DCR Strategies Inc. v. Vector Card Services LLC et al. Cairns v. DCR Strategies Inc. et al., 2013 ONSC 5881

DCR Strategies Inc. v. Vector Card Services LLC et al. Cairns v. DCR Strategies Inc. et al.

[Indexed as: DCR Strategies Inc. v. Vector Card Services LLC]

Ontario Reports

Ontario Superior Court of Justice,

Firestone J.

September 25, 2013

117 O.R. (3d) 551 | 2013 ONSC 5881

Case Summary

Civil procedure — Default judgment — Setting aside — Plaintiff by counterclaim sending letter to counsel for defendants by counterclaim during settlement negotiations stating that he would note defendants by counterclaim in default if defence to counterclaim was not received within 14 days — Letter mistakenly filed before coming to attention of counsel for defendants by counterclaim — Plaintiff by counterclaim noting defendants by counterclaim in default, obtaining default judgment and filing writs of execution without further notice — Noting in default and default judgment set aside — Defendants by counterclaim acting promptly after learning of default and providing plausible explanation for default — Arguable defence to counterclaim on merits existing.

DCR commenced an action against several former employees and consultants and their companies after discovering that they were allegedly setting up a competing business. One of the defendants, C, issued and served a statement of defence and counterclaim against DCR and others, including the law firm representing DCR in the main action and two lawyers from that firm, one of whom was a director of DCR. As a result, DCR was required to retain new counsel. New counsel wrote to C's counsel asking that he not take any default steps without ample warning. The parties then engaged in settlement discussions with respect to the claim and counterclaim. Counsel for C wrote to counsel for DCR and the other defendants by counterclaim requesting a defence to the counterclaim within 14 days, failing which they would be noted in default. That letter was mistakenly filed before it came to the attention of the defendants by counterclaim. Without further notice, counsel for C noted the defendants by counterclaim in default, obtained default judgment and filed writs of execution. The defendants by counterclaim moved to set aside the noting in default and the default judgment and to have the writs of execution withdrawn.

Held, the motion should be granted.

The defendants by counterclaim brought the motion expeditiously after learning of the default and provided a plausible explanation for the default. There was an arguable defence to the counterclaim on the merits. The defendants by counterclaim would suffer greater potential prejudice if default was not set aside than would C if default was set aside. It was unreasonable for C's counsel to note the defendants by counterclaim in default, obtain default judgment and file writs of execution without effective notice to their counsel, with whom C's counsel were actively engaged.

Cases referred to

1317621 Ontario Inc. v. Krauss, [2008] O.J. No. 3054, 2008 39224, 168 A.C.W.S. (3d) 964 (S.C.J.); Aetna Financial Services Ltd. v. Feigelman, 1985 55 (SCC), [1985] 1 S.C.R. 2, [1985] S.C.J. No. 1, 15 D.L.R. (4th) 161, 56 N.R. 241, [1985] 2 W.W.R. 97, 32 Man. R. (2d) 241, 29 B.L.R. 5, 55 C.B.R. (N.S.) 1, 4 C.P.R. (3d) 145, J.E. 85-192, EYB 1985-150475, 29 A.C.W.S. (2d) 267; Bank of Nova Scotia v. Black River Logging Inc., [2011] O.J. No. 5084, 2011 ONSC 6165 (S.C.J.); Canadian Imperial Bank of Commerce v. Sheahen (1978), 1978 2169 (ON SCDC), 22 O.R. (2d) 686, [1978] O.J. No. 3661, 94 D.L.R. (3d) 576, 13 C.P.C. 269, [1979] 1 A.C.W.S. 38 (Div. Ct.); D'Angelo v. Maco Security Monitoring Inc., [2006] O.J. No. 3542, [2006] O.T.C. 781, 151 A.C.W.S. (3d) 389, 2006 30587 (S.C.J.); DCR Strategies Inc. v. Vector Card Services, LLC, [2011] O.J. No. 3277, 2011 ONSC 4241 (S.C.J.); Dealers Supply (Agriculture) Ltd. v. Tweed Farm & Garden Supplies Ltd., [1987] O.J. No. 2346, 22 C.P.C. (2d) 257, 5 A.C.W.S. (3d) 330 (Dist. Ct.); Elekta Ltd. v. Rodkin, [2012] O.J. No. 1439, 2012 ONSC 2062 (S.C.J.); HSBC Securities (Canada) Inc. v. Firestar Capital Management Corp., [2008] O.J. No. 5345, 2008 ONCA 894, 245 O.A.C. 47 [Leave to appeal to S.C.C. refused [2009] S.C.C.A. No. 81]; Lister & Co. v. Stubbs, [1866‑1890] All E.R. 797, 45 Ch. D. 1 (C.A.); Male v. The Business Solutions Group (2013), 115 O.R. (3d) 359, [2013] O.J. No. 2669, 2013 ONCA 382; Peterbilt of Ontario Inc. v. 1565627 Ontario Ltd. (2007), 87 O.R. (3d) 479, [2007] O.J. No. 1685, 2007 ONCA 333, 41 C.P.C. (6th) 316, 157 A.C.W.S. (3d) 271; Pierre Gagne Contracting Ltd. v. Canada (Attorney General), [2000] O.J. No. 2828, 4 C.L.R. (3d) 149, 98 A.C.W.S. (3d) 910 (S.C.J.); Watkins v. Sosnowski, [2012] O.J. No. 2971, 2012 ONSC 3836 (S.C.J.)

Rules and regulations referred to

Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rules 19.03, 19.08, 19.09, 37.14

Authorities referred to

Sharpe, Robert J., Injunctions and Specific Performance, 4th ed., looseleaf (Toronto: Canada Law Book, 2012)

MOTION to set aside noting in the default and default judgment and for the withdrawal of writs of execution.

Alex Cameron and Andrew M. Baerg, for plaintiff/defendants by counterclaim DCR Strategies Inc., Diana Fletcher, Huguette Masse and Peter Tuovi.

Stefano G. Tripodi and Bryan D. Hackett, for defendants/plaintiff by counterclaim Vector Card Services LLC, Ted Nham, James H. Cairns, Shelley Hawley, carrying on business as "Lexiss Group", Lexiss Group Inc. and Jericho Digos.

1FIRESTONE J.: — The defendants by counterclaim DCR Strategies Inc. ("DCR"), Diana Fletcher ("Fletcher") and Huguette Masse ("Masse") bring this motion pursuant to rules 19.03, 19.08, 19.09 and 37.14 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 (the "Rules"), for the following orders:

(a) The noting in default and default judgment obtained against them by the plaintiff by counterclaim, James H. Cairns ("Cairns"), be set aside.

(b) The moving parties deliver their statement of defence to the counterclaim within 20 days after the order setting aside the noting in default and default judgment.

(c) All writs of execution registered by Cairns against Fletcher and Masse be withdrawn.

Factual Background

2DCR is an Ontario corporation in the business of loyalty reward programs and prepaid products. Fletcher is the president of DCR and Masse is the chief executive officer of DCR. Cairns formerly worked for DCR and he is the responding party to this motion.

3DCR commenced the within action ("main action") on April 8, 2011 against several former employees and consultants and their respective companies after DCR discovered they were allegedly setting up a competing business contrary to their obligations with DCR. $2,000,000 in damages as well as injunctive relief is sought.

4In the statement of claim, issued on April 8, 2011, DCR pleads:

(a) the individual defendants in the main action, including Cairns, are all former employees or salespersons of DCR;

(b) in or around March 2011, DCR discovered that those individual defendants while employed by DCR had planned to set up a business to compete with DCR; and

(c) the competing business eventually set up by those individual defendants was contrary to binding contractual terms between DCR and those defendants.

5On April 12, 2011, an interim injunction was granted by Mesbur J. restraining several defendants, including Cairns, from competing with DCR or using DCR's confidential information.

6On July 13, 2011, DCR obtained another interim injunction [[2011] O.J. No. 3277, 2011 ONSC 4241 (S.C.J.)]. The injunction endorsement of Aston J. states in part as follows, at para. 5:

There is clear and compelling evidence that the individual defendants have acted in concert and under a shroud of secrecy in launching a competing business through the vehicle Vector Card Services, LLC ("Vector").

7On December 15, 2011, Cairns issued and served a statement of defence and counterclaim. The counterclaim named Fletcher and Masse as defendants. The counterclaim also named the law firm representing DCR in the main action and two lawyers from that firm, one of whom is Peter Tuovi ("Tuovi") who acts as a director of DCR, as defendants. As a result, DCR was required to retain new counsel.

8In or around September 2012, the law firm of Fasken Martineau DuMoulin LLP ("Faskens") was retained as DCR's counsel in the main action and retained to defend Fletcher, Masse and Tuovi (in his capacity as director) in the counterclaim. Jennifer McAleer ("McAleer") was one of the lawyers at Faskens who had carriage of the file.

9On September 28, 2012, McAleer wrote to Cairns' counsel, enclosing their notice of change of lawyers. The letter also requested Cairns' counsel to advise them of which clients he was acting for and stated, "[w]ith respect to our clients' defence to that counterclaim, we trust you will not take any default steps without ample warning to us. Please contact us immediately if that is not acceptable" (emphasis added). No letter was sent in reply by Cairns' counsel indicating that this was not acceptable.

10From December 15, 2011 (the day the counterclaim was issued) to December 10, 2012, Cairns' counsel did not threaten taking default action in the counterclaim.

11During 2011 and 2012, the moving parties and Cairns engaged in without prejudice settlement discussions regarding both the main action and counterclaim.

12On December 10, 2012, Cairns' counsel wrote to Faskens requesting a defence to the counterclaim within 14 days, failing which they were instructed to note Faskens' clients in default without further notice.

13The moving parties submit Cairns' counsel letter of December 10, 2012 was inadvertently filed and was not brought to the attention of counsel at Faskens. As a result, the moving parties were not aware of Cairns' request.

14No other correspondence, e-mails, or telephone calls from Cairns' counsel was received by Faskens that indicated whether the moving parties had been noted in default or whether other default steps including a motion for default judgment and the filing of writs of execution had taken place. This is notwithstanding Faskens' September 28, 2012 letter requesting "ample warning" of "any default steps" and Faskens' continuing involvement in the main action.

15On January 21, 2013, the moving parties were noted in default in the counterclaim. On March 15, 2013, default judgment in the sum of $806,000 plus pre-judgment interest and costs was obtained. On April 17, 2013, writs of execution were issued against Fletcher and Masse.

16On April 24, 2013, while acting for Fletcher and Masse in a mortgage transaction, Tuovi learned of the execution registered against Fletcher and Masse for the first time. Prior to this, Tuovi, Fletcher, Masse and DCR submit they were not made aware that DCR, Fletcher and Masse had been noted in default. McAleer, in her affidavit, also deposes she first became aware of the default proceedings on April 24, 2013. She had not previously read the Cairns' counsel December 10, 2012 letter because it was inadvertently filed before she reviewed it.

17There is no doubt that Cairns' counsel's December 10, 2012 letter was sent to and received by Faskens. However, the evidence before me is that the letter did not come to the attention of the responsible lawyer due to an oversight.

18Fletcher deposes in her affidavit that it had always been the intention of both herself and DCR to defend the counterclaim. She further deposes that the counterclaim was not immediately defended because it named DCR's counsel in the main action necessitating DCR to find new legal representation, and DCR and Cairns were engaged in ongoing settlement discussions at the time and continued for more than a year thereafter. Fletcher noted that at no time did Cairns demand that a defence be provided.

19Tuovi, in his affidavit, confirms and refers to an e-mail, dated December 29, 2011, sent by his counsel at the time to Cairns' counsel advising that all defendants intend to vigorously defend the counterclaim. The e-mail also indicates it would take some time to appoint new counsel and those arrangements were being made.

20Masse deposes in her affidavit that after reading the counterclaim she fully intended to defend it. She further deposes that personally naming officers of DCR and DCR's lawyers as parties in the counterclaim seriously disrupted the progress of the main action. DCR was forced to retain new counsel in a complex action. For that reason as well as the fact that settlement discussions were ongoing, she did not immediately defend the counterclaim.

The Test for Setting Aside Noting in Default and Default Judgment

21Rules 19.03, 19.08 and 19.09 of the Rules allow setting aside a noting of default and a default judgment "on such terms as are just".

22In determining whether the court can exercise discretion, the moving party must meet three requirements as follows:

(a) The motion to set aside default judgment should be made as soon as possible after the applicant becomes aware of the judgment.

(b) The moving party's affidavit must set out the circumstances under which the default arose that give a plausible explanation for the default.

(c) The moving party must set forth facts to support the conclusion that there is at least an arguable case to present on the merits: see D'Angelo v. Maco Security Monitoring Inc., [2006] O.J. No. 3542, 2006 30587 (S.C.J.), at para. 7; and Bank of Nova Scotia v. Black River Logging Inc., [2011] O.J. No. 5084, 2011 ONSC 6165 (S.C.J.), at para. 19.

23For the reasons that follow, in my view, the noting in default and default judgment should be set aside in the interests of justice. As stated in Peterbilt of Ontario Inc. v. 1565627 Ontario Ltd. (2007), 87 O.R. (3d) 479, [2007] O.J. No. 1685, 2007 ONCA 333, at para. 2, on a motion to set aside a default judgment, the motion judge will be guided by established principles, but must ultimately determine whether the interests of justice favour granting the order. This is not a case where the moving parties had ignored the legal process.

24In determining whether the factors set out above have been met, a judge ought to lean in favor of an affirmative answer simply because prima facie no one should suffer a judgment against him or her except after a full hearing and after careful determination on the merits: see Dealers Supply (Agriculture) Ltd. v. Tweed Farm & Garden Supplies Ltd., [1987] O.J. No. 2346, 22 C.P.C. (2d) 257 (Dist. Ct.), at p. 263 C.P.C.; Pierre Gagne Contracting Ltd. v. Canada (Attorney General), [2000] O.J. No. 2828, 4 C.L.R. (3d) 149 (S.C.J.), at para. 7; and D'Angelo, at para. 8.

Have the Moving Parties Brought this Motion Promptly?

25On April 25, 2013, the day after McAleer learned of the default proceedings, McAleer wrote to Cairns' counsel requesting that he immediately consent to setting aside the noting in default and the default judgment, and to withdraw all writs of execution. Cairns' counsel refused the request by letter, dated April 26, 2013.

26The within motion was served on May 2, 2013 and scheduled for June 26, 2013. I find that the moving parties brought this motion expeditiously. There was no period of inaction after the moving parties learned of the default.

Do the Moving Parties' Affidavits Set Out the Circumstances in which the Default Arose that Give a Plausible Explanation for the Default?

27In this case, only one letter from Cairns' counsel indicates that noting in default would occur if the defence to counterclaim was not received within 14 days. The letter said nothing about bringing a motion for default judgment or filing writs of execution without notice. Cairns' counsel did not follow up by letters, e-mails or phone calls. Notwithstanding that Cairns' counsel knew the moving parties were represented by Faskens, they never served Faskens with the motion materials for default judgment. Faskens should have been served for the very reason set forth by D.M. Brown J. in Elekta Ltd. v. Rodkin, [2012] O.J. No. 1439, 2012 ONSC 2062 (S.C.J.), at para. 10, where he states in part:

By serving the default judgment motion record on the responding party and filing proof of service, a court can satisfy itself that the person against whom default judgment is sought knew about the claim, knew about the motion for default judgment yet, nevertheless, elected not to defend or respond.

28The evidence is clear that the December 10, 2012 letter was received by Faskens, but it was mistakenly filed before coming to McAleer's attention. This, along with the ongoing settlement discussions taking place and Cairns' counsel's knowledge that Faskens was retained both in the main action and the counterclaim, provide a plausible explanation for the default: see Bank of Nova Scotia, at para. 29.

29While some delay may have occurred in delivering a defence to the counterclaim, this certainly does not equate to "evidence of deliberate neglect or an intentional refusal to defend the counterclaim" as suggested by Cairns. The moving parties demonstrate a continuing intention to defend the counterclaim.

Do the Facts Support the Conclusion that there is an Arguable Case to Present on the Merits?

30In my view, there is an arguable defence to the counterclaim on the merits based on the facts to date. In coming to this conclusion, I look to both the main action and counterclaim, which are intertwined, and the fact that the main action is ongoing.

31HSBC Securities (Canada) Inc. v. Firestar Capital Management Corp., [2008] O.J. No. 5345, 2008 ONCA 894, at para. 28, leave to appeal to S.C.C. refused [2009] S.C.C.A. No. 81, requires that I take a "good hard look at the merits" and assess whether the moving parties established an arguable defence. The Court of Appeal further states, at para. 30, "[t]he motion judge should consider the potential prejudice to the moving party if the motion [to set aside default judgment] were dismissed, the potential prejudice to the respondent if the motion were allowed, and the effect of any order on the overall integrity of the administration of justice".

32The potential prejudice to the moving parties is greater if default is not set aside than the potential prejudice to Cairns if default is set aside.

33In the counterclaim, Cairns alleges DCR wrongfully terminated him. In the main action, DCR alleges Cairns set up a competing business contrary to his contractual obligations. DCR's allegation in the main action certainly has merit, and therefore, so does the counterclaim for the same reasons of Aston J., at para. 5, of his injunction endorsement. If the facts alleged in the main action are true, those facts are the basis for an arguable defence to Cairns' wrongful termination claim. The endorsement of Aston J. sets forth the basis of the defence to the counterclaim, at para. 21:

I am satisfied that there is a serious question to be tried on the issue of whether the defendants Nham and Cairns would breach contractual obligations to the plaintiff if not restrained in the manner sought by the plaintiff. Indeed, the plaintiff has established a strong prima facie case. I am also persuaded that the individual defendants acted in concert, to a greater or lesser degree, in a venture that would directly compete with the plaintiff by soliciting its customers and potential customers and use of confidential information, including specific customer information, in such completion. In each case, the participation of the defendants in the competing business, Vector, took place while the person was working for the plaintiff, whether technically as an employee or as an independent contractor.

34In establishing a defence on the merits, the defendant need not show that the defence will inevitably succeed. Rather, the defendant must show the defence has an air of reality and that there is a genuine issue requiring a trial: see Watkins v. Sosnowski, [2012] O.J. No. 2971, 2012 ONSC 3836 (S.C.J.), at para. 24. The moving parties' defence that Cairns breached his non-compete and non-solicit obligations to DCR has an air of reality and shows a genuine issue requiring trial.

35I also note that a basis for the default judgment was default under an alleged settlement agreement. Since the settlement agreement does not form the basis of the counterclaim, that ground for granting default judgment is respectfully erroneous.

36For the reasons set forth above, the noting in default and default judgment against the moving parties is set aside.

Withdrawal of the Writs of Execution

37The court has discretion to withdraw writs of execution when a judgment is set aside: see Canadian Imperial Bank of Commerce v. Sheahen (1978), 1978 2169 (ON SCDC), 22 O.R. (2d) 686, [1978] O.J. No. 3661 (Div. Ct.), at pp. 690-92 O.R. A court may allow a writ to stand when evidence indicates there is a risk that the defendant will dispose of his or her assets before judgment to the detriment of the plaintiff creditor: see 1317621 Ontario Inc. v. Krauss, [2008] O.J. No. 3054, 2008 39224 (S.C.J.), at para. 30.

38Considering all the facts of this case, it is my view that the writs of execution should be lifted. Allowing Cairns to benefit from and be better positioned than he otherwise would have been in the counterclaim would be unjust.

39It was unreasonable for Cairns' counsel to note the moving parties in default, obtain default judgment and file writs of execution without effective notice to Faskens, with whom they were actively engaged and with whom they knew was retained to act by the moving parties: see Male v. The Business Solutions Group (2013), 115 O.R. (3d) 359, [2013] O.J. No. 2669, 2013 ONCA 382, at para. 18.

40Cairns relies on a statement in Tuovi's affidavit as strong evidence of the possibility that the property owned jointly by Fletcher and Masse will be further encumbered, dissipated or dealt with in a manner detrimental to Cairns as a creditor. However, Cairns did not file any evidence that Fletcher and Masse are improperly encumbering or disposing of assets or property.

41Cairns did not cross-examine Fletcher, Tuovi, Masse or McAleer on their respective affidavits filed in support of this motion. There is, therefore, insufficient evidence of prejudice to Cairns, especially in light of the circumstances of this case.

42The Supreme Court of Canada affirmed the Lister principle in Aetna Financial Services Ltd. v. Feigelman, 1985 55 (SCC), [1985] 1 S.C.R. 2, [1985] S.C.J. No. 1, at pp. 10-14 S.C.R., which says pre-judgment execution cannot be obtained before judgment. This principle was enunciated by Cotton L.J. in Lister & Co. v. Stubbs, [1866-1890] All E.R. 797, 45 Ch. D. 1 (C.A.), at p. 799 All E.R.:

I know of no case where, because it is highly probable if the action were brought the plaintiff could establish that there was a debt due to him by the defendant, the defendant has been ordered to give a security till the debt has been established by the judgment or decree.

The Supreme Court also set out exceptions to the general rule in Lister, at pp. 12-14 All E.R.: (1) when assets are the subject matter of the dispute and without a writ to preserve those assets they would be destroyed during the adversarial process; (2) when the processes of the court must be protected generally; (3) to prevent fraud; and (4) for quia timet injunctions generally under extreme circumstances. None of these exceptions apply here.

43Most importantly, I refuse to allow the writs to stand for the reasons of Sharpe J.A. in his text, Injunctions and Specific Performance, 4th ed., looseleaf (Toronto: Canada Law Book, 2012), at para. 2.760:

Clearly, pre-trial execution of any kind poses definite problems. Attachment of assets or interference with disposition of assets will often constitute a serious interference with the defendant's affairs. That interference may be more readily justified where the plaintiff's right is specifically related to the asset in question. However, where the plaintiff asserts a general claim and looks to the assets only as a means of satisfying a likely or possible monetary judgment against the defendant, interference with the defendant's assets is more difficult to justify. Unless strictly limited to cases where the plaintiff's prospect of ultimate success is strong and to cases where the defendant is bent on flouting the court's process, restraining defendant's freedom to deal with his or her property upon the filing of an unsecured claim could well produce serious injustice.

Disposition

44I, therefore, order as follows:

(a) The noting in default and default judgment, dated March 15, 2013, is set aside.

(b) The defendants by counterclaim DCR, Fletcher and Masse must deliver their statement of defence to the counterclaim within 20 days from today's date.

(c) All writs of execution registered by Cairns against Fletcher and Masse are withdrawn.

45If the parties are not able to agree on costs, written submissions with a costs outline totalling no more than five pages may be filed within 20 days.