Court File and Parties
COURT FILE NO.: 145/18 DATE: 20190506 ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
2069586 Ontario Inc., 1139319 Ontario Inc., and Carmelo Calabrese Plaintiffs – and – Sovereign General Insurance Company and Bank of Montreal Defendant
Counsel: Laurie Aitchison, for the Plaintiffs Ramon Andal, for the Defendant Sovereign General Insurance Company
HEARD: April 25, 2019
Reasons for Decision
Woodley J.
Overview
[1] The Plaintiffs brought this action against Sovereign General Insurance Company (“Sovereign”) to recover the sum of $353,520.92, being the unpaid portion of a judgment dated April 7, 2017 (“the Judgment”) which the Plaintiffs obtained against Barbara Romanow (“Romanow”), Aztec Financial Corp. (“Aztec”) and Community Life Projects Inc. (“CLP”) in Court File No. 97164/16 (“the Underlying Action”).
[2] Sovereign brings this motion under Rule 21.01(1)(b) of the Rules of Civil Procedure to strike out the Plaintiffs’ claim and the cross-claim of Bank of Montreal against Sovereign on the ground that they disclose no reasonable cause of action.
[3] Sovereign claims that neither s. 132(1) of the Insurance Act, nor the Mortgage Brokers Errors & Omissions Policy, No. TEO798374520165 issued by Sovereign (“the Policy”) to Aztec grants the Plaintiffs the right to recover payment of the Judgment against the Policy. Further, the Policy provides no insurance coverage with respect to liability for the Judgment in the Underlying Action.
[4] For the purposes of this motion, the court will consider the Statement of Claim and the documents referred to therein. The facts pleaded are presumed to be true. The Statement of Claim referred to the following documents:
a. The default Judgment dated April 7, 2017 for $457,975.00 plus costs in the amount of $9,742.18; b. The Agreement between Aztec, CLP and the plaintiff 2069586 Ontario Inc. whereby Aztec received $457,975.00 in trust to be allocated to File AFCP STU1254; c. The Mortgage Brokers Errors and Omissions Policy issued by Sovereign to Aztec; and d. The Mortgage Brokers and Administrators Errors & Omissions Insurance Guidelines published by the Financial Services Commission of Ontario (FSCO Guidelines).
Facts
[5] The Plaintiff Carmelo Calabrese (“Calabrese”) is a principal, officer, shareholder and director of both 2069586 Ontario Inc. (“206”) and 1139319 Ontario Inc. (“113”).
[6] The Defendant Sovereign General Insurance Company is an insurance company and was the insurer of Aztec Financial Corp. (“Aztec”) and/or Barbara Romanow (“Romanow”).
[7] On April 7, 2017, the Plaintiffs obtained judgment in a separate action, bearing court file number 97164/16 (the “Aztec action”), against Aztec, Romanow, Fuad Husein and Community Life Projects Inc. (“CLP”) in the amount of $457,975.00 plus costs in the amount of $9,742.18.
[8] At all material times Aztec was a mortgage broker and Romanow was its principal broker.
[9] On July 8, 2016, an Agreement was entered into between Aztec, CLP, and 206. The Agreement dealt with 206 procuring a mortgage from CLP. One of the conditions of the Agreement was that 206 provide Aztec with $457,975.00 payable to Aztec, in trust.
[10] This money was to “remain in Aztec’s trust account until repaid to 2069586”.
[11] The Agreement further provided that the funds would remain in trust, care and control of Aztec until July 27, 2017, at which time the funds would be returned to 206 without interest or deduction.
[12] The Plaintiff 113, on behalf of the Plaintiff 206, provided Aztec with a bank draft payable to “Aztec Financial Corp., in trust” on or about July 8, 2016.
[13] The funds were never repaid to the Plaintiffs as set out in the Agreement and an action was commenced for breach of contract, breach of trust, fraud, and conversion and judgment was granted as set out above.
[14] Pursuant to the Notice of Garnishment the Plaintiffs received a partial payment of $114,196.26, leaving $353,520.92 still owing.
[15] Pursuant to the Mortgage Brokers, Lenders and Administrators Act (“MB Act”), all brokers are required to carry errors and omissions insurance policies that are to include a direct right of action against the insurer by injured third parties.
[16] Aztec had a mortgage brokers Errors and Omissions Liability Policy with Sovereign (“E & O Policy”).
[17] The E & O Policy (Endorsement 2, Part B, paragraph 6(B) provides:
In the event of the failure of the Named Insured to pay a claim upon demand of any third party, then the insurer shall make payment, after investigating coverage, directly to such third party and shall be entitled to reimbursement from an insured for the amount of the applicable deductible and any other amount incurred by the insurer.
[18] In addition, the “Mortgage Brokerages and Administrators Errors & Omissions Insurance Guidelines” as published by the Financial Services Commission of Ontario (“FSCO”) states that “injured third parties will have a direct right of action against the insurer under the policy”.
[19] Aztec and Romanow have failed to pay the Plaintiffs’ judgment and Sovereign, pursuant to its insurance policy, is now obligated to indemnify the Plaintiffs for the same.
Issue
[20] Am I entitled pursuant to Rule 21.01(1)(b) to strike out the Plaintiffs’ pleading on the ground that it discloses no reasonable cause of action and make an order or grant judgment accordingly?
Law and Analysis
[21] The Defendant Sovereign commenced this motion pursuant to Rule 21.01(1)(b) which reads as follows:
Rule 21.01(1)(b) states: A party may move before a judge,
(b) to strike out a pleading on the ground that it discloses no reasonable cause of action or defence and the judge may make an order or grant judgment accordingly.
[22] The test to determine a Rule 21.01(1)(b) motion is as established by the Supreme Court in Hunt v. Carey Canada Inc., [1990] 2 S.C.R. 959, which requires that it be “plain and obvious” that some or all of the statement of claim discloses no reasonable cause of action before it can be struck out. It is “inappropriate to use the Rule’s summary procedure to prevent a party from proceeding to trial on the grounds that the action raises difficult questions”.
[23] No evidence is to be adduced on a Rule 21 motion except that any document pleaded is incorporated by reference and the court is entitled to read and rely on the terms of such documents as if they were fully quoted in the pleadings. Allegations of fact as set out in the pleadings are to be accepted as true and proven, unless they are patently ridiculous or incapable of proof. Pleadings are to be read generously with allowances made for drafting frailties. (See Gravelle v. Ontario [2012] O.J. No. 4388).
[24] The moving party must prove that it is “plain and obvious” that the claim would fail for disclosing no reasonable cause of action. Based on the facts as alleged, the moving party must show that it is beyond a reasonable doubt that the Plaintiffs could not succeed in its action. However, as noted by the Court in Hunt, Plaintiffs should not be prevented from proceeding because of the length and complexity of the issues or the novelty of the cause of action or the potential for the Defendant to present a strong defence. (See Gravelle, supra, at p. 9, para 31).
[25] Pleadings are only struck without leave to amend in the “clearest of cases”. This is because there are inherent risks in striking out an action at the pleading stage when no sworn evidence has been put before the court. (See Gravelle, supra, at p. 9, para 32).
[26] It is an error to deal with a Rule 21.01(1)(b) motion as if it were a summary judgment motion under Rule 20. (See Castrillo v. Workplace Safety and Insurance Board, 2017 ONCA 121, 136 O.R. (3d) 654 (C.A.), p. 7, para 13).
[27] Further, as per Castrillo, supra, in order to strike a pleading under Rule 21.01(1)(b), the following framework must be followed:
a. The material facts pleaded must be deemed to be proven or true, except to the extent that the alleged facts are patently ridiculous or incapable of proof; b. The claim incorporates by reference any document pleaded and the court is entitled to read and rely on the terms of such documents as if they were fully quoted in the pleadings; c. A claimant is not entitled to rely upon the possibility that new facts may turn up as the case progresses; the facts pleaded are the basis upon which the claim is evaluated; d. The novelty of the cause of action is of no concern at this stage of the proceeding; e. The statement of claim must be read generously to allow for drafting deficiencies; and f. If the claim has some chance of success, it must be permitted to proceed.
[28] If I am required to make a substantive legal finding, such as interpreting privative clauses to determine that the Plaintiffs’ claim has no chance of success, then such finding is not available on a Rule 21.01(1)(b) motion but properly the subject of a motion for summary judgment or Rule 21.01(1)(a). (See Castrillo, supra, p. 17, para 65).
[29] In the present case the Defendant Sovereign argues as follows:
a. Section 132 of the Insurance Act provides the only statutory basis for a direct right of action by an injured party against an insurance company which requires that there be “injury or damage to the person or property of another” and not only pure economic loss. As the loss in the present case was “pure economic loss” there can be no recovery and no cause of action under s. 132; b. The insurance policy in question provides no coverage for the liability of Aztec and Romanow because: i. Liability does not come within the scope of the insuring agreement which is restricted to wrongful acts that arise solely out of or in connection with, the rendering or failure to render “professional services” as defined by the policy; and ii. Even if it arose solely out of the rendering of “professional services” such liability is excluded from coverage by the Policy exclusions;
[30] I accept Sovereign’s argument as it relates to s. 132 of the Insurance Act. The injury in the present case is restricted to “pure economic loss” and on the basis of the information before me it appears that there can be no recovery under s. 132.
[31] However, I do not accept Sovereign’s argument as it relates to coverage under the policy keeping in mind the test to be applied under Rule 21.01(1)(b).
i. Liability Outside the Scope of the Policy
[32] Sovereign argues that coverage is restricted to liability for a wrongful act that “arises solely out of, or in connection with, the rendering or failure to render professional services”, which is defined by the Policy as “only those services rendered by the insured while acting within the scope of the insured’s services as a mortgage broker and customary to the practice of mortgage brokering”.
[33] More particularly Sovereign relies upon the FSCO Errors & Omissions Guidelines, Item 3, that the policy covers an Ontario licensed mortgage brokerage and/or mortgage administrator “for all acts from the business of trading, dealing and/or administering mortgages as defined under the Mortgage Brokerages, Lenders and Administrators Act” (“the Act”). Acts which do not consist of “trading, dealing and/or administering mortgages” fall outside the scope of the FSCO Guidelines.
[34] Under the Act the services that fall under a mortgage broker are:
Dealing in mortgages
2.(1) for the purposes of this Act, a person or entity is dealing in mortgages in Ontario when he, she, or it engages in any of the following activities in Ontario, or holds themselves out as doing so:
- Soliciting another person or entity to borrow or lend money on the security of real property;
- Providing information about a prospective borrower to a prospective mortgage lender, whether or not this Act governs the lender.
- Assessing a prospective borrower on behalf of a prospective mortgage lender, whether or not this Act governs the lender.
- Negotiating or arranging a mortgage on behalf of another person or entity, or attempting to do so.
- Engaging in such other activities as may be prescribed.
Prohibition re carrying on business
(2) No person or entity shall carry on the business of dealing in mortgages in Ontario unless he, she or it has a brokerage licence or is exempted from the requirement to have such a licence.
[35] Sovereign claims that the Agreement, which gave rise to the liability of Romanow and Aztec under the Judgment, provides for the payment of money into trust to be held by Aztec until July 27, 2016, at which time the funds were to be returned to the plaintiff. The money held in trust was not secured by a mortgage. The trust arrangement, Sovereign argues, does not meet the definition of “mortgage” under the Mortgages Act.
[36] I disagree. The Statement of Claim at paragraph 9 references “an Agreement” entered into between Aztec, CLP, and 206, on July 8, 2016 that dealt with 206 procuring a mortgage from CLP. One of the conditions of the Agreement was that 206 was to provide Aztec with $457,975 payable to Aztec in trust.
[37] The “Agreement” was filed by the Plaintiffs. Paragraph 1 of the Agreement provides for the “placing” of funds into Aztec’s trust account to be allocated to File AFCP STU1254, to remain in trust subject to the balance of the Agreement. Paragraph 2 reports that CLP has approved 206 for a line of credit for land acquisition and development of the said Project, a Financing Commitment in respect of which shall be provided by the Broker and Lender to the Borrower within three business days after notice that the Borrower has received an accepted offer to purchase the Project.
[38] To accept Sovereign’s argument on a Rule 21.01(1)(b) motion I must find it “plain and obvious” that there is no cause of action as disclosed in the Statement of Claim. I am not able make such a finding in the present case.
[39] Under the Mortgages Act the services that fall under a mortgage broker include when he, she, or it engages in any of the following activities in Ontario, or holds themselves out as doing so: soliciting another person or entity to borrow or lend money on the security of real property; and negotiating or arranging a mortgage on behalf of another person or entity, or attempting to do so.
[40] At the very least this Agreement appears to solicit, negotiate and/or arrange 206 to borrow money for “land acquisition and development”.
[41] Paragraph 9 of the Statement of Claim states that the Agreement with 206 was to procure a mortgage. As this statement is neither “patently ridiculous” or “incapable of proof” it is sufficient to raise a cause of action under Rule 21.01(1)(b).
ii. Exclusions
[42] Sovereign further claims that “even if liability under the Judgment were found to arise solely out of or in connection with, the rendering or failure to render professional services, a number of exclusions in the Policy remove all coverage.
[43] The exclusions focus on intention and deliberate acts. Sovereign claims that intention is proven by the prior underlying Statement of Claim that resulted in the default Judgment under which insurance is now claimed. In particular Sovereign relies upon paragraphs 12 and 14 of the prior Statement of Claim that allege deliberate action, fraud and conversion. However, it is not the prior underlying Statement of Claim that is deemed to be correct – it is the Statement of Claim that applies to the within action. There is no such statement in the Statement of Claim against Sovereign. The underlying Statement of Claim that was never tested cannot be utilized as proof of the contents on a Rule 21.01(1)(b) motion.
[44] As for Exclusion K – the loss of money or securities in an Insured’s care or custody or control, or the actual or alleged inability to pay, collect or safeguard funds – there is insufficient evidence to establish that this exclusion would apply. In the circumstances it is not “plain and obvious” that some or all of the statement of claim discloses no cause of action.
[45] Finally, I cannot accept Sovereign’s argument on the basis of the evidence available on the Rule 21.01(1)(b) motion that Endorsement 2 does not apply. The Statement of Claim alleges that the Agreement dealt with “procuring a mortgage”. As the statement that the Agreement related to procuring a mortgage and as this statement is neither “patently ridiculous” nor “incapable of proof” I cannot accept Sovereign’s argument that Endorsement 2 does not apply.
[46] There is no evidence to be adduced on this motion. Allegations of fact as set out in the pleadings are to be accepted as trust and as proven, unless they are patently ridiculous or incapable of proof. Pleadings are to be read generously with allowances made for drafting frailties.
[47] On the basis of the evidence before me I cannot say that it is “plain and obvious” that the claim would fail for disclosing no reasonable cause of action. Further, although the Defendant Sovereign appears to have a very strong defence to the claim, as noted by the Supreme Court in Hunt v. Carey, supra, the Plaintiffs should not be prevented from proceeding with their case because of the potential for the Defendant to present a strong defence.
[48] The Plaintiffs’ claim as contained in their Statement of Claim contains sufficient facts to disclose a cause of action against the Defendant Sovereign. It is my view that a substantive determination of whether the insurance policy covers the situation before me requires a substantive determination of the matter. It would be an error to grant the Rule 21.01(1)(b) motion in the circumstances.
Conclusion
[49] In accordance with the Reasons for Decision herein, I hereby Order as follows:
a. The Defendant Sovereign’s motion is dismissed. b. If the parties are unable to agree upon costs, the Plaintiffs shall have 30 days from the date herein to file costs submissions. The Defendant Sovereign shall have 45 days from the date herein to respond. The Plaintiffs’ reply, if any, shall have 60 days from the date herein to serve and file any reply. The cost submissions, response, and reply shall not exceed three pages in length – and shall attach bills of costs. The parties shall be entitled to vary the time periods relating to the filing of costs submissions on consent and shall inform the court in writing of any amendments to the timing of the submissions.