SUPERIOR COURT OF JUSTICE - ONTARIO

COURT FILE NO.: C-162-12

DATE: 2013-02-20

RE: A.J.B, Plaintiff

AND:

S.J.D., V.A.C. and N.H., Defendants

BEFORE: The Honourable Mr. Justice D. A. BROAD

COUNSEL:
Loretta P. Merritt, and J. Ginsberg, for the Plaintiff/Responding Party

Jarvis J. Postnikoff (as agent for Gehl & Gehl), for the Defendant/ Moving Party V.A.C.

Stephen Good, for the Defendant/ Moving Party N.H. - V.A.C.

HEARD: February 14, 2013

ENDORSEMENT

Background and Nature of the Motions and the Action

[1] The Defendants V.A.C.and N.H. – V.A.C. have moved to set aside the noting in default entered against them on April 18 and May 18, 2012 respectively.

[2] The action was commenced by Notice of Action issued on December 22, 2011, with the Statement of Claim having been filed on January 18, 2012. S.J.D. and V.A.C. were the original named Defendants. S.J.D. is the Plaintiff’s mother and V.A.C. is her step-father. The Plaintiff claims damages in the sum of $2.5 million in reference to allegations that V.A.C. repeatedly sexually abused her between the ages of 5 and 15. The Plaintiff was 43 years of age at the time of commencement of the action. The Statement of Claim alleges that S.J.D. breached a fiduciary duty to the Plaintiff by enabling the abuse and on various other grounds. S.J.D. has defended the action and did not participate in argument of the motions.

Issue

[3] The issue on the Motions can be briefly stated – should the court exercise its discretion to set aside the noting in default of the moving defendants?

Facts

[4] After issuance of the Notice of Action, and prior to the filing of the Statement of Claim, the Plaintiff served a Motion Record for a Mareva injunction against V.A.C., on the basis that he was dissipating assets with a view to defeating the Plaintiff’s claim. V.A.C. responded to the Motion and it was argued before Justice Gordon on March 9, 2012, at which time he granted an injunction restraining the alienation of V.A.C.’s properties and assets up to an aggregate value of $500,000.00, and ordered various related relief. Justice Gordon ordered V.A.C. to pay costs fixed in the sum of $15,000.00 within 30 days. He also ordered that the Statement of Claim may be amended to add V.A.C.’s current spouse N.H. – V.A.C. as a defendant and to add a claim against her based upon allegations of fraudulent conveyances of assets and property to her by V.A.C.. No allegations were made against N.H. in reference to the historical sexual abuse. The Amended Statement of Claim was served on V.A.C. and N.H. – V.A.C. on April 12, 2012.

[5] V.A.C. was represented by a lawyer Aaron Lundrigan on the Mareva injuction application, and following service of the amended Statement of Claim N.H. retained Stephen Good to represent her.

[7] On March 28, 2012 Mr. Merritt wrote to Mr. Lundrigan stating, amongst other things, “please serve your Statement of Defence on or before April 17, 2012.” The consequences of a failure to serve a Statement of Defence by that date were not stated, and in particular, there was no warning given that a failure to deliver a Statement of Defence by the stated date would result in V.A.C. being noted in default. When no Statement of Defence was delivered, Plaintiff’s counsel noted V.A.C. in default on April 18, 2012. It appears from the record that Mr. Lundrigan was advised verbally in early May of the noting in default. This was confirmed by letter dated June 4, 2012 from the lawyers for the Plaintiff, noting that it was their expectation that any motion to reverse the noting in default would be made promptly.

[8] Mr. Good wrote by e-mail to Ms. Merritt to advise that he had been retained by N.H.. In the e-mail he enquired as to when the Amended Statement of Claim was served on his client. It appears that on May 3, 2012 Mr. Good spoke by telephone with Daniella Pacheco, an associate of Ms. Merritt. Ms. Pacheco followed up with an undated letter transmitted on that date, stating in part, that “as agreed, we will provide N.H. with an indulgence with respect to the filing of a Statement of Defence for another two (2) weeks. Should N.H. fail to file a Notice of Intent to Defend or a Statement of Defence by that date we will proceed with noting her in default of these proceedings.”

[9] It appears that on or about June 6, 2012 Mr. Good attempted to file his Statement of Defence, having evidently served it on the lawyers for the Plaintiff, but was unable to do so, as his client had been noted in default. Mr. Good wrote to Mr. Merritt, as appears from the responding letter of Ms. Merritt of June 12, 2012, wherein she informed him that his client had been noted in default. A further exchange of e-mails between Ms. Merritt and Mr. Good ensued, in which Mr. Good requested Ms. Merritt to consent to setting aside the noting in default, to which she responded that she would not seek those instructions until Mr. Good provided an explanation of the ground upon which he intended to rely in his motion for that relief. An exchange of e-mails between Mr. Good and Ms. Merritt took place July 21 and 25, 2012. Mr. Good advised that he had “submitted an ultimatum” to Mr. Lundrigan, and advised that if he heard nothing from Mr. Lundrigan by July 27, 2012, he would approach Ms. Merritt about “making a deal to protect what assets I can for my client and her son.” Ms Meritt’s response was that “we are not inclined to consent at this point but will wait to see what happens on July 27th.”

[10] N.H. deposed in her Affidavit that she authorized Mr. Good to enter into discussions with Mr. Lundrigan which disclosed that Mr. Lundrigan was addressing the issues of V.A.C.’s financial statements ordered to be produced by Justice Gordon, his defence and possible settlement discussions with Plaintiff’s counsel. She deposed further that Mr. Good advised that she should proceed with filing a defence, but should also take heed of developments coming out of Mr. Lundrigan’s office since they could impact her defence and could possibly lead to a resolution of the proceeding. She went on to depose that, after initial discussions between Messrs. Good and Lundrigan, Mr. Lundrigan ceased to respond to phone calls, e-mails or faxes. N.H. stated further that she believed that her being noted in default was directly related to Mr. Lundrigan’s inaction on the file and that Mr. Good’s good faith reliance on Mr. Lundrigan’s efforts caused a delay which prevented her defence from being filed in a timely fashion.

[11] It is noted that the statements in N.H.’s affidavit, summarized above, were not challenged in the affidavit of Ms. Pacheco filed in response to the motions, and N.H. was not cross-examined on her affidavit.

[12] Mr. Gehl deposes in his affidavit sworn September 27, 2012 that he had “recently” been informed by Mr. Good that V.A.C. and N.H. had been noted in default. Although the date that he learned of the noting in default is not given, from the context, it must have been prior to August 27, 2012 when Mr. Postnikoff, who had been retained by Mr. Gehl to bring the motion to set aside the noting in default of V.A.C., initiated contact with Plaintiff’s counsel. On that date Mr. Postnikoff wrote to Ms. Pacheco requesting her advice as to whether she would consent to setting aside the noting in default or whether a motion would be necessary.

[13] As no consent to setting aside the noting in default was forthcoming Mr. Postnikoff brought his motion on behalf of V.A.C. and on October 11, 2012 Mr. Good brought his corresponding motion on behalf of N.H..

Discussion

(i) Legal Principles

[14] The parties are generally agreed on the legal principles which govern motions of this nature. They differ on the application of those principles to the facts of this case.

[15] The starting point is Rule 19 of the Rules of Civil Procedure which simply provides that the noting in default of a defendant may be set aside by the Court on such terms as are just.

[16] The factors to be considered by the court in the exercise of its discretion were usefully summarized by Justice Koke in the recent case of Turner’s Garage v Schell [2011] O.J. No 5759 (S.C.J.) as follows, at para. 30:

a) whether there is believable evidence that the defendant had an intention to defend in the time permitted for responding to a statement of claim or counterclaim; b) whether there is evidence from the defendant explaining what prevented the defendant from responding to the statement of claim in a timely fashion; c) whether the motion has been brought with reasonable dispatch; and d) whether there is any prejudice that would be caused to the party relying upon the noting in default caused by setting it aside.

[17] Justice Koke went on to confirm, citing the cases of Metropolitan Toronto Condominium Corp. No. 706 v. Bardmore Developments Ltd. (1991), 1991 7095 (ON CA), 3 O.R. (3d) 278 (Ont. C.A.), at para. 1, and Nobosoft Corp. v. No Borders Inc. (2007), 2007 ONCA 444, 225 O.A.C. 36 (Ont. C.A.); 43 C.P.C. (6th) 36 at paras. 3 & 7, that the Court is to consider ‘the full context and factual matrix” and factors such as the behaviour of the parties, the length of the defendant's delay in seeking to respond to the claim, the reasons for the delay and the complexity and value of the claim.

[18] Ordinarily, on a motion to set aside a noting in default, as contrasted with a motion to set aside a default judgment, a defendant is not required to provide evidence as to the merits of any potential defence, except in “exceptional circumstances” (see Benelo v. Barzakay, [2003] O.J. No. 602 (Div. Ct.), at para. 22, and Metropolitan Toronto Condominium Corporation No. 706 v. Bardmore Development Ltd. 1991 7095 (ON CA), [1991] O.J. No. 717 (C.A.) at paras. 6-7).

(ii) Intention to Defend

[19] Ms. Merritt argues that V.A.C. never manifested an intention to defend the action, but rather engaged in deliberate obstructive conduct, “holding the plaintiff at bay”, asking for evidence, promising to consider settlement, not responding to correspondence for almost two months, all the while dissipating or attempting to dissipate his assets.

[21] The Motion Record filed by Ms. Lundrigan on behalf of V.A.C. in response to the Mareva injunction motion was appended to Mr. Gehl’s affidavit sworn November 23, 2012 filed in reply to Ms. Pacheco’s affidavit. It included the affidavit of V.A.C. in which he denied every allegation of abuse contained in the Plaintiff’s affidavit filed in support of the motion, and in the notice of action. Moreover the initial letter of Mr. Lundrigan of November 9, 2011, referred to above, stated that his firm had been retained by Mr., V.A.C. to respond to the allegations set forth in Ms. Merritt’s correspondence initially advancing the plaintiff’s claim. In my view, the statement in the letter of Mr. Lundrigan’s belief that a resolution may be possible is not evidence of the absence of an intention to defend an action, if necessary.

[22] Moreover, Mr. Lundrigan’s subsequent inaction on the file should not be interpreted, in the circumstances, as evidencing an abandonment by V.A.C. of an intention to defend the action.

[23] As directed by the jurisprudence, the court is to look at the full context and factual matrix, including the behaviour of the parties, and the complexity and value of the claim.

[24] It appears that the noting in default took place during a period when the lawyers for the plaintiff were actively engaged in telephone conversations and exchanges of correspondence with Mr. Lundrigan dealing with the implementation and implications of Justice Gordon’s order. Mr. Lundrigan wrote to Ms Pacheco as late at May 22, 2012 and Ms. Pacheco wrote to him as late as June 4, 2012, referring to “our various recent conversations”.

[25] Ms. Merritt’s letter dated March 28, 2012, requesting that Mr. Lundrigan serve his Statement of Defence by April 17, 2012, should be looked at in context. During the period prior to and after Ms. Merritt’s letter, the lawyers on both sides were engaged with each other on the issues arising from Justice Gordon’s order, which engagement continued after the noting in default. As indicated above, the letter did not contain an express warning that, in the event that the Statement of Defence was not served by the date mentioned, V.A.C. would be noted in default.

[26] In my view, in the context of an action advancing extremely serious allegations of what could be safely characterized as among the most morally reprehensible behaviour possible, claiming $2.5 million in damages, and in the context of an ongoing and active engagement of counsel, something more is required to evidence the abandonment of a previously expressed intention to respond to (which would include defending, if necessary) the claim, and denial of the allegations. This is particularly so where no warning was given by plaintiff’s counsel that a noting in default would immediately follow a failure to serve a Statement of Defence by a specified time. I am satisfied that, viewed in context, V.A.C. has satisfied the onus on him to show that he had a continuing intention to defend the action.

[27] With respect to N.H., I am also satisfied that she fully intended to defend the action. As indicated above, her affidavit evidence in this respect was not challenged nor cross-examined on, and her intention to defend was amply exemplified by the fact that her counsel Mr. Good prepared, served and attempted to file a Statement of Defence on her behalf before he learned that she had been noted in default.

[28] Ms. Merritt points to the attempts by V.A.C. to dissipate his assets and N.H.’s complicity in those attempts as evidencing their true intentions, rather than an intention to defend. I have not been provided with any reasons of Justice Gordon for his order, and therefore it is not clear that there has been any judicial finding that V.A.C. and N.H. did intend to dissipate or transfer assets in order to defeat the plaintiff. Moreover, even if there was such an intention, it would not preclude a coexistent intention to defend the action.

(ii) Reason for Not Defending on a Timely Basis

[29] The reason for Mr. Good not serving his Statement of Defence on behalf of N.H. is set forth in N.H.’s affidavit, as well as that of Sheila Good sworn February 7, 2013, who deposed that Mr. Good spoke to Ms. Pacheco who said that she would allow a “couple of weeks” for Mr. Good to file his defence. Obviously, Mr. Good was not alert to the implications of the subsequent letter from Ms. Pacheco in which she warned him that failure to file a defence within two weeks would result in his client being noted in default. In light of that warning, the plaintiff perhaps cannot be faulted for following through and noting N.H. in default. However, that does not mean that counsel for the plaintiff was justified in declining to consent to setting the noting in default of N.H. aside, or consenting to the motion to set it aside, once it was brought.

[30] The comments of Justice Janet M. Wilson in the case of Garten v. Kruk 2009 58071 (ON SCDC), [2009] 257 O.A.C. 59 (Div. Ct.) are instructive in this respect, where she stated at paragraphs 12 and 16:

12. The overriding principle [is] that the court should exercise its discretion to provide a just result for the party and that matters should be dealt with on their merits. To ignore this overriding principle [is] incorrect.

16 Motions to set aside a noting of default are generally granted in the usual case. The Courts should strive to grant reasonable accommodations and allow disputes to be resolved on their merits. Matters should not be determined based upon a technical default.

[31] Justice Wilson goes on to comment on the failure, in that case, of plaintiff’s counsel to warn counsel for the defendant, at paras. 26 to 29 as follows:

26 In my view, the principles enunciated by Nordheimer J. in Xpress View Inc. v. Daco Manufacturing Ltd. (2002), 36 C.C.E.L. (3d) 78 (Ont. S.C.J.) apply:

15. The costs thrown away were incurred as a result of the plaintiff taking advantage of a slip by the defendant's solicitors. This is a practice that is happening with altogether too much frequency. Indeed, this is the second time in a week that I have been faced with such a situation and it is one which I believe should stop. Counsel have obligations to deal with each other fairly and not to take advantage of missteps by opposing counsel. This requirement is reflected in the Rules of Professional Conduct, rule 14 of which, commentary 4, states, in part:

The lawyer should avoid sharp practice, and should not take advantage of or act without fair warning upon slips, irregularities or mistakes on the part of other lawyers not going to the merits or involving the sacrifice of the client's rights. (Emphasis added)

16. The requirement of integrity is also reflected in the case law. As Rose J. said more than 100 years ago in Re Backhouse v. Bright (1889), 13 P.R. 117 (Ont.H.C.J.):

To build up a client's case on slips of an opponent, is not the duty of a professional man.

27 The comments of Rose J. one hundred years later still apply, although the duty now applies to both men and women in the practice of law. 28 In the case before Nordheimer J., he noted that there was no follow-up letter or telephone call made to advise counsel that the defence was not received. He observes:

17. Plaintiff's counsel ought to have realized the potential for a slip or error and should, in my view, have had further contact with the defendant's solicitor before taking default steps.

[32] I hasten to note that it was not argued in this case that the action of counsel for the plaintiff constituted sharp practice, as was the finding in Garten v. Kruk where there was no communication at all of a deadline for delivery of a defence and no statement was made that a noting in default would result from a failure to do so. However, the quoted comments of Nordheimer J. in Xpress View Inc. v. Daco Manufacturing Ltd. would suggest that the better and expected practice, where plaintiff’s counsel knows that the defendant is represented by counsel, would be to consider the possibility of a slip and to contact defendant’s counsel by letter or telephone before proceeding with a noting in default.

[33] Given that there were ongoing communications between him and counsel for the plaintiff, it was reasonable for Mr. Good to expect that if counsel for the plaintiff intended to note his client in default, that intention would be clearly communicated to him before that step was taken. (See Charendoff v. McLennan, 2012 ONSC 4762 (S.C.J.) at para. 42).

[34] Certainly, when Mr. Good’s slip was made apparent by the service of N.H.’s Statement of Defence prior to any notification to him of the noting in default, and Mr. Good thereafter requested plaintiff’s counsel consent to the setting aside of the noting in default, such consent should have been forthcoming, as being consistent with the policy in favour of having issues determined on their merits, not on the basis of procedural slips.

[35] Regarding the failure of V.A.C. to defend on a timely basis, the explanation was set forth in Mr. Gehl’s affidavit, namely that Mr. Lundrigan advised that he was suffering from depression for which he is receiving treatment and that he was absent from the office for extended periods of time. Implicit in this is that Mr. Lundrigan failed, due to his own personal problems, or through neglect, to prepare and serve a Statement of Defence. I agree with Ms. Merritt that the evidence on this issue is thin and lacks substantiation.

[36] However, the evidence offered by Mr. Gehl on this issue must be viewed contextually. As indicated above, Ms. Merritt did not warn Mr. Lundrigan that failure to serve a Statement of Defence by the stipulated date would result in V.A.C. being noted in default. Nor did she contact Mr. Lundrigan when the deadline passed to advise him that the Statement of Defence was overdue, and that a noting in default was being contemplated. The principles arising from Xpress View, Garten v. Kruk and Charendoff, set forth above, would also apply, perhaps with more force, to the situation of Mr. Lundrigan and his client. One explanation for Mr. Lundrigan’s failure to deliver a Statement of Defence may very well be that he was not told that his client would be noted in default if he did not deliver a defence by a particular date.

(iv) Moving with Reasonable Dispatch

[37] On the question of whether V.A.C. and N.H. moved with the requisite dispatch to set aside the noting in default, Ms. Merritt argues that the defendant’s delays are lengthy enough to disentitle them to the relief they seek. She points to the cases of Turner’s Garage and 1316845 Ontario Ltd. v. Es-Lea Holdings Ltd. [2008] O.J. No. 1915 (S.C.J.) where the defendants moved six and one half months and fourteen months respectively after being noted in default.

[38] It is noted that in Turner’s Garage, Justice Koke, at para. 42, relied on the fact that the motion to set aside the noting in default was not brought until a motion for judgment was advanced, in holding that that did not meet the test to bring the motion expeditiously.

[39] In this case, counsel for both N.H. and V.A.C. each requested plaintiff’s counsel to consent to setting aside the noting in default after learning of it, within one month in N.H.’s case, and within approximately three and one-half moths in V.A.C.’s case (based on the advice to Mr. Lundrigan). V.A.C. launched his motion within approximately one and one-half months after being advised that the consent would not be forthcoming, and N.H. launched hers shortly thereafter.

[40] In my view, when viewed contextually in light of all of the circumstances, there was no “undue or deliberate delay” (to adopt the language used by Justices Armstrong and MacPherson, at paras. 20 and 38 respectively, in the case of Morgan v. Toronto (City) Police Services Board 2003 14993 (ON CA), 2003 169 O.A.C. 390 (C.A.)) on the part of the moving parties in bringing forward their motions. They each moved with reasonable dispatch, once they learned of the noting in default, to seek the consent of counsel for the plaintiff to set it aside, and then in bringing their motions when that consent was not forthcoming.

(v) Prejudice

[41] The plaintiff argues that she will be prejudiced if the notings in default are set aside, by losing an opportunity to secure an expeditious judgment. In my view, a delay in the plaintiff’s ability to proceed to judgment, by permitting the defendant to defend the action, does not constitute prejudice. There must ordinarily be some adverse change in the plaintiff’s legal or practical position in the intervening period between when the action should have been defended and when the motion is brought, to support the existence of prejudice. An example is where a key witness is no longer available to testify by reason of death or disability, or other key evidence for use at the trial is no longer available. The prospect of the defendants dissipating their assets prior to trial was dealt with by Justice Gordon’s order and does not militate against the granting of the orders.

(vi) Failure to Comply with Court Orders

[42] Ms. Merritt points to the failure of V.A.C. to comply in a timely way with the order of Justice Gordon to pay the proceeds of sale of one of the properties into court and to provide a statement of all of his assets, as well as his failure to pay the costs warded by Justice Gordon. She points to the case of Bartlett v Hordo [2004] as support for the proposition that a failure of the moving party to obey court orders may be taken into account by the judge hearing the motion in refusing to set aside a noting in default.

[43] The fact that the behaviour of the parties may be taken into account in the exercise of the court’s discretion on a motion to set aside a noting in default, is well established, as laid down in Bardmore. This may include, in appropriate circumstances, a failure of the moving party to obey court orders, including an order for the payment of costs. However, as exemplified by the decision of Justice Pepall in Bartlett, it is one factor, among several, which may be considered by the court as part of a contextual analysis. At para. 8 she referenced the moving parties’ failure to obey court orders and to pay costs in conjunction with other factors, such as a failure to explain the delay in defending in any meaningful way, the lack of complexity in the issues in the litigation, the lack of any bona fide intent to defend the action, and the failure to put forward satisfactory terms to secure the plaintiffs’ claims. Justice Molloy pointed to all of these factors in the exercise of her discretion to not give effect to her general inclination to give parties every opportunity to participate in proceedings.

[44] In this case, V.A.C. has now delivered a financial statement and has paid the proceeds of sale of the property (previously held in escrow by his lawyer) into court as ordered by Justice Gordon. It appears that, in light of the freeze on his assets in the Mareva injuction order, he has no ability to pay the costs ordered. V.A.C. is now prepared to have the plaintiff apply the funds received from Investors Group (evidently paid by it in error to counsel for the plaintiff) in the sum of $12,000.00 towards the costs award and to have the balance paid from the monies paid into court.

[45] In these circumstances, any failure by V.A.C. to obey the order of Justice Gordon is overridden by the policy expressed in many cases, including the Court of Appeal in Nobosoft, adopting the words of Molloy, J. in McNeill Electronics Ltd. v. American Sensors Electronics Inc. (1996), 5 C.P.C. (4th) 266 (Ont. Gen. Div.) reversed on other grounds (1998), 1998 17693 (ON CA), 108 O.A.C. 257 (C.A.), that “it is not in the interests of justice to strike pleadings or grant judgments based solely on technical defaults. Rather, the Court will always strive to see that issues between litigants are resolved on their merits whenever it can be done with fairness to the parties.”

Disposition

[46] On the basis of the foregoing it is ordered as follows:

(a) The noting in default of the Defendants V.A.C. and N.H. – V.A.C. are hereby set aside;

(b) The said defendants shall have twenty (20) days from the date hereof to serve and file their Statements of Defence;

(c) The Plaintiff shall be at liberty to apply the full amount currently held by her counsel, including accrued interest thereon, from the funds received from Investors Group, against the outstanding costs award pursuant to the Order of Justice Gordon dated March 9, 2012; and

(d) An amount required to satisfy the balance of the said costs award, including accrued interest thereon, shall be paid out of court from the monies paid into court pursuant to the said Order, after application of the said funds held by counsel for the Plaintiff.

[47] In light of my finding that the plaintiff should have consented to setting aside the noting in default, following receipt of the requests by counsel for V.A.C. and N.H., I would not order those defendants to pay the costs thrown away claimed by the plaintiff, consisting of preparation time and disbursements in relation to a motion for default judgment.

[48] I am inclined to order that there be no costs of the motions in the circumstances, however, if counsel wish to make submissions on costs they shall do so within 30 days hereof. Each party shall have a further 10 days to deliver reply submissions to the submissions of the opposing party.

D. A. Broad J.

Date: February 20, 2013