Court File and Parties

COURT FILE NO.: CV-16-11315-00CL DATE: 20170213 ONTARIO SUPERIOR COURT OF JUSTICE (COMMERCIAL LIST)

BETWEEN: L-Jalco Holdings Inc., Plaintiff

- and - Thomas Albert Botly Bell, also known as Dr. Thomas Albert Botly Bell, Defendant

BEFORE: F.L. Myers J.

COUNSEL: Kenneth H. Page, for the plaintiff David W. Levangie, for the defendant

HEARD: February 10, 2017

Endorsement

1The defendant moves to set aside the judgment granted against him without notice on June 8, 2016. The judgment included a declaration under s. 178 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c.B-3 that the defendant committed fraud so that the judgment will survive his bankruptcy.

2For the reasons that follow the judgment cannot stand and must be set aside.

The defendant borrowed $51,000 from the plaintiff

3It is common ground that in April, 2010, the defendant borrowed $51,000 from the plaintiff. The defendant and his wife had previously borrowed substantially greater sums from the plaintiff. They had granted a mortgage to the plaintiff to secure the prior borrowings against their matrimonial home.

4John Lawrynowicz is the principal of the corporate plaintiff. He says that the defendant asked for a further, urgent advance to deal with a cash flow problem. Mr. Lawrynowicz says that he asked the defendant if he and his wife would sign-off on an increase to their mortgage to secure the new advance and the defendant agreed. The plaintiff advanced the funds the next day without any formal documentation being signed. At the plaintiff’s request, the defendant’s staff provided the name of his real estate lawyer to the plaintiff. The plaintiff instructed its counsel to prepare appropriate documents. The plaintiff’s counsel sent draft security documents to the defendant’s counsel in due course. The defendant never signed the security documents.

The plaintiff alleges that the defendant obtained the loan by fraud

5In 2012 the defendant went bankrupt.

6The defendant’s bankruptcy has not resulted in payment in full to the plaintiff on its mortgage. Therefore, a debt judgment in favour of the plaintiff will do it no good. The judgment will amount to an unsecured claim in the defendant’s bankruptcy that will not be paid. Unless the plaintiff is able to prove that the defendant committed a fraud so that its judgment will survive the defendant’s discharge from bankruptcy under s. 178 of the BIA, a judgment on the debt is of no value to the plaintiff.

7In the course of reviewing material provided as part of the bankruptcy, Mr. Lawrynowicz says that he became aware of the fact that the defendant and his wife had separated several months prior to the April, 2010 advance of the loan. He has concluded therefore that the defendant’s promise to have his wife sign a mortgage amendment, on which he relied in agreeing to advance the loan, was fraudulent because the defendant knew that he had no way to get his wife to sign for an increase in the mortgage when he said that he would do so.

8The promise of future performance is not a statement of existing fact on which a misrepresentation claim can be made. However, where, at the time a person makes a promise of future performance, he or she has no reasonable belief of being able fulfill the promise, then a misrepresentation claim can be based on the promisor’s implicit statement as to his or her present intention to perform as a statement of fact. That is, a promise of future performance often implicitly incudes a representation that at present the promisor intends to fulfill the promise. That is a statement of existing fact. If a person makes a promise knowing that he or she cannot perform it, then he or she is misrepresenting - not the future performance - but the statement of his or her present intention to perform the promise later. If, at the time that a promise is made, the promisor does not intend to perform, the promisor’s misstatement as to his or her present intention can be a misstatement of an existing fact on which a misrepresentation claim may be found. Datile Financial Corp. v. Royal Trust Corp. of Canada, appeal allowed on other grounds, .

There are credibility issues

9The defendant does not deny the debt. But he does deny the allegation of fraud. He says that the loan was always unsecured. There was no discussion or agreement for the loan to be secured or to be part of his mortgage. He does not explain how the new loan happens to have the same interest rate as the pre-existing mortgage; why the plaintiff’s lawyer would have sent draft security documents to the defendant’s lawyer; or why the plaintiff was willing to advance $51,000 to him the day after a request, without demanding even a promissory note, if not for the existence of the pre-existing mortgage security to cover the loan. The fact that the defendant failed to produce the non-privileged part of his real estate lawyer’s file is also a fact that weighs against the defendant.

10However, the defendant plainly denies that there was any discussion of the mortgage during his request for the loan. His testimony was not undermined on cross-examination. Perhaps the plaintiff just assumed that the new loan would go against the mortgage. But the defendant says that he knew that had no way to obtain his wife’s consent once they separated and he did not offer to do so. He also notes that his ex-wife’s sister is Mr. Lawrynowicz’s daughter-in-law. They are extended family. As sisters, the defendant’s ex-wife and Mr. Lawrynowicz’s daughter-in-law are apparently quite close. The defendant asserts that the Mr. Lawrynowicz must have known that he was separated from his wife, if not in April 2010, certainly more than two years before the plaintiff issued the statement of claim on March 10, 2016. Under cross-examination, Mr. Lawrynowicz agreed that he might have learned about the defendant’s separation before the bankruptcy. But he could not say when precisely he learned of the separation.

11The defendant raises two issues with this evidence. First, he puts in issue whether he committed a fraud at all. He also puts in issue the limitation period by suggesting that the plaintiff knew or ought reasonable to have known of his separation long ago. The plaintiff’s lawyer accepts that both of these issues turn on the credibility of the evidence of the two protagonists.

The plaintiff had no right to move for judgment without notice

12On June 8, 2016, the plaintiff moved, without notice, to a judge, for an order that the debt owed by the defendant to the plaintiff will survive the defendant’s bankruptcy under s. 178 of the BIA. The notice of motion does not disclose which provision of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, allowed it to move for this relief without notice to the defendant.

13Among the grounds set out in support of the motion in the plaintiff’s notice of motion, the plaintiff wrote that, “[t]he Defendant was provided with notice of the within proceeding and has opted not to defend same.” In addition, Mr. Lawrynowicz swore the following in his affidavit in support of the motion:

16. The Statement of Claim was served personally on [the defendant] by Patti Mozas, Process Server on March 22, 2016 at 1:15 p.m. A copy of the Affidavit of service is included in the within Record.
17. [The defendant] has chosen not to defend the within proceeding and accordingly we seek a Declaration that the debt survives bankruptcy as well as costs on a substantial indemnity basis.

14The problem with this evidence is that, in face of irrefutable proof to the contrary, Patti Mozas, Process Server, now admits that she did not serve the statement of claim on the defendant on March 22, 2016. She now says that she must have served the defendant on March 24, 2016 and she has provided some back-up text messages to support that evidence. The formatting of the text messages raises questions. The defendant denies ever being served with the statement of claim. Moreover, he points to the fact that he participated in prior motion proceedings that were brought by the plaintiff to lift the stay under s. 69 of the BIA as a precursor to this action. He argues that his prior participation establishes that he does not ignore legal process that is duly served upon him. Once again, the plaintiff’s counsel agrees that the resolution of this issue involves a credibility dispute; this time between the process server and the defendant.

15I note as well that Rule 37.07 (1) of the Rules of Civil Procedure requires that a party who brings a motion in a proceeding must provide notice of the motion to the opposing party. The rule allows exceptions upon proof that providing notice may be impractical or cause serious prejudice. The plaintiff adduced no evidence to support an exception to allow it to move without notice to the defendant under Rule 37.07. Rather, it relied upon the defendant’s failure to participate in the proceeding. Ignoring, for the moment, that there is a credibility issue as to whether the defendant was ever served or had notice of the proceeding, the failure of a party to participate in the proceeding is not a ground for moving without notice under Rule 37.07.

16Rule 19.02 (3) provides that where a party has been noted in default, it is not entitled to any further notice except in specifically listed cases. Similarly, Rule 19.05 (1) allows a party to move before a judge for default judgment where the defendant has been noted in default.

17But the plaintiff has not noted the defendant in default in this action.

18Without noting the defendant in default therefore, the plaintiff had no right to bring its motion without notice to the defendant.

19The plaintiff also had no right to move for default judgment. And it did not do so. The notice of motion says nothing about either default judgment or summary judgment. How the plaintiff obtained judgment on its s. 178 motion is not at all clear.

20Even had the motion been for default judgment, the best practice would have still called for the plaintiff to serve its motion record on the defendant despite Rule 19.02 (3). Elekta Ltd. v. Rodkin, 2012 ONSC 2062, at para. 10. Moreover, by bringing the motion without notice, the plaintiff was duty-bound to make full and fair disclosure of all material facts under Rule 39.01 (6) of the Rule of Civil Procedure. It was obliged to specifically point out to the presiding judge the fact that it had not noted the defendant in default. The plaintiff’s evidence of the defendant’s failure to participate in the proceeding was irrelevant under Rule 37.07 and can only have been adduced to make the motion appear to be for or akin to default judgment. Under Rule 37.06 (b), the plaintiff was required to state in its notice of motion the rules under which it was purporting to move. It could have argued for judgment without notice and without noting the defendant in default if it thought that it had grounds to do so. But, at minimum, it had to alert the judge to the issue. The plaintiff was required to disclose plainly to the judge that it had not noted the defendant in default; that no rule allowed it to do what it was trying to do; or at least to point out to the judge that it was doing something unusual to which any defendant would reasonably be expected to object.

The plaintiff had no right to move under s. 178 of the BIA without notice

21It has been held repeatedly that a declaration under s. 178 of the BIA should not be sought on a motion for default judgment. B2B Bank v Batson, 2014 ONSC 6105. Royal Bank of Canada v. Elsioufi, 2016 ONSC 5257. The plaintiff’s counsel seeks to distinguish the latter decision because in that case the defendant was not already bankrupt as he is in this case. But, the point of those cases is that a declaration under s. 178 ought to be made only in conjunction with a fair, full, and proper assessment of the underlying fraud claim on the merits and on notice to the trustee where possible. I fully agree with my colleagues Stinson J. and Dunphy J. that a declaration under s. 178 should not be sought by way of a cursory review on consent, on deemed admissions under Rule 19, or, I would add, without notice to the defendant, in proceedings divorced from the bankruptcy proceeding while it remains extant.

Setting aside default judgment

22Even if the motion had appropriately been one to set aside default judgment, the result would be the same. The Court of Appeal set out the test to set aside a default judgment in Mountain View Farms Ltd. v. McQueen, 2014 ONCA 194 as follows:

47The court’s ultimate task on a motion to set aside a default judgment is to determine whether the interests of justice favour granting the order. The approach to be taken to this determination has been considered numerous times by this court. The following draws heavily on the summary of the principles in those cases by Perell J. in Watkins v. Sosnowski, 2012 ONSC 3836, at paras. 19-20 and 23-24.

[48] The court must consider the following three factors: (a) whether the motion was brought promptly after the defendant learned of the default judgment; (b) whether there is a plausible excuse or explanation for the defendant’s default in complying with the Rules; and (c) whether the facts establish that the defendant has an arguable defence on the merits.

[49] To this list, I would add the following two factors the court should have regard to, as set out in Peterbilt of Ontario Inc. v. 1565627 Ontario Ltd. 2007 ONCA 333, 87 O.R. (3d) 479 (C.A.), at para. 2: (d) the potential prejudice to the moving party should the motion be dismissed, and the potential prejudice to the respondent should the motion be allowed; and (e) the effect of any order the court might make on the overall integrity of the administration of justice.

50These factors are not to be treated as rigid rules; the court must consider the particular circumstances of each case to decide whether it is just to relieve the defendant from the consequences of his or her default.

23The plaintiff agrees that the defendant moved promptly to set aside the judgment once it came to his attention.

24As to the basis for default, as discussed above, there is a credibility issue as to whether the defendant was served with the statement of claim and committed any default. The fact that the plaintiff did not note the defendant in default exacerbates this concern.

25As to whether the defendant has an arguable defence, it is clear that there is no defence to the debt. But, as discussed above, a judgment in debt is of no value to the plaintiff. The issue as alleged in the statement of claim is whether the loan was obtained by fraud. On that issue the plaintiff says that the defendant has no defence. However, there are at least two credibility issues on the facts in evidence before me that I am not in a position to resolve on this motion. All that the defendant needs to establish is an arguable basis for a defence. Fraud is a serious matter. While the burden of proof for fraud is the regular civil burden, it is not appropriate to leave a finding of fraud in place where there are at least two defences available (a traverse of the allegation of misrepresentation and a limitations defence) that both turn on credibility findings that have not yet been made.

26As to prejudice, if the judgment stands, the plaintiff will be entitled to enforce it against the defendant after the defendant’s discharge from bankruptcy. This risks defeating one of the fundamental goals of bankruptcy - to provide a fresh start to an honest but hapless debtor. I agree with Dunphy J. in Elsioufi, that there is an equally strong policy of our courts to discourage wrongdoers from abusing the bankruptcy system. If the defendant committed a fraud, he should be held accountable for it. But if he did not do so, if he was just an over-extended businessperson who borrowed beyond his capacity to pay, then he may be entitled to a fresh start on his discharge. Those decisions cannot be made at this time.

27The plaintiff suffers no corresponding prejudice if the judgment is set aside. Simply being bound by the Rules of Civil Procedure to afford a defendant an opportunity to defend himself can hardly be thought of as prejudice. But I am cognizant that this case involves only $51,000. It may not be economical to engage in much process in a $51,000 claim. If the judgment is set aside, the plaintiff might be denied an efficient and affordable remedy due to the cost of the process. That may be a basis for the plaintiff to waive part of the claim and go to Small Claims Court or to bring the claim under the Simplified Rules in this court. The plaintiff could have brought the case under the Simplified Rules and moved quickly to ask for a very limited, summary trial for example. But, the fact that the claim is relatively small cannot be a basis to deny the defendant the right to defend himself against an allegation of fraud or any allegation for that matter. Unless properly noted in default, all parties before the court have the right to participate and to be heard.

Order

28The judgment dated June 8, 2016 in this action is set aside for non-disclosure under Rule 39.01 (6); for failure to give notice under Rule 37.07 (1); and for improper use of s. 178 of the BIA. To the extent that the order of June 8, 2016 can be conceived of as a default judgment, then it is set aside under the test set out in Mountain View Farms Ltd..

Costs

29It seems to me, preliminarily, that until a court determines whether the defendant committed a fraudulent misrepresentation, it may be difficult to assess where responsibility for costs should lie. If the parties cannot agree on costs, the defendant may deliver no more than three pages of submissions plus his costs outline and any offers to settle on which he relies by February 20, 2017. The plaintiff may deliver no more than three pages of submissions plus its costs outline and any offers to settle on which it relies by February 27, 2017. All documents should be provided in searchable PDF format as attachments to an email to my Assistant. No copies of statutory material or case law are to be delivered. References to any statutory material or case law, if any, may be made only by hyperlinks to