SUPERIOR COURT OF JUSTICE - ONTARIO

COURT FILE NO.: CV-12-000461437
DATE: 20130108

RE: Wells Fargo Bank, N.A., Plaintiff

– AND –

Best Theratronics Ltd., Defendant

BEFORE: Justice E.M. Morgan

COUNSEL:
A. Irvin Schein, for the Plaintiff

David Quayat, for the Defendant

HEARD: January 8, 2013

ENDORSEMENT

[1] The Defendant moves under Rule 21 for an Order striking out the Statement of Claim as disclosing no cause of action.

[2] The Defendant’s position is that the pleading is fashioned as a breach of contract claim under the law of Virginia, but there is no pleading as to how or why Virginia law applies to the claim against the Defendant.

[3] Mr. Quayat, on the Defendant’s behalf, argues that the Defendant is not identified in the pleading as a debtor of the Plaintiff’s but rather is identified as a debtor of the Plaintiff’s debtors in the United States. He further contends that a claim in contract law where privity of contract between the parties is so clearly lacking would be unrecognizable under Ontario law.

[4] The Plaintiff’s position is that the cause of action is grounded in Ontario law, and that Virginia law is only necessary in order to understand the underlying facts.

[5] Mr. Schein, on the Plaintiff’s behalf, explains that the pleading identifies the Plaintiff as having taken assignment of the debts owed by the Defendant to two parties in the United States. He further submits that although this assignment took place pursuant to Virginia law, the claim by the Plaintiff as assignee of the debts against the Defendant, a Canadian federally incorporated company located in Ontario, is brought in the ordinary course under Ontario law.

[6] As appropriate in a Rule 21 motion, both sides take the facts as pleaded in the Statement of Claim to be true.

[7] The pleading states that the Plaintiff is a U.S. federally chartered bank. It goes on to identify two other companies, Best Medical International Inc. (“BMI”) and Huestis Machine Corporation (“Huestis”) as, respectively, Virginia and Rhode Island corporations with which the Plaintiff entered into security agreements. According to paragraphs 4 and 5 of the Statement of Claim, BMI and Huestis each granted security to the Plaintiff (or, more accurately, to the Plaintiff’s predecessor in title whose rights the Plaintiff has inherited), which security included an assignment of accounts receivable.

[8] Paragraphs 6 and 7 of the Statement of Claim describe management agreements entered into between the Defendant and each of BMI and Huestis, pursuant to which the Defendant agreed to pay $150,000 per month to BMI and $100,000 per month to Huestis. In this way, the Defendant became an ongoing debtor to each of those companies.

[9] The Statement of Claim states in paragraph 8 that the credit facilities granted by the Plaintiff to BMI and Huestis have matured and that each have an indebtedness to the Plaintiff of several million dollars. This paragraph also relates that both companies have failed or refused to repay the amounts owing to the Plaintiff.

[10] The crucial part of the Statement of Claim is paragraph 9. It is rather densely written, but it is here, if anywhere, that the cause of action against the Defendant is found. Using what is admittedly difficult language, it generally sets out the fact that with the default of BMI and Huestis, the Plaintiff is entitled under the Uniform Commercial Code of the Commonwealth of Virgina to take assignment of any accounts of BMI and Huestis. It goes on to state that the Plaintiff is now entitled to issue notices and to make claims upon the account debtors of those two companies.

[11] The Defendant takes the pleading as setting out a claim in contract that lacks what Ontario law would require in the way of privity. Mr. Quayat describes it in his factum as “nothing more than a deficient form of a garnishment proceeding.” He submits that in the absence of an enforceable judgment against BMI and Huestis or some other legally cognizable nexus between the Plaintiff and the Defendant, there is no recognizable claim against the Defendant.

[12] For its part, the Plaintiff submits that if the Defendant fails to remit payment to the Plaintiff once it has been given notice of the assignment of BMI’s and Huestis’ receivables to the Plaintiff, the Plaintiff is entitled to sue the Defendant on an ordinary contract basis. Mr. Schein explains that Virginia’s Uniform Commercial Code authorizes the Plaintiff, as assignee, to stand in the shoes of BMI and Huestis and that the debt that the Defendant owes to those two corporations is now owed to the Plaintiff.

[13] In paragraphs 10 and 11 of the Statement of Claim, it is made clear that notice of the assignment and of the debt has been given to the Defendant in respect of both BMI and Huestis. In paragraph 14 it is set out that monthly management fees become due and payable by the Defendant to BMI and Huestis on the first of every month from September 1, 2012 onward, and that by virtue of the assignment of their receivables the Plaintiff is entitled to recover those amounts as they become due.

[14] The Defendant is correct in arguing that the Statement of Claim is drafted in a rather terse style and is susceptible to misapprehension with respect to the role of foreign law. The Defendant is also correct in contending that the Statement of Claim is rather sparse in its details with respect to the relevant security agreements and the rights and obligations thereunder.

[15] However, the Defendant is not correct in submitting that the Plaintiff has failed to plead a cause of action recognized in Ontario. In his factum and in oral argument, Mr. Schein has unpacked the all-important paragraph 9 of the Statement of Claim and it has become clear that the claim is simply an action on an ordinary debt that has been assigned to the Plaintiff.

[16] The monthly management fees from the Defendant to BMI and Huestis are presumably enforceable under Ontario law. It is those fees that are the subject of the claim and they present a cognizable cause of action. Virginia law is significant from a factual point of view as it is the reason that the Plaintiff is in a position to claim those fees; and, indeed, Virginia’s Uniform Commercial Code is specifically pleaded as providing the basis for the assignment of BMI’s and Huestis’ receivables to the Plaintiff.

[17] In other words, once unraveled the claim becomes little more than a commonplace commercial transaction in which receivables are assigned and the assignee becomes the plaintiff in collecting those receivables. This is not some exotic form of foreign contractual claim where there is no privity of contract, nor is it an attempt at obtaining some kind of pre-judgment garnishee order. It is, to use the words of the Court of Appeal in Goorbarry v Bank of Nova Scotia (2011), 2011 ONCA 793, 109 OR (3d) 92, at para 11, adopting the words of Lord Diplock in Letang v Cooper, [1965] 1 QB 232, at 242-43 (CA), “a factual situation the existence of which entitles one person to obtain from the court a remedy against another person.”

[18] To the extent that any matter under the security agreements between the Plaintiff and BMI and Huestis, or the management agreements between the Defendant and BMI and Huestis, is unclear, those documents are specifically mentioned in the pleading and are subject to being produced upon the Defendant’s request before serving its Statement of Defense. Likewise, to the extent that any details of the relevant notices of debt and assignment are lacking or are unclear, they could potentially be the subject of a demand for particulars.

[19] Moreover, to the extent that there is any dispute as to whether the Defendant actually owes the alleged management fees to BMI and Huestis, or that BMI and Huestis are truly indebted to the Plaintiff, those are matters to be addressed in the Defendant’s defense on the merits. None of these issues, however, provide a basis for striking the Statement of Claim under Rule 21.

[20] It is well established that to succeed in a Rule 21 motion, a moving party must show that it is “plain and obvious” that the Plaintiff could not succeed at trial. The Defendant has not met that test here. In support of this conclusion, I note that the Court of Appeal has recently admonished that under Rule 21 “the pleading must be read generously in favour of the respondents with allowances for drafting deficiencies.” Wellington v Ontario (2011), 2011 ONCA 274, 105 OR (3d) 81, at para 14 (Ont CA).

[21] The motion is therefore dismissed.

[22] It is evident to me that much of the impetus for the motion was due to the way the Statement of Claim was written. Mr. Schein’s factum and oral submissions went a long way toward clarifying the cause of action. The motion turns out to have been premised on a misunderstanding that could not have been fully addressed in a demand for particulars. Under the circumstances, there will be no order of costs for or against either party.

Morgan J.

Date: January 8, 2013