SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL LIST

RE: Peoples Trust Company, Applicant

AND:

Rose of Sharon (Ontario) Retirement Community, Respondent

BEFORE: D. M. Brown J.

COUNSEL:
C. Prophet and C. Stanek, for the Receiver, Deloitte & Touche Inc.
R. Jaipargas, for Trisura Guarantee Insurance Company

HEARD: December 21, 2012

REASONS FOR DECISION (corrected)

I. Motion to lift stay in a receivership in order to set down for trial a construction lien action

[1] On September 27, 2011, C. Campbell J. appointed Deloitte & Touche Inc. receiver and manager of all the assets, undertakings and properties of Rose of Sharon (Ontario) Retirement Community. Paragraph 8 of the Appointment Order contained the standard clause staying proceedings against the debtor.

[2] Rose of Sharon owned a long-term care condominium located on Maplewood Avenue, Toronto. Prior to the appointment of the Receiver construction lien litigation had broken out over the condominium project and the general contractor, Mikal-Calladan Construction Inc., had initiated lien proceedings. On January 30, 2012, Trisura Guarantee Insurance Company obtained an assignment of Mikal-Calladan’s lien. On November 26, 2012, Trisura obtained an order to continue the construction lien action. As required by the terms of section 37 of the Construction Lien Act , R.S.O. 1990, c. C.30 , Trisura must set the construction lien action down for trial by December 31, 2012, failing which its lien will expire.

[3] Trisura therefore moved for an order lifting the stay of proceedings to allow it to pursue the construction lien action so that it can set the action down for trial.

[4] The Receiver did not oppose the lifting of the stay, but it sought certain terms for the order. Trisura has agreed to all the terms, but one – whether as a condition of lifting the stay this Court should set aside a default judgment granted against Rose of Sharon some two days after the Appointment Order was made and the earlier noting in default of Rose of Sharon.

II. Governing legal principles governing the lifting of stays

[5] On a motion to lift a stay of proceedings in a receivership the moving party bears the onus of convincing the court that the relief should be granted, and in considering such a request the court should look at the totality of the circumstances and the relative prejudice to both sides. [1] The parties agreed that the court may find guidance in the jurisprudence which has developed around requests to lift stays imposed by the Bankruptcy and Insolvency Act . Section 69.4(1) of the BIA provides that a court may declare that the statutory stays no longer operate, “subject to any qualifications that the court considers proper”, where the court is satisfied that the creditor is likely to be materially prejudiced by the continued operation of the stays or that it is equitable on other grounds to make such a declaration. In Re Ma [2] the Court of Appeal set out the basic considerations on a request to lift a stay under BIA s. 69.4:

Under s. 69.4 the court may make a declaration lifting the automatic stay if it is satisfied (a) that the creditor is "likely to be materially prejudiced by [its] continued operation" or (b) "that it is equitable on other grounds to make such a declaration." The approach to be taken on s. 69.4 application was considered by Adams J. in Re Francisco (1995), 32 C.B.R. (3d) 29 at 29-30 (Ont. Gen. Div.), a decision affirmed by this court (1996), 40 C.B.R. (3d) 77 (Ont. C.A.):

In considering an application for leave, the function of a bankruptcy court is not to inquire into the merits of the action sought to be commenced or continued. Instead, the role is one of ensuring that sound reasons, consistent with the scheme of the Bankruptcy and Insolvency Act , R.S.C. 1985, c. B-3, exist for relieving against the otherwise automatic stay of proceedings.

As this passage makes clear, lifting the automatic stay is far from a routine matter. There is an onus on the applicant to establish a basis for the order within the meaning of s. 69.4. As stated in Re Francisco , the role of the court is to ensure that there are "sound reasons, consistent with the scheme of the Bankruptcy and Insolvency Act " to relieve against the automatic stay. While the test is not whether there is a prima facie case, that does not, in our view, preclude any consideration of the merits of the proposed action where relevant to the issue of whether there are "sound reasons" for lifting the stay. For example, if it were apparent that the proposed action had little prospect of success, it would be difficult to find that there were sound reasons for lifting the stay.

III. The basic chronology

[6] Mikal-Calladan preserved a Claim for Lien on November 19, 2010 against title to the Project. It perfected its lien by commencing the construction lien action – CV-10-417426 – on December 31, 2010. On July 21, 2011, Peoples Trust served a statement of defence in the Lien Action. Rose of Sharon was noted in default in the Lien Action; exactly when, the materials did not disclose.

[7] On August 31, 2011, with the consent of Peoples Trust, the parties agreed to refer the Lien Action to a construction lien master in Toronto for a trial. MacDonald J. made a standard Reference Order on that day which provided that “the Master determine all questions arising in this action on the reference”.

[8] Then, less than a month later, at the suit of Peoples Trust, the Appointment Order was made.

[9] On September 12, 2011, before the Appointment Order was made, Mikal-Calladan had requisitioned default judgment against Rose of Sharon. On September 29, two days after the Appointment Order was made, the Registrar signed default judgment against Rose of Sharon for $4,195,768.64, plus costs of $1,350.00 (the “Default Judgment”).

[10] As mentioned, earlier this year Trisura took an assignment of Mikal-Calladan’s Lien Claim and obtained an order to continue the Lien Action about a month ago.

[11] With the December 31 deadline looming to set down the Lien Action or face the expiry of its lien, on November 7, 2012 Trisura’s counsel wrote to the Receiver’s requesting that the Receiver consent to a lifting of the stay so it could set the Lien Action down for trial. Trisura’s counsel indicated that “the main issue in the lien action relates to the priority of the lien over the People’s Trust mortgage”.

[12] Receiver’s counsel responded on November 22, 2012 advising that the Receiver was prepared to consent to lifting the stay on the following terms:

Condition 1: Trisura obtained an order to continue in the Lien Action;

Condition 2: Trisura agreed to set aside the noting in default of Rose of Sharon and the Default Judgment so that the Receiver could defend the Lien Action;

Condition 3: Issues of liability, timeliness and quantum in the Lien Action would be determined in a Reference before a Master; and,

Condition 4: The issue of the priorities of the construction lien vis-à-vis any other encumbrance would be determined by a judge of the Commercial List.

[13] Mr. Edouard Chassé, a claims adjuster retained by Trisura, in his affidavit stated that Trisura had obtained an order to continue and it agreed to Conditions 3 and 4. Trisura opposed Condition 2 “as the Receiver has had notice of the default for 14 months and has taken no steps” to set aside the noting in default and default judgment.

IV. Analysis

[14] There is no doubt that if the stay is not lifted, Trisura would be prejudiced materially by losing its ability to advance its lien claim. Section 37(1) of the Construction Lien Act provides that a perfected lien, such as that assigned to Trisura, expires immediately after the second anniversary of the commencement of the lien action unless either (i) an order is made for the trial of an action in which the lien may be enforced or (ii) an action in which the lien may be enforced is set down for trial. December 31, 2012 is the second anniversary of the commencement of the Lien Action, so unless the stay is lifted, Trisura’s lien claim will expire. As mentioned, the Receiver has consented to the lifting of the stay, so the remaining dispute centres only around Condition 2 – the Receiver’s requirement that the noting of default and Default Judgment against Rose be set aside.

[15] Trisura advanced two arguments why no setting aside should occur. First, Trisura argued that because the August 31, 2011 Reference Order of MacDonald J. stipulated that “the Master determine all questions arising in this action on the reference and all questions arising under the Construction Lien Act ”, it was not open to the court supervising the receivership proceedings to set aside a noting of default which had occurred in the Lien Action.

[16] I disagree, for two reasons. First, the Default Judgment was made two days after the Appointment Order. No doubt that occurred because the papers requisitioning the Default Judgment were moving through the court’s administrative office and the Registrar was unaware of the Appointment Order. Nonetheless, given the stay of proceedings ordered in the Appointment Order, the Default Judgment contravened the Appointment Order and therefore was of no force or effect.

[17] Second, Trisura’s submission ignored what occurred less than one month after MacDonald J. made his Reference Order – this receivership came about. As a result of the Appointment Order, the court supervising the receivership considers all issues relating to or touching upon the receivership and therefore is the proper court to determine whether, as a condition of lifting a stay of proceedings, certain relief should be granted to the receiver as part of the process of balancing the respective interests at stake on the lift-stay motion.

[18] Which brings me to the second argument made by Trisura: it contended that the appropriate test for considering whether to set aside a noting in default in a construction lien action is that set out in the Construction Lien Act and the related jurisprudence and, in the circumstances of this case, the Receiver could not meet that test. Section 54(3) of the CLA provides that where a defendant has been noted in default, it shall not be permitted to contest the claim “except with leave of the court, to be given only where the court is satisfied that there is evidence to support a defence”. Section 67(3) of the CLA states that “except where inconsistent with this Act…the Courts of Justice Act and the rules of court apply to pleadings and proceedings under this Act.”

[19] In M.J. Dixon Construction Ltd. v. Hakim Optical Laboratory Ltd. , Master Polika held that Rule 19.03(1) of the Rules of Civil Procedure dealing with the setting aside of notings in default was inconsistent with CLA s. 54(3) because it was less stringent than the test under the CLA by reason of granting the court a discretion to set aside a noting of default on such terms as were just. Master Polika stated that the sole test a party moving to set aside the noting of default in a construction lien action needed to meet was that set out in CLA s. 54(3) – i.e. to satisfy the court that there existed evidence to support a defence. [3] In A1 Equipment Rental Ltd. v. Borkowski Lederer J. stated that a party moving to set aside a noting in default under the CLA must not only demonstrate that evidence existed to support a defence, it also had to move promptly to set aside the noting in default. [4]

[20] Whether, when a lien claimant seeks leave of the court supervising a receivership to lift the stay of proceedings and the receiver seeks a condition that a noting of default be set aside, the court must apply the test under CLA s. 54(3) or may proceed on a less stringent basis as part of its discretion in lifting the stay, is a question I need not determine for the simple reason that on the facts of this case the Receiver meets the test under the CLA .

[21] Trisura submitted that the Receiver cannot now attempt to impose a condition setting aside the noting of default when over a year has passed since that event. The evidence does not support that contention. First, just over a week after the making of the Appointment Order, counsel for Mikal-Calladan wrote to Receiver’s counsel advising of the Default Judgment and stating:

Under the circumstances, we will not take any steps to enforce our client’s judgment in the absence of obtaining the necessary leave from the Court.

In light of that position taken by the lien claimant, it is not surprising that the Receiver took no immediate steps to set aside the Default Judgment or the noting in default.

[22] In its First Report dated December 12, 2011 the Receiver reported:

While there may be setoffs against Mikail’s claim that may be asserted by the Receiver, pending disposition of the Property, the Receiver does not intend to take any action in connection with any of the above-noted lien claims at this time.

Again, this constitutes evidence of a reasonable explanation by the Receiver about why it did not take steps at the time in the Lien Action.

[23] On February 29, 2012, Trisura advised the Receiver of the assignment of the Lien Claim, but then took no further steps to move the Lien Action along until October 24, 2012 when it informed the Receiver that it wished to obtain a trial date. Further emails between counsel ultimately resulted in the Receiver’s November 22, 2012 letter setting out the terms for lifting the stay of proceedings. In those circumstances, I see no argument that the Receiver failed to take steps promptly to set aside the noting in default once it became aware of Trisura’s intention to proceed with the Lien Action. I also would note, by way of chronology, that on September 14, 2012, a month before Trisura approached the Receiver about further steps in the Lien Action, the Receiver had commenced a claim against Trisura under the performance bond for the Project.

[24] As to whether the Receiver has filed evidence to support a defence, it has. Although the Receiver has not filed a draft Statement of Defence, the Receiver provided Trisura with ample details of its defence through its July 10, 2012 letter to Trisura’s counsel, in particular the sections entitled “Set-Offs” and “Deficiencies”, as well as in portions of its Statement of Claim in the performance bond action, specifically paragraphs 42 and 62 of the claim.

[25] In balancing the interests of Trisura and the Receiver on this motion to lift the stay of proceedings, I conclude that it is fair and appropriate to require, as a term of lifting the stay, that both the noting of default of Rose of Sharon and the Default Judgment be set aside, and that the Receiver be permitted to file a Statement of Defence in the Lien Action within 20 days.

V. Summary and costs

[26] By way of summary, I grant the motion of Trisura to lift the stay of proceedings contained in the Appointment Order to allow it to pursue the Lien Action, including allowing Trisura to set the Lien Action down for trial. Out of an abundance of caution, given the proximity of the December 31 deadline, I also order the trial of the Lien Action. As conditions for lifting the stay I order as follows:

(i) the noting in default of Rose of Sharon and the Default Judgment against it are set aside so that the Receiver can defend the Lien Action;

(ii) the Receiver may file a Statement of Defence in the Lien Action within 20 days;

(iii) the issues of liability, timeliness and quantum in the Lien Action shall be determined in a Reference before a Master; and,

(iv) the issue of the priorities of the construction lien vis-à-vis any other encumbrance shall be determined by a judge of the Commercial List in these receivership proceedings.

As to costs, the conditions sought by the Receiver in its November 22, 2012 letter were reasonable. There really was no need for a contested motion. Accordingly, I grant the Receiver its costs of this motion fixed at $4,000.00 payable by Trisura within 20 days of the date of this Order. I am available at a 9:30 appointment tomorrow, Friday, December 28, 2012, to issue this order, if required.

D. M. Brown J.

Date : December 27, 2012

[1] Ford Credit Canada Ltd. v. Welcome Ford Sales Ltd. , 2010 ABQB 199 , paras. 13 and 14.

[2] (2001), 24 C.B.R. (4 th ) 68 (Ont. C.A.), paras. 2 and 3 .

[3] (2009), 79 C.L.R. (3d) 144 (S.C.J.), para. 24 .

[4] (2008), 70 C.L.R. (3d) 274 (S.C.J.), para. 51 .