Court File and Parties
COURT FILE NO.: CV-16-126971 DATE: 20170309 ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
Lucy Romero, Plaintiff
– and –
Homero Robert Romero, George Pappas, and 1821342 Ontario Corporation, Defendants
COUNSEL: Ian Klaiman, for the Plaintiff Andrea M. Habas, for the Defendants
HEARD: March 3, 2017
RULING
Introduction
1The defendant George Pappas, seeks an order setting aside the default judgment granted by The Honourable Madam Justice Gilmore on August 25, 2016. As well, he seeks an order setting aside all enforcement proceedings undertaken by the plaintiff and staying all writs. He asks that he be granted leave to deliver a statement of defence within 20 days and seeks costs.
2Mr. Pappas is a licensed lawyer and a former Principal of Pappas Romero Law Firm Professional Corporation. Mr. Romero is a licensed paralegal. Mr. Pappas and Mr. Romero practised law together as an incorporated entity, until a falling out.
3Mr. Romero is the husband of the plaintiff.
41821342 Ontario Corporation was a management company of the legal corporation through which Mr. Pappas and Mr. Romero practised. The spouses of Mr. Pappas and Mr. Romero were equal shareholders of all of the shares in 1821342 Ontario Corporation (hereinafter referred to as “182”).
5Default judgment was granted against Mr. Pappas and the other defendants following their noting in default.
The Plaintiff's Claim
6The Plaintiff claimed:
As against Romero and Pappas,
(a) An order directing that they execute any and all documents necessary to convey and pay funds from 182 to the plaintiff, pursuant to the claims as against 182 (b) costs of the action.
As against the Defendants 182,
(a) the sum of $75,000; (b) interest on that sum; (c) a review and audit of the retained earnings of 182; (d) payment forthwith of the retained earnings to the plaintiff together with interest; and (e) costs.
7The pleading alleged that the defendants Pappas and Romero are individuals who operated a law firm and were officers and directors of 182. It was posited that the law firm intended to wind up its relationship as of the 30th of June, 2016, as well as the operations of the management company, 182. The plaintiff alleged that 182 had $150,000 available to it as retained earnings in respect of which Mr. Pappas and Mr. Romero had approved payment to the shareholders. It is alleged that the refusal of Mr. Pappas to sign documents, including cheques was wrongful, in bad faith and entitled the plaintiff to oppression remedies and claims pursuant to the Ontario Business Corporations Act, R.S.O. 1990, c. B-16, or particularly s. 245, 248 and 249.
The Motion to Set Aside
8In support of this motion, Mr. Pappas deposes that he has no recollection of ever having been personally served with the statement of claim, but, cannot categorically state that he was not served. As of early June, 2016 when the statement of claim was served, he was immersed in a heated matrimonial proceeding with his former spouse, in the process of winding up his former law firm and starting up a new one. The winding up of the old firm was not amicable. His failure to respond to the statement of claim was, he deposes, simply as a result of inattentiveness. He may have been of the general impression the plaintiff was not seeking any significant relief as against him in the statement of claim. To be sure there were letters between the lawyers acting for the parties, but none referred to the statement of claim having been served.
9On receipt of notice the default judgment had been given, Mr. Pappas immediately contacted his lawyer. The plaintiff does not contest but that this motion to set aside the default judgment was timely. At the present time 182 has no liquid assets. It has assets in the form of receivables of approximately $190,000. These may and must, in due course, be used to pay 182’s creditors, and the balance available to its shareholders, submits Mr. Pappas.
10Mr. Pappas does not agree, that he had any personal obligation to Mr. Romero’s wife, Lucy Romero.
The Cross-Motion
11The plaintiff seeks an adjournment of this motion to set aside the default judgment. She has served a cross-motion, seeking to compel Mr. Pappas to answer questions he refused to answer when he was cross-examined on the affidavit filed in support of his motion. The cross-motion should be adjudicated first, submits the plaintiff.
12Mr. Pappas refused to answer certain questions when cross examined. These included: whether he’s been representing clients; how he tracks work in progress on files; what work in progress there was and what accounts were recovered from April, 2016 to date; how much was outstanding on the line of credit, how many files he took, what fees were generated by the files he took, what WIP existed in the files he took, whether there was any way to determine the value in a ‘personal injury’ file of work-in-progress; whether he had any retainer agreements with personal injury clients or had any non-plaintiff personal injury etc.
13The plaintiff urges that Mr. Pappas’ refusal to answer questions when cross-examined should detract from his credibility, when weighing his evidence as to the circumstances under which he failed to respond to the statement of claim.
14On the face of them, submits the plaintiff, the financial statements of 182 indicate that the corporation has sufficient net retained earnings to pay out the claim of the plaintiff, to which, as a 50% shareholder she is indubitably entitled.
15The law firm ceased carrying on business on June 30, 2016. Mr. Pappas and Mr. Romero divided the law firm’s files and have agreed to arbitration to resolve all of the issues between them. It is anticipated that Mr. Pappas and Mr. Romero will account to the law firm for the unbilled disbursements and work in progress and collection of accounts receivable. In due course, funds should become available as they are paid by the principals to 182. The law firm has debts including a $475,000 line of credit with the TD Bank. Depending on the structure of that debt, logic dictates that perhaps it must be paid first by the corporation. Mr. Pappas points out that the plaintiff’s husband is presently in possession of more than 50% of the assets of the law firm.
Analysis
16At paragraph 2 of the Order sought to be set aside, the defendant George Pappas was ordered to pay the sum of $99,221.50 in Canadian funds to the plaintiff.
17As an examination of the statement of claim will reveal, there was no claim made by the plaintiff against the defendant Pappas for a sum of money to be paid. The only claim made for a money judgment was as against the defendant 182 and was limited to the sum of $75,000.
18Clearly, it is, at the very least, an irregularity for the plaintiff to have obtained a judgment for the payment of money when such relief was not requested in the statement of claim. Within the four corners of the statement of claim, the plaintiff had no entitlement to judgment against Mr. Pappas for the $99,221.50 he was ordered to pay. A minor point, by comparison, perhaps, is that the sum claimed not against Mr. Pappas exceeded the sum actually claimed against the other defendants. The order for payment and for costs as against Mr. Pappas, is therefore, set aside. In my view, it was incumbent on the plaintiff to have amended the statement of claim before seeking judgment in respect of a substantial claim in respect of which no notice had been given. Such an amendment would have required notice to Mr. Pappas in the circumstances.
Test for Setting Aside Default Judgment
19In the event I am incorrect in having determined that there was sufficient irregularity in the judgment granted, for it to be set aside on that ground alone, the test for setting aside a default judgment may also be considered.
20There is no issue raised by the plaintiff that the motion to set aside was promptly made.
21The plaintiff challenges whether Mr. Pappas has offered a plausible excuse or explanation for his default. I accept Mr. Pappas’ evidence that he was inattentive to the statement of claim due to overwhelming personal concerns, including the circumstances of his concurrent work and personal relationship breakdowns. On the facts to which he deposes, Mr. Pappas has an arguable defence. The financial statements of 182 do show retained earnings. This does not, as Mr. Pappas points out, mean that the corporation has the immediate means to pay its shareholders their notional entitlement. Indeed, for the moment the corporation is likely insolvent. The financial statements show less than $6,000.00 on deposit in the bank. The law practice of Mr. Pappas and Mr. Romero has broken down and the principals are locked in a dispute. In any event, Mr. Pappas does not require an arguable defence to the money claim of the plaintiff, since there is no claim made in the statement of claim entitling the plaintiff to a sum of money from him in any event. There is no prejudice, in my view, to the plaintiff should the order obtained on default be set aside, since both Mr. Romero and Mr. Pappas remain in the jurisdiction, practicing law and each has possession of the files which constituted their practice.
Disposition
22There shall be an order therefore setting aside the default judgment granted by The Honourable Madam Justice Gilmore dated August 25, 2016, as against Mr. Pappas, an order setting aside all enforcement proceedings and to the extent necessary given the other relief, an interlocutory order staying all writs of seizure and all enforcement proceedings. George Pappas shall have leave to deliver a statement of defence within 20 days.
23Insofar as the balance of the judgment given by Gilmore J., it should be stayed as against the defendant George Pappas until such time as there has been a determination of the net retained earnings of 1821342 Ontario Corporation as of June 30, 2016, properly accounting for the termination of the practice of law by Messrs. Romero and Pappas and the winding up of 182.
Costs
24The parties may make brief written submissions on costs, the plaintiff within 10 days and the defendant within 20.
Madam Justice A.M. Mullins Released: March 9, 2017