Canada Building Materials Company v. Pitts Construction, 2017 ONSC 5792
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: Canada Building Materials Company and CBM Ready Mix Division, Plaintiffs
AND:
Pitts Construction Inc., Daniel C. Quartarone, Rosario Spinello, Cristina Valdes, CCRS Construction Inc. and Chris Cece, Defendants
BEFORE: Justice J. Di Luca
COUNSEL: D. King, Counsel, for the Moving Party/Defendant, Cristina Valdes
J. Frustaglio and D. Baker, Counsel, for the Responding Parties/Plaintiffs
HEARD: September 15 and 21, 2017
ENDORSEMENT
1The defendant Cristina Valdes brings this motion seeking to set aside a default judgment entered against her on March 13, 2013 in the amount of $467,777.14. The judgment relates to an action commenced by the plaintiffs in relation to unpaid amounts for construction materials and related trust claims under the Construction Lien Act.
2For the reasons that follow, I am satisfied that this is an appropriate case to set aside the default judgment.
Background Facts
3Ms. Valdes was born in Mexico in 1957 and came to Canada in 1984. She is a single mother with four children. While she speaks and reads English, she is not entirely fluent. She has been employed at the Toronto District School Board for 17 years. She is currently a secretary earning approximately $50,000 per year. She owns a modest home that is encumbered by two credit lines. The equity in her home is less than the value of the judgment.
4In 2006, Ms. Valdes was approached by her son, the co-defendant Daniel Quartarone, who at the time was either 19 or 20 years old. Mr. Quartarone was starting a construction business with a friend, the co-defendant, Rosario Spinello. Ms. Valdes agreed to lend her son $100,000 for this endeavour. The financing was arranged through a credit line registered on title to Ms. Valdes’ home.
5The loan was made to Mr. Quartarone. It was on an “as needed basis” and Ms. Valdes remained the sole signing authority on the account. When Mr. Quartarone needed funds for his business, his mother would give him a cheque. On a couple of occasions, Mr. Quartarone made payments on the line of credit himself by attending at the bank.
6In June 2008, Pitts Construction Inc. [Pitts Construction] was incorporated. One of the directors of the company is Ms. Valdes. On this motion, Ms. Valdes asserts that she was unknowingly and without her consent made a director of the corporation, a fact she only discovered years later.
7Ms. Valdes also asserts that she had no involvement in the operation or management of Pitts Construction. She has not received any money or payments from Pitts Construction. Her involvement was limited to providing the credit line to her son.
8In March 2012, counsel for the Plaintiffs, sent eleven demand letters to Ms. Valdes in accordance with the requirements of the Construction Lien Act. These letters relate to the amounts owed by Pitts Construction and are the subject of the default judgment.
9In August 2012, a statement of claim was issued and personally served on Ms. Valdes.
10In March 2013, default judgment was obtained against Ms. Valdes, Mr. Quartarone, and Pitts Construction. Pitts Construction and Mr. Spinello filed Notices of Bankruptcy.
11On July 8, 2013, Ms. Valdes was sent a Notice of Garnishment that included with it a copy of the Judgment. On July 12, 2013, Ms. Valdes sent a letter to counsel for the Plaintiffs indicating that she had no involvement with Pitts Construction and had no involvement with the lawsuit or the matters it pertained to. She politely asked counsel to leave her alone.
12On January 28, 2015, Ms. Valdes moved to set aside the default judgment. The motion was not heard until September 2017.
Legal Test
13Rules 19.08(1) and (2) of the Rules of Civil Procedure provide that a judge may set aside a default judgment on such terms as are just. Rule 19.08(3) provides that on setting aside a judgment under sub rule (1) or (2), a judge may also set aside the noting in default.
14The test governing the exercise of discretion to set aside a default judgment involves five factors as discussed in Peterbilt of Ontario Inc. v. 1565627 Ontario Ltd., (2007) ONCA 333 and 420-450 Britannia Road East Ltd. v. Kennedy, 2015 ONSC 1791. The five factors are as follows:
i. Whether the facts establish an arguable defence;
ii. Whether there is a plausible excuse or explanation for the defendant’s default in complying with the Rules of Civil Procedure;
iii. Whether the motion to set aside was brought promptly;
iv. What are the competing potential prejudices to the parties of granting or refusing to set aside the default judgment; and,
v. What is the effect of any order on the overall integrity of the administration of justice.
15These five factors provide a guideline for the exercise of the court’s discretion. However, they are not fixed, unbending factors. The court must consider the particular circumstances of each case to assess whether it would be fair and just to relieve a party from the consequences of the default: see Mountain View Farms Ltd. v. McQueen, 2014 ONCA 194.
16I turn next to addressing each of the factors listed above.
Is There An Arguable Defence?
17As a preliminary matter, counsel for the Plaintiffs notes that under the Construction Lien Act, the test to set aside a Noting in Default under section 54(3) is more onerous than the test under the Rules of Civil Procedure, in that the moving party must show that there is a “meritorious defence.” That said, the test for setting aside a default judgment is similar under the Construction Lien Act and the Rules of Civil Procedure: see Built-Con Contracting Ltd. v. Lisgar Construction Co., 2016 ONSC 1720 at para. 20.
18An arguable defence is a defence that has an air of reality, see Mountain View Farms Ltd. v. McQueen at para. 51. The defendant need not show that the defence will invariably succeed. A meritorious defence would appear to be something more than an arguable defence, though it is difficult to ascertain from the case law what that means. Assuming the difference is more than semantic, it remains a question of degree. Ultimately, I must be satisfied that the defence proffered is a good defence, see Walker Brothers Quarries Ltd. v. 1276304 Ontario Inc., 2004 Carswell Ont. 5085 (S.C.J.).
19Ms. Valdes has filed an affidavit that indicates that she never knowingly agreed to be a director of Pitts Construction and that she had no involvement in the operation of the corporation. She was cross-examined on her affidavit by Plaintiffs’ counsel. Nothing in the cross-examination causes me to doubt her assertions. Ms. Valdes has also provided notarized statements from Mr. Quartarone and Mr. Spinello corroborating her position. While the notarized statements are not ideal, Ms. Valdes does not have to prove her defence in order to set aside the default judgment.
20Lastly, in March 2013, Ms. Valdes received a demand for payment from the Canada Revenue Agency relating to tax debts of Pitts Construction. Ms. Valdes asserts that this is when she first learned that she had been named a director of Pitts Construction. On April 15, 2013, Ms. Valdes challenged the tax assessment on the basis that she had no connection with Pitts Construction. She was successful. On November 15, 2013, the Canada Revenue Agency agreed that she was not to be considered a director of the company within the meaning of section 227.1(1) of the Income Tax Act.
21Ms. Valdes’ liability in relation to Pitts Construction is linked to her status as a director. While the statement of claim implies that she had a role in the operation of the company, this appears to be based solely on the fact that her name appears as a director. There is no specific suggestion or particularized allegation that she did anything on behalf of the company that would give rise to liability.
22In order to establish liability at trial, the Plaintiffs would be required to establish that Ms. Valdes acted in a capacity as described in s. 13(1) of the Construction Lien Act. While this section is not limited to directors, it does require that the person alleged to be liable assents to or acquiesces in conduct that she knows or reasonably ought to know amounts to a breach of trust by the corporation. If established, Ms. Valdes’ claim that she had no involvement with the corporation and was unknowingly and unwittingly made a director of the company would be a clear defence on the merits.
23On the basis of the evidence before me, I am satisfied that Ms. Valdes has an arguable/meritorious defence. While the finding by Canada Revenue Agency is not necessarily admissible in a trial of this matter, should one ever happen, the fact that the Canada Revenue Agency agreed with Ms. Valdes’ position that she was unwittingly made a director of Pitts Construction further confirms to me that there is an air of reality and/or merit to her defence.
Is There a Plausible Explanation for the Defendant’s Default?
24Ms. Valdes asserts that when she first learned of the Statement of Claim, she asked her son for an explanation. Her son told her not to worry about it and indicated that it was a mistake that he would deal with. Mr. Quartarone assured Ms. Valdes that the Statement of Claim had nothing to do with her.
25At the time she received the demand letters and the Statement of Claim, Ms. Valdes did not yet know that she had been named as a director of Pitts Construction.
26Ms. Valdes asserts, and I accept, that she honestly relied on her son’s assurances and thought that the matter had nothing to do with her and had been dealt with.
27In the circumstances, I am satisfied that Ms. Valdes has advanced a plausible explanation for her default. Ms. Valdes relied on repeated assurances made by her son that the matter would be dealt with and to her knowledge it was. I find that she is a relatively unsophisticated litigant who did not appreciate the gravity of her predicament. Perhaps foolishly, she relied on her son. I do not find that she deliberately and intentionally opted to avoid the court’s process.
28Indeed, when she received the default judgment, Ms. Valdes promptly responded to Plaintiffs’ counsel in writing. Her letter was misguided, but it did nonetheless advance her position. This conduct is inconsistent with the conduct of someone who is avoiding the process.
Was the Motion to Set Aside Brought Promptly?
29In July 2013, Ms. Valdes received correspondence from Plaintiffs’ counsel. She immediately responded indicating that she had no involvement in the matter and advised that she was never knowingly a director of Pitts Construction. While it is true that Ms. Valdes’ response was not the most legally correct or helpful response, it nonetheless reiterated the basic position she advances here; namely, that she had no involvement in the matter. Ms. Valdes claims that she followed up her letter with a telephone call to Plaintiffs’ counsel but never received a return call. Plaintiffs’ counsel disputes this fact. I do not need to resolve this factual dispute.
30Ms. Valdes took no further substantive steps until she discovered that her credit line had been frozen. She made this discovery at some point in 2014, though her affidavit sworn October 3, 2014 merely describes the date as “recently”.
31Following the discovery of the frozen credit line, Ms. Valdes took steps to retain counsel and her motion was initially scheduled for October 23, 2014. The matter was then adjourned on a number of occasions, until it was finally heard by me on September 15 and 21, 2017.
32I find that there was delay in bringing this motion. It was not brought as promptly as it should have been. After writing to counsel for the Plaintiffs, Ms. Valdes essentially proceeded on the assumption that the matter had simply “gone away”.
33While I accept that she is not a sophisticated litigant with knowledge and means to properly respond to a default judgment, I find that she did not demonstrate diligence in promptly bringing the motion to set aside the default judgment. She could have, and should have, taken more immediate steps to get some legal advice to address this problem in a more timely fashion.
34On the whole, this factor weighs against setting aside the default judgment.
What Are the Competing Potential Prejudices?
35If the order to set aside the default judgment is not set aside Ms. Valdes is “on the hook” for over $440,000, an amount well in excess of the equity in her home. She is a single mother earning approximately $50,000 per year. If the Judgment is enforced, she could lose her home. The prejudice against her if the order is not granted is manifest.
36The Plaintiffs argue that it will be prejudiced by the delay that will result from the setting aside of the default judgment and notes that witnesses can no longer be located. As well, the Plaintiffs argue that the delay occasioned by setting aside the judgment, the Defendant will be granted an opportunity to dissipate her assets in advance of any future judgment. Lastly, the Plaintiff argues that Ms. Valdes is the only solvent defendant remaining and that as a result, it will be left with no remedy should the default judgment be set aside.
37In my view, these claims of prejudice are not strong. The Plaintiffs have secured a judgment by default on a claim that would appear difficult to advance on the merits even in the absence of delay. I am not satisfied that key evidence or witnesses are no longer available. As well, the fact that the other defendants have declared bankruptcy does not impact the court’s decision vis-à-vis Ms. Valdes. She has no control over the finances of her co-defendants. Lastly, Ms. Valdes has indicated that she is willing to have a non-dissipation order registered on title so that any concern about the dissipation of her only significant asset is assuaged.
The Integrity of the Administration of Justice
38There is no doubt that the administration of justice is brought into disrepute in cases where a person deliberately or intentionally ignores court processes and then only seeks relief when the “pinch” of a judgment is felt. That is not the way the system works.
39That said, the integrity of the administration of justice also demands a careful assessment of the facts of a case to determine whether fairness and justice demand some degree of flexibility notwithstanding the Rules.
40I am not satisfied that Ms. Valdes deliberately and intentionally ignored the authority and jurisdiction of the court or its process. I am satisfied that the integrity of the administration of justice will not be adversely impacted by setting aside the default judgment.
Conclusion
41I turn finally to balancing the five factors. I note that four of the five factors weigh in favour of granting the motion. That said, the delay in bringing the motion to set aside the default judgment is significant and causes me some concern. Recognizing that the test is intended to be applied in a flexible and fact-specific manner, I am satisfied that in balancing the factors I should exercise my discretion to set aside the default judgment. As a result, I order the following:
a. The Default Judgment dated March 11, 2013 is set aside;
b. The Noting in Default is set aside;
c. Any enforcement proceedings against Ms. Valdes are stayed pending further order;
d. A Non-Dissipation Order shall issue and can be registered on title in relation to Ms. Valdes’ home; and,
e. Ms. Valdes, is to serve and file a Statement of Defence within 30 days of the release of this Endorsement.
Costs
42Following completion of the argument, I invited counsel for the Plaintiffs to advise the court about costs incurred to enforce the default judgment. I have since received written submissions indicating that approximately $3,500 in costs, all-inclusive, are claimed in relation to enforcement of the default judgment. Counsel for Ms. Valdes has provided responding submissions and argues that the costs sought are excessive and unwarranted in relation to the limited steps taken in terms of enforcement proceedings. I agree that the costs claimed are excessive.
43I am also advised that Stong J. ordered costs of $2,500 on the motion to obtain default judgment. Those costs would have related to costs incurred in commencing the proceedings up to the default judgment motion. The costs order of Stong J. has not been satisfied to date.
44Setting aside the default judgment has the effect of setting aside the related costs order. That said, the Plaintiff should be entitled to at least a portion of the costs ordered by Stong J. as costs thrown away as a result of this motion. As well, the Plaintiffs proceeded fairly and properly in obtaining a default judgment. They did not advance enforcement proceedings pending the outcome of the motion, which was delayed through no fault of their own. The position they advanced on the motion was reasonable.
45While I find that Ms. Valdes has met the test for setting aside the default judgment, her conduct did not display a high degree of diligence in bringing and moving the matter forward expeditiously. Indeed, this whole matter could have been avoided had she taken a more critical view of her son’s assurances and had she conducted some independent investigation into her legal predicament.
46When all of these factors are considered and balanced, I find that this is an appropriate case to depart from the ordinary rule that the successful party is entitled to costs. In my view, costs thrown away should be payable to the Plaintiffs. In view of the principles of proportionality and reasonableness, I fix costs thrown away at $2,000 all-inclusive and payable to the Plaintiffs.
Justice J. Di Luca
Date: September 29, 2017