Case Summary

The defendant, William O, brought a motion to set aside a default judgment for fraudulent misrepresentation obtained against him. The court applied the five-part test for setting aside default judgment, considering promptness, explanation for default, arguable defence, prejudice, and the integrity of the administration of justice. While the motion was brought promptly, the court found O's explanations for his default lacked credibility, noting his awareness of the dispute and failure to update contact information. Furthermore, O's proposed defence, based on bald denials of signatures and knowledge of invoices, was deemed to lack an "air of reality" given the evidence. The court dismissed the motion, concluding that setting aside the judgment would condone O's deliberate attempts to avoid liability. interesting_citations_summary: > This decision provides a robust application of the five-part test for setting aside default judgment, as articulated in *Mountain View Farms Ltd. v. McQueen* and *Peterbilt of Ontario Inc. v. 1565627 Ontario Ltd.* It emphasizes that a defendant must provide a credible explanation for default and demonstrate an arguable defence with an "air of reality," beyond mere bald denials or unsubstantiated allegations of forgery. The court's analysis underscores that deliberate avoidance of litigation, coupled with a lack of substantive evidence for a defence, will weigh heavily against setting aside a default judgment, particularly when considering the integrity of the administration of justice. final_judgement: > The motion brought by William O to set aside default judgment is dismissed. Baron Finance Incorporated is entitled to costs of $6,000, inclusive of disbursements. winning_degree_applicant: 5 winning_degree_respondent: 1 judge_bias_applicant: 0 judge_bias_respondent: 0 year: 2018 decision_number: 6832 file_number: "CV-16-560043" source: "https://www.canlii.org/en/on/onsc/doc/2018/2018onsc6832/2018onsc6832.html" keywords: - Default judgment - Set aside - Fraudulent misrepresentation - Factoring agreement - Personal guarantee - Service - Credibility - Arguable defence - Rules of Civil Procedure - Administration of justice areas_of_law: - Civil Procedure - Contract Law - Fraud cited_cases: legislation: - title: "Rules of Civil Procedure, R.R.O. 1990, Reg. 194" url: "https://www.ontario.ca/laws/regulation/900194" case_law: - title: "Mountain View Farms Ltd. v. McQueen, 2014 ONCA 194" url: "https://www.canlii.org/en/on/onca/doc/2014/2014onca194/2014onca194.html" - title: "Peterbilt of Ontario Inc. v. 1565627 Ontario Ltd., 2007 ONCA 333, 87 O.R. (3d) 479 (C.A.)" url: "https://www.canlii.org/en/on/onca/doc/2007/2007onca333/2007onca333.html" - title: "CIBC v. Petten, [2010] O.J. No. 5236 (Sup. Ct.)" url: "https://www.canlii.org/en/on/onsc/doc/2010/2010onsc6236/2010onsc6236.html" --- COURT FILE NO.: CV-16-560043 DATE: 20181115 ONTARIO SUPERIOR COURT OF JUSTICE **B E T W E E N :** BARON FINANCE INCORPORATED Plaintiff (Respondent) – and – SVITLANA MARCHUK, WILLIAM O AND JUNAPAUL FASHION CONTRACTORS O/B JUNAPAUL HOLDINGS CORP. Defendants (Moving Party) Monica Unger Peters for the Plaintiff (Respondent) Daniel Traheit for the Defendant William O (Moving Party) HEARD: July 16, 2018 favreau j. : # Introduction [1] The defendant, William O, brings a motion to set aside default judgment made against him on April 24, 2017. [2] For the reasons that follow, the motion to set aside default judgment is dismissed. Mr. O has failed to show that he has a reasonable explanation for the default or that he has an arguable defence to the claim. # Background facts ## Factoring agreement [3] The plaintiff, Baron Finance Incorporated ("Baron"), is in the business of providing financing to borrowers in exchange for the assignment of accounts receivable. [4] The defendant Junapaul Fashion Contractors O/B Junapaul Holdings Corp. ("Junapaul") was in the business of manufacturing clothing. [5] On September 30, 2015, Baron and Junapaul entered into a "factoring agreement", whereby Baron agreed to provide financing to Junapaul in exchange for which Junapaul was to assign some of its accounts receivable to Baron. [6] The factoring agreement was personally guaranteed by the defendants Svitlana Marchuk and William O. [7] Between March 23, 2016 and June 10, 2016, Baron advanced $110,629.48 to Junapaul, and by August 31, 2016, the amount owed by Junapaul to Baron was $98,807.63. [8] As part of the security on the amounts advanced, Junapaul assigned invoices in relation to goods Junapaul claimed to have sold to Black Feather Holding Incorporated ("Black Feather"). [9] Baron claims that it sought payment of the invoices from Black Feather, but was advised by Black Feather that Junapaul, in some cases, never delivered the goods at issue and, in other cases, cancelled the orders. ## Statement of claim and service on Mr. O [10] On August 3, 2015, Baron gave notice of default under the factoring agreement to Junapaul. Having not received payment in response to the notice of default, on September 7, 2016, Baron commenced an action against Junapaul, Ms. Marchuk and Mr. O. [11] The statement of claim alleges breach of the factoring agreement, and also alleges fraud as follows at paragraphs 15 and 16 that: > 15. Baron was subsequently advised that the invoices to Black Feather, upon which Baron's advancement of funds were based, were either fraudulent or not-payable and that the goods referenced in the invoices to Black feather were never delivered to Black feather. As a result, Black Feather is not liable to pay these invoices. > > 16. Baron therefore maintains that Junapaul breached the terms of the Financing Agreement by misrepresenting the [sic] that the goods in the Black feather Invoices had been duly delivered, and that the amounts owing thereunder were payable. [12] After the issuance of the statement of claim, the law firm acting for the plaintiff made two attempts to personally serve Mr. O: a. On September 12, 2016, a process server attended 19 Innisfree Court, Toronto, Ontario. This was the address shown on an Identification Verification Form prepared by Baron on October 1, 2015, around the time Mr. O signed the guarantee. The signed verification form included a photocopy of Mr. O's driver's license, with the Innisfree address. When the process server attended this address, he found that the building was under construction and no one was living there. b. On September 25, 2016, a process server attended 206-17 Michael Power Place, Toronto, Ontario. This was an address obtained by the process server through an unspecified inquiry made to the Ontario government. The process server was unable to serve Mr. O at that address and was informed by the concierge of the building that there was no one living at that address named William O. [13] The plaintiff subsequently served Mr. O at the Innisfree and Michael Power Place addresses via regular mail and also served him via email at an email address Mr. O used to conduct business for Junapaul. [14] Mr. O did not defend the claim. [15] On March 31, 2017, the plaintiff amended the statement of claim, adding "for fraudulent misrepresentation" to the claim for $98,897.63 in the prayer for relief at paragraph 1. The amended claim was served on Mr. O via regular mail at the Michael Power Place address and electronically at his email address. [16] Mr. O did not defend the amended claim. ## Motion for summary judgment [17] The plaintiff scheduled a motion for summary judgment against Junapaul and Ms. Marchuk for February 8, 2017. Having heard nothing from Mr. O, Baron intended to pursue default proceedings against him. [18] A few days before the scheduled motion, Ms. Marchuk entered into a course of negotiations with Baron's lawyer, which led to a settlement of the action between Baron on the one hand and Junapaul and Ms. Marchuk on the other hand. [19] The minutes of settlement provided that Junapaul and Ms. Marchuk were to pay $115,000 in three installments to Baron. The first installment was due on February 15, 2017. The settlement also provided that Ms. Marchuk and Junapaul were to consent to judgment in the event of default under the settlement. [20] On January 27, 2017, Mr. Marchuk sent signed minutes of settlement and a signed consent to judgment via email to Baron's counsel. In both cases, the signatures provided on behalf of Junapaul, above the statement "I have authority to bind the corporation", appear to be signed by Mr. O. The documents include a signature with "WILLIAM O" handwritten below. [21] Mr. O was not directly involved in negotiating the minutes of settlement or the consent to judgment with Baron's lawyer. However, during the course of negotiations, after Ms. Marchuk sent the documents that included Mr. O's apparent signatures, counsel for Baron expressed surprise at Mr. O's involvement in signing the documents, after which Ms. Marchuk responded: > I convinced him to sign on behalf of the company. I am not sure how is willing to act on personal matters. Giving timing, could we just execute the settlement? You always can proceed with default judgment against him if something should go wrong, isn't it? [22] Following the execution of the minutes of settlement and the consent to judgment, Junapaul's first payment to Baron was due on February 15, 2017. Baron did not receive the amount owed, and it proceeded to obtain judgment against Junapaul and Ms. Marchuk on February 17, 2017, in accordance with the consent to judgment given as part of the settlement. [23] Shortly after the defendants failed to make the first payment, Baron became aware that Ms. Marchuk had sold her house on February 3, 2017. Ms. Marchuk subsequently filed for personal bankruptcy on March 17, 2017. ## Default judgment against Mr. O [24] On April 24, 2017, Baron brought a motion to validate service of the statement of claim and amended statement of claim on Mr. O, and to obtain default judgment for fraudulent misrepresentation against him. [25] In advance of the motion, the motion record was served on Mr. O at the Michael Power Place address via regular mail and electronically at his email address. [26] On April 24, 2017, Ferguson J. of this Court granted Baron's motion, making an order validating service of the statement of claim, amended statement of claim and motion record, requiring the Registrar to note Mr. O in default, and providing as follows: > THIS COURT ADJUDGES AND DECLARES that the defendant William O is liable to the Plaintiff for fraudulent misrepresentation, and shall pay to the Plaintiff the sum of $98,807.63, together with prejudgment interest to April 24, 2017 of $22,647.56. [27] The Court also ordered that future documents could be served on Mr. O by serving them by regular mail at the Michael Power Place address and electronically by serving them at Mr. O's email address. [28] After obtaining default judgment, the plaintiff sought to examine Mr. O in aid of execution. Mr. O did not attend the examination, and the plaintiff commenced contempt proceedings. In the context of those proceedings, Baron's counsel obtained yet another address for Mr. O, where he was served personally. [29] It was only after being personally served with the contempt materials that Mr. O responded to the litigation. At that point, a motion was scheduled for March 23, 2018. On that day, Nishikawa J. of this Court made an order requiring Mr. O to attend an examination in aid of execution on April 23, 2018, which was to be held without prejudice to Mr. O's ability to bring a motion to set aside the default judgment. The Order also set out a schedule leading up to the motion to set aside the default judgment. # Positions of the parties [30] In support of his motion to set aside default judgment, Mr. O has sworn an affidavit in which he says that he only became aware of the action against him when he was served with the materials on the contempt motion. He also says that his role in Junapaul was fairly limited, and that he did not sign the factoring agreement or guarantee, and that he has never heard of Black Feather. He further states that he had no involvement in the negotiations of the settlement of the motion for summary judgment, and that he did not sign the minutes of settlement or consent to judgment. Based on this evidence, Mr. O's lawyer argues that Mr. O has a good explanation for the default because he was never aware of the claim, and that he has a good defence to the claim because there is a live issue as to whether Mr. O was a party to the agreements with Baron and whether he was involved in any fraudulent misrepresentations that may have been made about amounts owed by Black Feather to Janupaul. [31] Baron resists the motion to set aside default judgment on the basis that Mr. O has failed to properly explain his default, and that he has not demonstrated that he has a good defence. Baron argues that Mr. O has presented nothing more than bald denials in support of his position that he did not receive notice of the action or that he was not involved in Janupaul's dealings with Baron or Black Feather. # Analysis [32] The issue on this motion is whether the default judgment entered against Mr. O should be set aside. [33] [Rule 19 of the Rules of Civil Procedure](https://www.ontario.ca/laws/regulation/900194) provides as follows: > 19.08 (1) A judgment against a defendant who has been noted in default that is signed by the registrar or granted by the court on motion under rule 19.04 may be set aside or varied by the court on such terms as are just. > > (2) A judgment against a defendant who has been noted in default that is obtained on a motion for judgment on the statement of claim under rule 19.05 or that is obtained after trial may be set aside or varied by a judge on such terms as are just. > > (3) On setting aside a judgment under subrule (1) or (2) the court or judge may also set aside the noting of default under rule 19.03. [34] The parties agree that the test to be applied is as set out in [Mountain View Farms Ltd. v. McQueen, 2014 ONCA 194](https://www.canlii.org/en/on/onca/doc/2014/2014onca194/2014onca194.html), at paras. 48 and 49, wherein the Court of Appeal enunciated a five part test for setting aside default judgment: > 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](https://www.canlii.org/en/on/onca/doc/2007/2007onca333/2007onca333.html): > > (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. [35] The Court of Appeal went on, at paras. 50 and 51, to emphasize, that this five part test is not meant to be applied rigidly: > 50 These 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. > > 51 For instance, the presence of an arguable defence on the merits may justify the court exercising its discretion to set aside the default judgment, even if the other factors are unsatisfied in whole or in part. In showing a defence on the merits, the defendant need not show that the defence will inevitably succeed. The defendant must show that his or her defence has an air of reality. ## Issue 1 -- Was the motion brought without delay? [36] Mr. O claims to have become aware of the default judgment in late February 2018, and by March 23, 2018, at the hearing before Justice Nishikawa, the parties had agreed to a schedule for the motion to set aside default judgment. [37] Baron does not dispute that the motion was brought promptly after Mr. O was personally served with the contempt proceedings. [38] Accordingly, I am prepared to find that the motion was brought without delay. ## Issue 2 -- Was the default adequately explained? [39] Mr. O's explanation for the delay is that he was not aware of the action brought against him until February 2018, when he was personally served with the contempt proceedings. He denies that the documents served came to his attention or that he was in any way involved in the settlement that led to the signing of the minutes of settlement. [40] I do not accept Mr. O's excuses for his default in responding to the action. Individually, each of his explanations may be believable, but, in my view, cumulatively, they are simply not credible. [41] First, as Baron points out, there is evidence that Mr. O was aware of Junapaul's default under the factoring agreement. In particular, in April 2016, Mr. O was copied on emails showing that Baron had made inquiries about the status of the Black Feather invoices, and that it was advised by Black Feather that a number of Black Feather invoices assigned by Junapaul to Baron were cancelled or goods had not been delivered. In addition, Baron sent its notice of default to Junapaul in August 2016, a time when Mr. O still worked at Junapaul by his own admission during his cross-examination on the motion. Therefore, there is evidence that Mr. O was aware of the dispute with Baron before he left Junapaul. [42] Second, Mr. O admits having connections to the addresses where documents were sent, and yet he took no steps to ensure that mail sent to those addresses would come to his attention. Mr. O lived with his family at the Innisfree address from 1972 to February 2015. Mr. O's evidence is that, when his mother died, she left the house to his sister. He claims that he was not aware of any documents that may have been sent to that address because he is not on speaking terms with his sister. However, he provided no evidence beyond the bald statement in his affidavit that he is not on speaking terms with his sister and no evidence as to whether and why he took no steps to update the address on his driver's license or to forward his mail after moving out from this address in 2015. Similarly, he admits having lived at the Michael Power Place address from February 2015 to May 2016, but again provides no explanation for his failure to take steps to forward his mail or update his driver's license after leaving this address. He also admits having used the Junapaul email address to which documents were sent, but claims he stopped using it after he left Junapaul in September 2016. Again, he gives no explanation for failing to include an out of office message when he left the company. [43] Finally, Mr. O denies that he was aware of the claim at the time Ms. Marchuk negotiated the settlement and denies that he signed the minutes of settlement and consent to judgment. He suggests that his signatures on these documents were generated electronically. His claim that he did not sign these documents is not backed up by any evidence beyond his speculation that the signatures were generated electronically. There is no expert evidence or other evidence beyond his bald denial and speculation. Looking at the signatures on these documents, I note that they do not appear to have been generated electronically. For example, under each signature, Mr. O's name is handwritten in upper case letters and the signatures in both cases cross over the signature lines. Under the circumstances, without more than Mr. O's bald assertion that he did not sign the documents, I do not accept that he was not aware of the settlement, and therefore that he was not aware of the claim at the time the minutes of settlement and consent to judgment were signed. [44] Accordingly, I am not satisfied with Mr. O's explanations for the default. In combination, the evidence reviewed above suggests that Mr. O was aware of Baron's claim and that he actively took steps to avoid dealing with it. He has provided nothing more than a bald denial of knowledge, while making very serious but unsubstantiated allegations of forgery. It is only when he was faced with the prospect of being found personally in contempt that Mr. O took active steps to respond to the claim. I find that his excuses lack credibility, and his behaviour suggests a deliberate attempt to avoid liability by ignoring Baron's claim until he faced potential serious personal jeopardy. ## Issue 3 - Does Mr. O have an arguable defence? [45] While the case law does not require Mr. O to establish a defence to the action, it does require him to demonstrate that he has an arguable defence or that the defence has an "air of reality": [Mountain View Farms Ltd., para. 51](https://www.canlii.org/en/on/onca/doc/2014/2014onca194/2014onca194.html). [46] Mr. O's proposed defence to Baron's claim is that he played no active role in Junapaul other than doing some sales and sewing work, and that any signatures on the documents Baron relies on were forgeries. He also denies having any knowledge of Black Feather and its invoices. [47] In my view, Mr. O's proposed defence lacks an air of reality. [48] Mr. O's signature appears on five documents that were signed at the time Baron and Junapaul entered into the factoring agreement: a. The factoring agreement dated September 30, 2015, bears a signature above Mr. O's name, wherein Mr. O is described as the president of Junipaul; b. An addendum to the factoring agreement again bears a signature above Mr. O's name, wherein Mr. O is described as the president of Junipaul; c. A Director's Resolution, dated September 30, 2015, approving Junapaul's participation in the factoring agreement bears a signature above Mr. O's name; d. A personal guarantee dated September 30, 2015, bears a signature above Mr. O's name; and e. An Identification Verification Form dated October 1, 2015, in which Mr. O is identified as the client, bears a signature in the box marked "client signature", and notably attaches photocopies of Mr. O's driver's license and a credit card. [49] Mr. O has provided no evidence in support of his position that these signatures are forgeries. Interestingly, the signatures on all documents Mr. O claims not to have signed bear a noticeable resemblance to his signature on the affidavit sworn in support of this motion. [50] In any event, while baldly stating that the signatures on these documents are forgeries, Mr. O has not provided any credible explanation as to who may have forged his signature and why they would have been motivated to do so. It is hard to imagine that Baron would seek to forge his signature, given that it was lending money to Junapaul and would be motivated to protect its interests. There is also no evidence of a motive for anyone within Junapaul having a motive to forge Mr. O’s signature. Significantly, Mr. O was not the only person who signed a personal guarantee; Ms. Marchuk also signed the guarantee. [51] A number of the documents referred to above, including the Identification Verification Form, were witnessed by Artem Chlemev, who was an employee of Baron at the time. Mr. O states that he has never met Mr. Chlemev. He asserts that his lawyer has not been able to locate Mr. Chlemev to date and that Mr. Chlemev's evidence is key to the issue of forgery. In my view, this is a red herring. I note that Mr. O's record on the motion does not describe what efforts have been made to locate Mr. Chlemev. In any event, in the absence of anything beyond Mr. O's bald assertion that he did not sign the documents, I do not see how Mr. Chlemev's unavailability as a witness on the motion gives Mr. O an arguable defence. [52] In the absence of anything more, such as the evidence of a handwriting expert, I cannot accept that Mr. O's defence that he was not a party to agreement with Baron has an air of reality. [53] Mr. O also states that he knew nothing about Black Feather and its invoices. Yet, as referred to above, it is evident that Mr. O was copied on emails when the issues with the Black Feather invoices were identified. [54] During the motion, Mr. O's lawyer argued that Mr. O has an arguable defence because the plaintiff's claim and the evidence before Ferguson J. do not support a finding that Mr. O fraudulently misrepresented the value of the Black Feather invoices. At this stage, my role is not to sit on appeal from Ferguson J.’s decision, but to assess whether Mr. O has an arguable defence to the claim, and it is his burden to demonstrate that his defence has an air of reality. In his affidavit, Mr. O asserts that his defence to Baron's claim is that he never signed any of the documents and that he had no knowledge of the Black Feather invoices. As reviewed above, I find that this proposed defence does not have an air of reality. [55] I must add that Mr. O's position is not assisted by his overall evidence on this motion. Believing Mr. O would mean accepting that he is a most unfortunate man. Not only was his signature forged several times when the agreement was reached between Junapaul and Baron in 2015 and again in 2017 when a settlement was reached with Baron, but he had the misfortune of never receiving any documents served on him, such that the first he ever knew about the deal with Baron and the claim against him was the threat that he may go to jail. In my view, for a court to accept such a series of unfortunate events requires more than the few paragraphs of bald denials Mr. O has put forward in his affidavit. [56] In the circumstances, I find that his defence lacks an air of reality and that he has not demonstrated a good arguable defence. ## Issue 4 - Is there potential prejudice to the parties? [57] As held in [Mountain View Farms Ltd.](https://www.canlii.org/en/on/onca/doc/2014/2014onca194/2014onca194.html), prejudice to the parties is one of the factors to be weighed in considering whether to set aside default judgment. [58] However, as recognized in [CIBC v. Petten, [2010] O.J. No. 5236 (Sup. Ct.), at para. 6](https://www.canlii.org/en/on/onsc/doc/2010/2010onsc6236/2010onsc6236.html), there will always be prejudice to the moving party if the motion is not granted. [59] In my view, this is why prejudice is one factor to be weighed amongst others. Ultimately, where a defaulting defendant has a meritorious defence, the prejudice in requiring the defendant to pay a judgment that could have been defeated on the merits may weigh strongly in favour of setting aside a default judgment even if the explanations for the default and delay are not entirely satisfactory. [60] In a case such as this one, where the defence lacks an air of reality, the prejudice to the defendants is less obvious, as it is not evident that any kind of real defence is available. ## Issue 5 - What would the effect of setting aside default judgment be on the integrity of the administration of justice? [61] This factor looks at the effect of the order on the overall integrity of the administration of justice. [62] In my view, setting aside the default judgment in this case would have the effect of condoning Mr. O's behaviour in taking no steps to ensure that his publicly available addresses were up to date and in failing to provide any evidence beyond bald statements to explain his default and to support his argument that he has a meritorious defence. [63] Accordingly, weighing all of the factors together, I do not find that this is a case in which setting aside default judgment is warranted. # Conclusion [64] For the reasons above, Mr. O's motion to set aside default judgment is dismissed. [65] At the conclusion of the hearing of the motion, the parties agreed that the successful party would be entitled to costs in the amount of $6,000 all inclusive. Accordingly, Baron is entitled to costs of $6,000, inclusive of disbursements. FAVREAU J. RELEASED: November 15, 2018