SUPERIOR COURT OF JUSTICE - ONTARIO

COURT FILE NO.: 08-CV-349644 PD3

DATE: 20130712

RE: Linda Atkinson, Seed Entertainment LLC, and Meni Mancini, Plaintiffs

– AND –

James R. Sinclair, Visual Spirit Inc., and Iyouwe Inc., Defendands

BEFORE: E.M. Morgan J.

COUNSEL:
Howard C. Cohen, for the Plaintiffs

Krista R. Chaytor, for the Defendants

HEARD: July 11, 2013

ENDORSEMENT

[1] The Defendants move to set aside a default judgment granted against them on December 1, 2010 by Whitaker J. after a one day hearing on October 15, 2010. The judgment found that the Defendants perpetrated fraud against the Plaintiffs, and awarded the Plaintiffs both compensatory and punitive damages.

[2] The Statement of Claim was issued in February 2008. After some correspondence between Mr. Julian Nawrocki, then representing the Defendants, and Mr. Howard Cohen, counsel for the Plaintiffs, in which Mr. Nawrocki objected to some of the language in the pleading, the Plaintiffs issued a Fresh As Amended Statement of Claim on November 14, 2008.

[3] On December 30, 2008, Mr. Nawrocki again wrote to Mr. Cohen complaining that the Fresh As Amended Statement of Claim contained some language that was inflammatory and should be expunged. Mr. Nawrocki’s letter stated:

If a motion is necessary, I will be pleased to convass dates with you. I will assume that you will not be taking any steps against our clients in the meantime. If I am wrong, please advise immediately.

[4] Mr. Nawrocki then scheduled a motion to strike the Statement of Claim and served motion materials on Mr. Cohen on March 14, 2009.

[5] The motion was then delayed by mutual consent of the parties in order to allow a settlement conference to take place. That meeting was held on July 23, 2009, but did not result in the termination of the action.

[6] Several attempts at reviving the settlement discussions appear to have ensued by text messages and possibly some indirect communication between the parties. However, by November 2009 it was apparent that the attempts to resolve the matter had failed. On November 23, 2009, Mr. Nawrocki rescheduled the motion to strike the Statement of Claim for February 23, 2010.

[7] On February 2, 2010, Mr. Cohen wrote to Mr. Nawrocki about some scheduling conflicts for the date chosen for the motion. Mr. Nawrocki responded to Mr. Cohen on February 17, 2010, indicating that he had no objection to changing the date and that he would allow the appointed motion date to lapse as he was getting off the record and it would be more convenient for Mr. Cohen to schedule a new date with the Defendants’ new lawyer.

[8] Mr. Nawrocki’s law firm was removed as solicitors of record for the Defendants by Order dated February 16, 2010. That Order was entered by the court on February 24, 2010 and on February 25, 2010 was mailed to the Defendants at the residence of the personal Defendant, James Sinclair.

[9] On February 26, 2010, the court issued a Notice That Action Will Be Dismissed due to the failure to file a Statement of Defence and failure to be set down for trial. On April 22, 2010, the court issued an Order Dismissing Action As Abandoned.

[10] On March 30, 2010, without further communication with the Defendants, the Plaintiffs noted the Defendants in default.

[11] Both the Notice That Action Will Be Dismissed and the Order Dismissing Action As Abandoned were sent by the court registrar to all parties, including to the Defendants at their Nova Scotia mailing address. All parties appear to have received these documents in a timely fashion.

[12] On May 20, 2010, the Plaintiffs brought a motion without notice to the Defendants seeking to set aside the dismissal of their action as abandoned. This Order was granted by Master Muir but was never served on the Defendants.

[13] The Plaintiffs then moved for default judgment, again without notice to the Defendants. As indicated, a hearing on the motion for judgment was conducted on October 15, 2010, at which time Whitaker J. received submissions from Mr. Cohen as well as affidavit and viva voce evidence from the Plaintiffs.

[14] It is not clear how much of the procedural history was before Whitaker J. I note, however, that paragraph 2 of his judgment dated December 1, 2010 states:

The plaintiffs have been unable to locate the defendants who appear to have fled Canada for the United States. As a result, the defendants have not been served with the motion material.

[15] That paragraph causes me some concern. The evidence before me is that Mr. Sinclair had not fled the country and that, in fact, there was no serious effort by the Plaintiffs to locate him. While it appears accurate to say that he had business in the United States and travelled there often, he continued to reside at the same address in Nova Scotia as he always had.

[16] It is evident that the Plaintiffs knew Mr. Sinclair’s home address. As indicated above, the court registrar mailed the Notice and Order to him at that address, and the address appeared on the face of both court-issued documents.

[17] In addition, the Plaintiffs’ claim is at least partly based on a mortgage that the Plaintiffs had registered against Mr. Sinclair’s house in Nova Scotia. The fact that the Plaintiffs were aware of the municipal address of this property is specifically referenced in paragraph 16 of Whitaker J.’s judgment. Whitaker J. does not appear to have been aware that this property was the personal residence of Mr. Sinclair, but the Plaintiffs were certainly aware of that.

[18] If they could not locate Mr. Sinclair it seems that this was because they did not think to look at his home. None of that, however, appears to have been explained to Whitaker J.

[19] It would also seem that it was never made clear to Whitaker J. that the Defendants’ former counsel had served motion materials for a motion to strike the Statement of Claim just before the Defendants were noted in default. Given that he believed that the Plaintiffs could not locate Mr. Sinclair, it is not surprising that he took for granted that there had been no recent communication with the Defendants.

[20] I do not know whether the Defendants really planned to retain new counsel and pursue the motion to strike once Mr. Nawrocki was off the record. As matters transpired, however, it is understandable that they ultimately did not do so. After all, within days of Mr. Nawrocki’s law firm removing itself from the record, the Defendants received notice from the court registrar that the action was being dismissed for having been abandoned.

[21] The Plaintiffs characterize the Defendants as having buried their heads in the sand and not contacting them or their counsel at that point. In my view, however, it is hard to blame a Defendant for doing nothing in the face of a Notice and Order dismissing the action. Generally speaking, Defendants do not invest their time and resources in taking steps to ensure that Plaintiffs can continue to sue them. It is reasonable for Defendants to wait for the Plaintiffs to be in touch, but it is not reasonable for Plaintiffs to assert that they were waiting for the Defendants to move the stalled action forward.

[22] The last thing that the Defendants actually heard from the Plaintiffs or their counsel was the exchange of correspondence over scheduling the motion to strike. As set out above, that motion had been served and booked with the court. Mr. Cohen’s inquiry to Mr. Nawrocki about scheduling coincided with Mr. Nawrocki’s removal from the record, and so the motion date came and went without being confirmed. Nevertheless, the record is clear that the motion was already underway and only needed to have a new date booked.

[23] The fact that there was a motion to strike the Plaintiffs’ pleading, coupled with the fact that the court issued an Order Dismissing the Claim As Abandoned, makes the granting of default judgment without notice to the Defendants procedurally irregular. This gives rise to a right to set aside the default judgment.

[24] Blair J., as he then was, addressed a situation akin to the present one in LeBlanc v. York Catholic District School Board (2002), 2002 37923 (ON SC), 61 OR (3d) 686 (SCJ). He held, at para 26, that “it is also 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.”

[25] Counsel for both parties have spent considerable time at the hearing and in their written submissions addressing whether or not the Defendants will have ultimately have a viable defense to the claim. Mr. Cohen submits quite strenuously that the Plaintiffs’ claim is unanswerable and that there is no point ordering a new trial as the result will inevitably be the same as that reached by Whitaker J. Ms. Chaytor, who has now come on board for the Defendants, submits equally strenuously that Whitaker J. made any number of findings that he would not have made had there been a defence presented to him. She argues that the finding of fraud against the Defendants is particularly troublesome in the absence of notice and without any defence at trial.

[26] I need not decide which side is right. The fact is that the procedural irregularities mandate that the default judgment be set aside without delving into the merits. As this court put it in Royal Trust v Dunn (1991), 1991 7227 (ON SC), 6 OR (3d) 468, at para 19, “[i]f 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.”

[27] It has long been the view of the courts that, “[a]fter service of a notice of motion, as a general rule, any act done by any party affected by the application which affects the rights of the parties on the pending motion will be ignored by the Court....” Bruce v. John Northway & Son Ltd., [1962] OWN 150, at 151 (Ont SC). Accordingly, where default judgment, without notice, followed service of the materials for a motion to strike, “the defendants are entitled to have it set aside ex debito justitiae without being required to explain their default or to show that they have a good defence to this action on the merits.” Cafissi v Vanna, 1973 534 (ON SC), [1973] 1 OR 654, at para 4 (Ont SC).

[28] Mr. Cohen has expressed the Plaintiffs’ concern that the Defendants, and in particular Mr. Sinclair, are likely to declare bankruptcy once the judgment of Whitaker J. is set aside. He submits that there are numerous claimants and judgments against Mr. Sinclair, and that it is important that the Plaintiffs be given the chance to establish fraud as that would survive any personal bankruptcy. Mr. Cohen therefore requests, as an alternative ground, that if the judgment of Whitaker J. is to be set aside the Defendants be ordered to pay into court the full amount of that judgment, to be held as security for any eventual award.

[29] In response to this, Ms. Chaytor submits that the request for security is designed to make it financially impossible for the Defendants to actually pursue the defence that they are entitled to pursue. She also argues that there is no evidence in the record as to Mr. Sinclair’s current financial state and that, in any case, it is his right, if circumstances warrant it, to declare bankruptcy. A bankruptcy court would then have jurisdiction to determine whether he is in fact insolvent and whether the protections of the Bankruptcy and Insolvency Act, RSC 1985, c B-3 (the “Act”) apply.

[30] Bankruptcy courts across Canada have made it clear that Mr. Cohen’s concern, although understandable under the circumstances, is misplaced as a matter of law. Section 69 of the Act imposes a stay of proceedings on any claim made against a bankrupt, although a claimant may apply under section 69.4 of the Act for leave to continue an action if the claimant can establish that he or she is likely to be materially prejudiced by the operation of the stay or it is equitable for the action to proceed.

[31] Imposing a stay of proceedings on a claim for fraud is a recognized example of an instance where the claimant would likely be materially prejudiced. The British Columbia Supreme Court, interpreting section 69.4 in Laing v French (2004) 2004 BCSC 851, 33 BCLR (4th) 148, has held, at para 19, that “leave [to continue the action rather than stay it] should be granted because the action is for a debt to which a discharge under the [Act] would be no defence, namely an action in fraud.”

[32] Section 178(1)(d) of the Act provides that an order of discharge does not release a bankrupt person from any civil liability arising from fraud. Of course, the Plaintiffs’ concern here is that the declaration of bankruptcy may be made by the Defendant prior to a new judgment being issued to replace the one set aside today. The B.C. court in Laing addressed this problem of a prospective finding of fraud directly:

If it is clear that the claim is one which survives bankruptcy, and that the action will not interfere with the administration of the bankrupt estate or give the creditor an unfair advantage over other creditors, leave may be given: Bookman, Re (1983), 47 CBR (NS) 144 (Ont SC). It is inappropriate for debts that will not be released upon the discharge of the bankrupt to be determined only within the consideration of the proofs of claim filed in the bankruptcy: Taylor Ventures Ltd., Re, [[2002] BCSC 82], at para 8, Advocate Mines Ltd., Re, [(1984), 52 CBR (N.S.) 277 (Ont SC)].

[33] Accordingly, even if the Defendants do not pay security into court, the Plaintiffs will not be without avenues to address their concern about a fraud claim surviving bankruptcy. If Mr. Sinclair were to seek bankruptcy protection under the Act, the Plaintiffs could bring an application for leave to proceed against him and for their claim not to be subject to a stay of proceedings. In order to obtain such leave, they would not have to prove their claim on the merits at that point, but rather would have to establish only that they have “pleaded sufficient allegations to bring its claim, at least arguably, within s. 178(1)(d).” Re Francisco (1995), 1995 7371 (ON SC), 32 CBR (3d) 29, at para 12 (Ont Gen Div).

[34] The judgment of Whitaker J. should therefore be set aside. Under Rule 19.08 of the Rules of Civil Procedure, the court may set aside the judgment on terms that it considers just. Given the availability of a leave application under section 69.4 of the Act, I do not consider it necessary to order any security to be paid into court by the Defendants to cover the prospect of a bankruptcy staying the Plaintiffs’ fraud claim.

[35] That said, I do consider it worrisome that this matter has been outstanding for a long time. The Defendants, through their first counsel, spent the first year complaining about, but not defending against, the Statement of Claim. They then removed their lawyer from the record before following through with their motion to strike. Although I would now expect the Plaintiffs to be pushing the action ahead more expeditiously than in the past, some timing parameters should be set in order to ensure that the action proceeds without further delay.

[36] Ms. Chaytor has indicated that she expects to continue to represent the Defendants, which will alleviate any need to serve them out of province. She also has indicated that she expects to bring back the motion to strike the Fresh As Amended Statement of Claim.

[37] The Defendants, of course, cannot be held to these expectations as they are free to change their mind as to their choice of counsel and are free to change their strategy as to the pending motion. I therefore cannot today predict the pace at which this action will proceed.

[38] It is only just that the Defendants be required do something to defend the claim within 30 days of the date of this endorsement. The point of setting aside the default judgment is not to allow the matter to languish any more than it has.

[39] Within 30 days, the Defendants must either serve a new Notice of Return of Motion (or, if they wish, an altogether new Notice of Motion and motion materials) for striking the Plaintiffs’ pleading with as early a hearing date as the court can provide that is mutually agreed with counsel for the Plaintiffs, or they must serve their Statement of Defence. I would expect counsel to cooperate in arriving at mutually convenient dates if the Defendants decide to pursue the motion. If for some reason the Defendants or their counsel cannot agree on a motion date with Plaintiffs’ counsel, the Defendants are to unilaterally obtain as early a date as the court can offer for this motion and are to serve their Notice with that date as the return date – all within 30 days of today.

[40] If the Defendants do not take one of these steps – i.e. service of a Notice of Return of Motion/Notice of Motion, or service of a Statement of Defence – within 30 days, the Plaintiffs will be free to move, without further notice, to reinstate the judgment of Whitaker J. There is no reason to require them to conduct another one-sided hearing, as Whitaker J. has already done the work of considering and ruling on the Plaintiffs’ evidence.

[41] Given that I am setting aside the judgment of Whitaker J., as sought by the Defendants, the Defendants shall have their costs of this motion.

[42] Both counsel have submitted Cost Outlines which are very close to each other in the amounts that they seek – both in the mid-$60,000 range. That signals to me that both outlines are a reflection of a reasonable figure for partial indemnity costs on this motion.

[43] The one substantial difference between them is that the Defendants also seek reimbursement for Mr. Sinclair’s four trips to Toronto from Nova Scotia – one to attend his own cross-examination, one to attend the cross-examination of each of the Plaintiffs’ two deponents, and one to attend the hearing of the motion.

[44] None of these airfares should be recovered by Mr. Sinclair. Rule 39.02(4)(b) makes a party that cross-examines on an affidavit “liable for the partial indemnity costs of every adverse party on the motion…unless the court orders otherwise.” Given the Defendants’ success on the motion I am willing to relieve the Defendants of the obligation to pay costs for the two cross-examinations of the Plaintiffs’ affiants, but there is no reason to make the Plaintiffs bear Mr. Sinclair’s travel costs as well. For those two sessions, as with the hearing of the motion, Mr. Sinclair was entitled to attend or not attend, as he saw fit, but at his own expense.

[45] As for the cross-examination of Mr. Sinclair himself, the Plaintiffs must pay the costs of that session as part of the overall costs award. However, it is asking too much for a moving party who is out of province to seek relief from the court and to make the opposing party pay for his travels. If Mr. Sinclair had to get on an airplane to avail himself of a remedy in the Ontario court, he must at least travel here at his own expense.

[46] The Defendants also seek costs of a Master’s motion on refusals brought but then abandoned by the Plaintiffs. The time spent by Defendants’ counsel preparing for the motion on refusals undoubtedly deepened Defendants’ counsel’s knowledge of the case and contributed to her success here. This time was not truly thrown away. Moreover, the Defendants never sought those costs from a Master. I am not inclined to award any costs of the abandoned motion.

[47] The Plaintiffs shall pay costs to the Defendants in the amount of $63,264.46, inclusive of disbursements and HST.

Morgan J.

Date: July 12, 2013