brought this to Mr. Charendoff’s attention. On October 20, 2006, Mr. Charendoff advanced approximately $400,000.00 to TSG. The agreement pursuant to which those funds were advanced called for TSG to repay the principal and a bonus of $75,000 upon the occurrence of certain events. It was anticipated that those events would occur within two to three months.

[ 7 ] In early 2007, Mr. Charendoff took the position that the events that would trigger the obligation to repay had occurred. TSG’s position was that they had not. Mr. Charendoff retained Mr. Matlofsky in relation to that dispute and on July 10, 2007 Mr. Matlofsky commenced an action against TSG for the recovery of the amounts set out in the loan agreement.

[ 8 ] When TSG did not deliver a defence within the time prescribed by the Rules, Mr. Matlofsky had it noted in default. On August 7, 2007 default judgment was granted in the amount of $508,662.74. Whether that judgment was regularly obtained is not a question that is before me on this motion. I would note, however, that TSG takes the position that the statement of claim was not properly served and that it never came to its attention within the time permitted for delivery of a defence. On August 21, 2007 TSG filed a motion to set aside the default judgment.

[ 9 ] On October 7, 2007, Mr. Charendoff filed a complaint with the Law Society of Upper Canada alleging, inter alia , that Mr. McLennan had been in a conflict of interest in relation to the loan to TSG and that he should have instructed Charendoff to obtain independent legal advice.

[ 10 ] On November 2, 2007 Mr. Charendoff commenced a second action for recovery of the amounts alleged to be owing pursuant to the loan agreement. In this second action, he named as defendants not only TSG but also Mr. McLennan, 124155 and the five Harris brothers. The Harris brothers are the principals of TSG.

[ 11 ] The statement of claim was served on McLennan and 124155 on November 7, 2007. Pursuant to subrule 18.01(a), they were required to deliver a statement of defence within 20 days. On November 27, they delivered a notice of intent to defend, which entitled them to an additional 10 days to deliver a defence. The first day on which they could have been considered to be in default, therefore, was December 8, 2007.

[ 12 ] On December 7, 2007, Mr. Matlofsky filed a requisition to have McLennan noted in default. Under the Rules, he was only entitled to take that step if McLennan had “[failed] to deliver a statement of defence within the prescribed time”. As the prescribed time had not expired, the requisition was premature. On December 10, 2007, however, on the basis of the requisition, the registrar noted Mr. McLennan in default. [1]

[ 13 ] The fact that the requisition was filed a day early was not a mere technicality in this case. On the same day as the requisition was filed , i.e, at a time when he was not in default, Mr. McLennan served Mr. Matlofsky with a notice of motion to strike the statement of claim, or in the alternative to stay the action until the earlier action had been tried, or in the further alternative for particulars. It is unclear whether Mr. Matlofsky filed the requisition before or after he was served with the notice of motion. I am prepared to assume that it was before. However, even if that were the case, Mr. Matlofsky took no steps to withdraw the requisition and he has consistently taken the position that Mr. McLennan was properly and regularly noted in default.

[ 14 ] Mr. Matlofsky not only did not warn Mr. McLennan before having him noted in default, he did not inform him of it after it occurred. Mr. McLennan’s motion to strike the statement of claim was returnable on March 27, 2008. On March 21, 2008, Mr. Matlofsky served McLennan with responding material on that motion. Upon receipt of the responding material, Mr. McLennan advised Mr. Matlofsky that the motion would be adjourned so that he could consider whether to file material in reply.

[ 15 ] On March 27, 2008, Mr. McLennan learned for the first time that Mr. Matlofsky had caused him to be noted in default. He received this information not from Mr. Matlofsky but from the Law Society. As I noted earlier, Mr. Charendoff had made a complaint to the Law Society about Mr. McLennan’s conduct in relation to the loan to TSG. In support of Mr. Charendoff’s complaint, Mr. Matlofsky wrote to the Law Society to advise that Mr. McLennan had been noted in default in the action brought by Mr. Charendoff.

[ 16 ] Immediately upon learning that he had been noted in default, Mr. McLennan faxed a letter to Mr. Matlofsky forcefully objecting to what he had done. He further stated:

I hereby confirm the intention of myself and 124155 Canada Inc. to proceed with the above-described motion to strike et al, to which as a result of your egregious actions, I now add in the clearest terms the intention also to proceed to set aside any noting in default or default judgment you have obtained or may obtain, all done without notice, against myself and/or 124155 Canada Inc. expeditiously as necessary. That is, you are hereby requested to cease and desist forthwith in your attempts to note myself and 124155 Canada Inc. in default and to obtain default judgment.

[ 17 ] On the same day (March 27), under separate cover, McLennan faxed Mr. Matlofsky a notice of motion, returnable May 15, 2008, to set aside the noting in default. Mr. Matlofsky acknowledged receipt of the correspondence from Mr. McLennan, but he offered no explanation for his conduct. Nor did he make any reference to Mr. McLennan’s stated intention to proceed with the motion to strike and the motion to set aside the noting in default.

[ 18 ] In the course of cross-examination on the affidavit that he filed on the present motion, Mr. McLennan was asked why he had not immediately rescheduled his motion to strike when it was adjourned on March 27, 2008. Mr. McLennan pointed out that under the Rules, he could not take any steps in that respect until the noting in default was set aside.

[ 19 ] On May 5, 2008, Mr. McLennan faxed a letter to Mr. Matlofsky asking him to consent to the setting aside of the noting in default:

Before going to the unnecessary expense and waste of the Court’s time to perfect and argue [the motion to set aside], you are hereby asked to consent to such an order… [U]ndoubtedly the relief will be readily granted, so you are requested to consent. If you do not so consent in writing by fax received by noon this Friday, May 9, 2008, you will be presumed not to consent and I will be forced to proceed with it. Please respond.

[ 20 ] Mr. Matlofsky did not respond. One week later, on May 12, Mr. McLennan faxed Mr. Matlofsky a further letter, which stated:

By not responding to my May 5 th last letter as requested, this means that my Motion to set aside your Noting in Default must now be rescheduled to go forward which I am in the process of doing and will advise in due course and serve materials. In the meantime, the said Motion will NOT be heard on May 15 th next. Please note this.

[ 21 ] On May 15, Mr. Matlofsky wrote to McLennan stating as follows:

I have your letters of May 5, 2008 and May 12, 2008. My clients have instructed me to consent to the setting aside of the Noting in Default of you and 124155 Canada Inc. in this matter.

[ 22 ] On July18, without prior discussion with Mr. McLennan, Mr. Matlofsky sent him a letter reversing his position and withdrawing his consent:

On May 15, 2008 on behalf of my clients I consented to the setting aside of the Noting in Default of you and 124155 Canada Inc. in this matter. Since then you have done nothing to either file a defence or to reschedule the motion that you brought to demand particulars. Your motion was dismissed as abandoned. Therefore I now withdraw my client’s consent to permit the setting aside of the noting in default. The only conclusion I can reach is that you and 124155 Canada Inc. have no intention to defend this action and have been acting solely to delay the prosecution of this action.

[ 23 ] In cross-examination, Mr. McLennan was asked what he had done after receiving the plaintiffs’ consent on May 15. He replied:

Well, I had to go through it. You recall that you had coordinated about five different steps. You brought the action against The Sales Game. You subsequently brought the action against me and The Sales Game and the individuals. Then you had your client make a complaint to the Law Society. Then you contacted the police or had them contacted. Then you had your client bring and which you took over an application to court to try and tax statute-barred accounts. And you’re a solicitor of record of that. And I was responding to all that stuff at that time, in a very short time frame… And there’s also the other counsel and the other parties to co-ordinate matters with [in relation to their motion to set aside a noting in default.

[ 24 ] On August 22, 2008 Mr. Matlofsky filed an ex parte motion for default judgment against both McLennan and 124155, returnable on September 2, 2008. While there had been communications between McLennan and Mr. Matlofsky over the summer in relation to other disputes between Mr. Charendoff and McLennan – including a letter faxed by McLennan to Matlofsky on August 28, 2008 (to which Mr. Matlofsky did not respond) respecting the availability of Mr. Charendoff for cross-examination – Mr. Matlofsky did not reveal to Mr. McLennan that he was in the process of moving for judgment.

[ 25 ] On September 2, Mr. Matlofsky appeared before Justice Roberts on his ex parte motion for judgment. Justice Roberts endorsed the record as follows:

Having noted the defendants in default and having heard nothing further from the defendants since the plaintiffs consent to the setting aside of the noting in default was withdrawn on July 18, 2008, the plaintiffs move for default judgment against all of the defendants. Based on the evidence before me, and subject to the plaintiffs providing further evidence as set out below, the plaintiffs are entitled to judgment against all the defendants as follows…

[ 26 ] On October 18, 2008, Mr. Matlofsky appeared before Justice Roberts and provided the further evidence referred to in the endorsement of September 2. Based on that evidence, judgment was issued against all of the defendants in the amount of $487,018.03.

[ 27 ] Mr. Matlofsky had not only not warned McLennan of his intention to move for judgment, he never subsequently advised him that judgment had been granted. He kept McLennan in the dark, notwithstanding that on September 17, 2008 he received a letter from him advising that the motion to set aside the noting in default would be heard on November 23, 2008. The motion did not proceed on November 23 because the other defendants were also seeking to set aside default proceedings against them and efforts were being made to arrange one date for all of the motions. On December 15, counsel for the other defendants examined the court file, discovered what had happened on September 2 and October 18, and notified Mr. McLennan.

B. Discussion

[ 28 ] Rule19.01 provides that “where a defendant fails to deliver a statement of defence within the prescribed time, the plaintiff may…require the registrar to note the defendant in default”. Being noted in default has significant consequences. A defendant who has been noted in default “is not entitled to notice of any step in the action and need not be served with any document in the action…” (subrule 19.02(3)), and “where a defendant has been noted in default, the plaintiff may move before a judge for judgment … on the statement of claim….” (subrule 19.05(1)).

[ 29 ] The court has power to set aside default proceeding. Subrule 19.03(1) provides that “the noting of default may be set aside by the court on such terms as are just.” And subrules 19.08(2) and (3), which are invoked by the defendant McLennan here, provide that “a judgment against a defendant who has been noted in default that is obtained on a motion for judgment on the statement of claim under Rule 19.05 …may be set aside or varied by a judge on such terms as are just”, and where that occurs “the court or judge may also set aside the noting in default under Rule 19.03.”

[ 30 ] Generally speaking, a defendant seeking to set aside a default judgment must establish that the motion to set aside was brought as soon as possible after the defendant learned of the judgment, that the circumstances of the default give rise to a plausible explanation for the default, and that the facts establish at least an arguable defence: Leblanc v. York Catholic District School Board , 2002 37923 (ON SC) , [2002] O.J. No. 4641 (Ont. S.C.J.). On this motion, Mr. Matlofsky placed considerable reliance on the third of those criteria. In his submission “there is no possible defence on the merits”.

[ 31 ] The authorities make it clear, however, that a defendant seeking to set aside a default judgment will not always have to show that there is a good defence. The distinction between cases in which such a requirement will be imposed and those in which it will not was explained by Borins J. (as he then was) in Royal Trust Corp. of Canada v. Dunn , 1991 7227 (ON SC) , [1991] O.J. No. 2231 (Gen. Div.), at paragraph 19 :

It is well established that there are two situations in which the court is able to set aside a default judgment… The first is when a defendant is able to establish that the judgment was irregularly obtained. If the defendant can establish that correct procedures have not been followed either in obtaining the judgment or in relation to some step taken by the plaintiff in the commencement of the proceedings, such as in failing to serve the statement of claim in a proper manner, then normally the defendant can have the judgment set aside as of right without the requirement of establishing a defence to the plaintiff's claim. The second is when the judgment has been regularly obtained and where the defendant asks the court to exercise its discretion to set aside the default judgment and to permit him or her to defend the claim. It is in the second situation that the defendant is required to satisfy a number of conditions, including establishing a defence to the action on the merits, before the court will exercise its discretion in the defendant's favour, and then usually on the imposition of terms, such as payment into court of the amount claimed and the costs thrown away.

[emphasis added]

[ 32 ] In my view, the situation before the court is in the first category described by Justice Borins: it is one in which the judgment was irregularly obtained. I say that for two reasons. First, the notation of default was requisitioned by the plaintiffs at a time when the defendant was not yet in default. Second, the notation of default was made notwithstanding that within the time prescribed for delivery of a defence Mr. McLennan had served not only a notice of intent to defend but also a notice of motion to strike the statement of claim or to stay the action.

[ 33 ] With respect to the latter circumstance, this case bears a striking similarity to Leblanc v. York Catholic District School Board , supra . In that case the plaintiff was a schoolteacher who had been dismissed from his employment. When his efforts to resolve his grievances proved unsuccessful, he commenced a lawsuit against his employer, his union and the Labour Relations Board. After being served with the statement of claim, each of the defendants filed a notice of intention to defend, and shortly thereafter each brought a motion to strike the statement of claim. Before the motions to strike could be heard, however, and without notice to the defendants, the plaintiff had them noted in default on the basis that they had failed to deliver statements of defence. The plaintiff then moved ex parte for judgment on the statement of claim. Judgment was granted.

[ 34 ] As soon as the defendants learned what had happened, they moved before Regional Senior Justice Blair (as he then was) to set aside both the judgment and the noting in default. The plaintiff’s position was that noting the defendants in default was proper because they had not delivered statements of defence. He submitted that bringing a motion to strike the statement of claim did not constitute a defence. Blair R.S.J. disagreed. He stated, at paragraph 22:

It is true that the defendants had not delivered their statements of defence, but it is not true that they had not defended the action. It is well accepted that the bringing of a motion before the Court to obtain a stay or the dismissal of an action is recognized as a step in the defence of the proceeding : see Cafissi v. Vana 1973 534 (ON SC) , [1973] 1 O.R. 654 , at p. 655 (Superior Court) .

[emphasis added]

[ 35 ] As noted above, generally speaking a party seeking to set aside a default judgment must establish that the motion to set aside was brought as soon as possible after the party learned of the judgment, that the circumstances of the default give rise to a plausible explanation for the default, and that the facts establish at least an arguable defence. Justice Blair was satisfied that the defendants in Leblanc had established all three of those criteria, but he made it clear that having regard to the circumstances under which the default judgment was obtained it was not necessary for the defendants to establish an arguable defence. He stated, at paragraph 26:

[ It] is…well established that if a plaintiff notes a defendant in default and obtains a default judgment while there is a motion before the Court to strike a statement of claim, the defendant has the right to set aside the default and the judgment without demonstrating a good defence on the merits: see Cafissi v. Vana , supra , at p. 655.

[ 36 ] Accordingly, both the default judgment and the noting of default were set aside.

[ 37 ] Apart from the fact that the time prescribed for delivery of a statement of defence had not yet expired when Mr. Matlofsky had Mr. McLennan noted in default, the material circumstances of this case are indistinguishable from those in Leblanc . Unless it can be said that Mr. McLennan failed to move expeditiously to set aside the notation of default, I can see no basis for coming to a different result here.

[ 38 ] The fact that he had been noted in default on December 10, 2007 did not come to Mr. McLennan’s attention until March 27, 2008. That is not surprising in that Mr. Matlofsky never warned him in advance and never notified him after. Not only did Mr. Matlofsky not reveal the noting in default, he permitted Mr. McLennan to proceed with a motion to strike the statement of claim and he filed material responding to that motion. Mr. McLennan only discovered what had happened when he received the letter from the Law Society demanding an explanation for his failure to defend the action. Upon receipt of that letter, he immediately served Mr. Matlofsky with notice of a set-aside motion. Mr. Matlofsky ought to have promptly advised Mr. McLennan that the motion would not be opposed. He did not do so. Nor did he reply in a timely fashion to letters faxed to him on May 5 and May 12 seeking consent to setting aside the notation of default. It was only on May 15, some seven weeks after notice of the set-aside motion was served, that Mr. Matlofsky finally agreed to consent.

[ 39 ] I acknowledge that Mr. McLennan could have moved more expeditiously at that point to have a consent order entered so that the impediment to proceeding with the motion to strike would be removed. However, Mr. Matlofsky had not placed conditions on the plaintiffs’ consent, and at no time between May 15 and July 18 did he communicate any concern about delay, notwithstanding that he and Mr. McLennan were dealing with each other in relation to other ongoing disputes.

[ 40 ] On July 18, without prior discussion, Mr. Matlofsky sent Mr. McLennan the letter withdrawing the consent. This reversal of position put Mr. McLennan back where he was on March 27, namely with a need to schedule a set-aside motion. Again, he could have acted more quickly, but he had already made it clear that he was going to seek to have the noting in default set aside – indeed he had already brought one motion for that relief.

[ 41 ] Further, notwithstanding that he and Mr. McLennan were in communication in relation to other matters after July 18, including the scheduling of a cross-examination of Mr. Charendoff on his motion to tax Mr. McLennan’s accounts, Mr. Matlofsky never gave any indication that he was going to move for judgment. That is significant because whether Mr. McLennan’s failure to immediately schedule a second set-aside motion should disentitle him to relief must be considered in the context of what it is reasonable for lawyers engaged in litigation to expect of each other.

[ 42 ] In the absence of circumstances indicating that no defence will be forthcoming, moving without warning to have a defendant noted in default immediately after the expiration of the time prescribed for delivery of a defence will generally be regarded as sharp practice: Abrams and McGuiness, Canadian Civil Procedure Law , section 8.4; Xpress View Inc. v. Daco Manufacturing Ltd , [2002] O.J. No. 4078, at paragraphs 15-19 (Sup. Ct.) ; Garten v. Kruk , 2009 58071 (ON SCDC) , [2009] O.J. No. 4438, at paragraph 29 (Div. Ct.). Moving ex parte and without warning for default judgment while engaged in ongoing communication with a defendant about other matters should be similarly characterized. It is unnecessary to the determination of this motion to make findings of sharp practice. It is sufficient to say that it was reasonable for Mr. McLennan to expect that if the plaintiffs intended to institute default proceedings, that intention would be communicated to him before those proceedings were brought.

[ 43 ] I am satisfied that when all of the circumstances are considered, the somewhat pedestrian approach Mr. McLennan took to re-scheduling his motion to set aside the noting in default should not disentitle him to relief against the default judgment that was, for the reasons I have explained, irregularly obtained.

C. Disposition

[ 44 ] The default judgment against the defendants. McLennan and 124155 Canada Inc. is set aside, as is the notation of default as against McLennan.

[ 45 ] If the parties are unable to agree as to the costs of this motion, the moving parties may file written submissions together with a Costs Outline within 30 days of the release of these reasons. The responding parties may file responding submissions within 15 days thereafter. The submissions of either party shall not exceed two pages, double-spaced, exclusive of the Costs Outline

MacDonnell, J.

Date: October 1, 2012

[1] The requisition made no reference to the defendant 124155 Canada Inc. Until it was drawn to their attention at the hearing of this motion, both Mr. Matlofsky and Mr. McLennan had assumed that both defendants had been noted in default. Mr. Matlofsky conceded that as there was no evidence that 124155 had ever been noted in default, the default judgment granted against it could not stand.