Court File and Parties

COURT FILE NO.: CV-19-838

DATE: 20191002

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Shedden Investments Inc., Peter Gallo, Faina Busch and General Busch, Plaintiffs

AND:

Katherine Robin Freitas and Manuel Freitas, Defendants

BEFORE: Justice C. Boswell

COUNSEL: Trent Morris for the Plaintiffs

Andrew Francis for the Defendants/Moving Parties

HEARD: October 1, 2019

ENDORSEMENT

[1] The defendants move for an order setting aside a default judgment signed by the Registrar on June 25, 2019. The plaintiffs oppose the motion on the basis that the defendants are unable to demonstrate that they have an arguable defence on the merits.

The Background Facts

[2] The background facts may be stated briefly. The plaintiffs are the lenders/mortgagees and the defendants are the borrowers/mortgagors in relation to a mortgage dated November 2, 2018. The mortgage went into default on March 1, 2019 and the plaintiffs took steps to enforce it.

[3] A statement of claim was commenced on May 9, 2019. It was served upon the defendants on May 13, 2019.

[4] The defendants retained counsel to assist them with this action in June 2019. On June 14, 2019 their counsel served the plaintiffs’ counsel (not Mr. Morris) with a Notice of Intent to Defend. Accompanying that Notice was a letter to the plaintiffs’ counsel advising him that defence counsel had been retained and was seeking a brief indulgence to investigate the plaintiffs’ claim. Defence counsel advised the plaintiffs’ lawyer that his clients had cognitive disabilities that make it difficult for them to understand documents and so it was taking a little extra time to investigate the claim and get their defence done.

[5] The plaintiffs’ lawyer did not reply to the letter from defence counsel. Instead, he provided his process server with the documents required to obtain default judgment on June 17, 2019 with instructions not to file them until June 24, 2019. In other words, he granted the defendants a 10-day indulgence after receiving their lawyer’s letter. He did not, however, advise their lawyer about his position.

[6] Having not received a Statement of Defence by June 24, 2019 the plaintiffs noted the defendants in default and obtained default judgment for possession of the mortgaged property and payment of the sum of $213,476.97.

[7] There is no dispute that when the defendants learned of the default judgment, they promptly moved to set it aside.

The Legal Framework

[8] The principles that govern motions of this nature are well-settled. When asked to set aside a default judgment, the court must generally consider the following five factors:

(a) Was the motion brought promptly after the defendants learned of the default judgment?

(b) Is there a plausible explanation for the default?

(c) Are the defendants able to demonstrate that they have an arguable defence on the merits?

(d) What prejudice will the moving parties experience if the motion is dismissed and what prejudice will the plaintiffs experience if the motion is granted? and,

(e) The effect of any order on the integrity of the administration of justice.

See Mountain View Farms Ltd v. McQueen, 2014 ONCA 194; and HSBC Securities (Canada) Inc. v. Firestar Capital Management Corp., 2008 ONCA 894.

[9] The Mountain View Farms factors are not to be assessed rigidly. The weight to be put on individual factors may vary from case to case. The overarching concern is to determine, in the circumstances of the given case, whether it is just to relieve a defendant from his or her default: Mountain View, at para. 50.

[10] While the Mountain View factors are ones of general application, the Court of Appeal has held that, in certain circumstances, a default judgment should be set aside as of right. In other words, there are certain circumstances in which a default judgment should be set aside without the requirements of Mountain View Farms being met, or even considered. In particular, a moving defendant is arguably entitled to have a default judgment set aside as of right where:

(a) A defendant is noted in default at a time when that defendant is actively defending the case; or,

(b) Where default judgment is obtained without notice to the defendant’s counsel when the plaintiff’s counsel has been actively engaged with him or her.

See Male v. Business Solutions Group, 2013 ONCA 382, at para’s 16-19.

The Parties’ Positions

[11] The parties’ positions may be briefly stated as well.

[12] The moving defendants assert that the plaintiffs’ counsel engaged in sharp practice and obtained default judgment without any notice to them. They claim to be entitled to the order sought as of right, based on the principles of Male. In the alternative, they contend that they have clearly established an entitlement to the order sought when the Mountain View Farm factors are applied.

[13] The plaintiffs submit that the principles from Male do not apply here because the plaintiffs’ counsel was never actively engaged with the defendants’ counsel. Moreover, the defendants took no steps to defend, other than to file a Notice of Intent to Defend. The plaintiffs’ counsel urges the court not to extend the Male principles beyond the factual circumstances present in that case.

[14] The plaintiffs further contend that the defendants have not identified a tenable claim against them in their capacity as lenders and, as such, are not able to satisfy the traditional factors described in Mountain View Farms.

Discussion

[15] In my view, the defendants are entitled to the relief requested as of right. I am not suggesting that the service of a Notice of Intent to Defend is all a defendant ever need do to stave off default proceedings indefinitely. But here the defendants retained counsel and delivered a Notice of Intent to Defend. Their counsel advised opposing counsel that the defendants have cognitive disabilities and more time than usual would be needed to take their instructions and put in a defence. The plaintiffs’ counsel did not even extend the courtesy of a reply. Within 11 days he had obtained default judgment. In my view those precipitous actions were unprofessional and uncivilized.

[16] In Male the Court of Appeal re-affirmed its endorsement of s. 19 of the Advocates’ Society’s, The Principles of Civility for Advocates, which provides:

19. Subject to the Rules of Practice, advocates should not cause any default or dismissal to be entered without first notifying opposing counsel…

[17] It would have taken minimal effort on the part of the plaintiffs’ counsel to advise the defendants’ counsel of his drop-dead date of June 24, 2019. No explanation was offered to the court as to why a reply was never extended to the defendants’ lawyer’s letter of June 14, 2019.

[18] Even if I am wrong in my determination that the defendants are entitled to the relief sought, as of right, I would still grant them that relief, applying the traditional Mountain View Farms factors.

[19] The only one of the five traditional factors in dispute is whether the defendants have an arguable defence on the merits. I find that they do.

[20] The defendants, in their proposed defence and counterclaim, make the following allegations, amongst others;

(a) They each suffer from cognitive disabilities that impact on their ability to understand documents;

(b) The mortgage in issue – a second mortgage – was arranged by a broker, a Mr. Matthew Waylett. Mr. Waylett is alleged to have lied to the defendants, misled them about the terms of the mortgage and threatened them, all in an effort to get the deal done;

(c) The terms of the mortgage were patently unconscionable. Of the $202,000 loan, $18,950 was paid as a lender placement fee, $11,700 was paid as a brokerage fee; and $1,100 was paid as an administration fee. None of these fees was disclosed in advance. The mortgage interest rate is 12.25% and monthly interest-only payments are $2,062.08, which exceed the defendants’ combined monthly income;

(d) The defendants purportedly obtained independent legal advice from a solicitor, Mr. David Henders, but the advice was deficient, if given at all, and arguably negligent;

(e) The defendants assert that the mortgage is unenforceable due to undue influence, duress, unconscionability, and misrepresentation; and,

(f) The lenders are at law responsible for the actions of Mr. Waylett who acted as their agent.

[21] Counsel to the defendants argued that the defendant may have arguable claims against the mortgage broker and solicitor, but they have no viable route to any sort of claim against the lenders. Counsel argued that mortgage lenders are generally under no obligation to look out for borrowers’ interests. Even if a presumption of undue influence arises on the facts of this case, the lenders have a complete answer, counsel submitted, on the basis that the defendants obtained independent legal advice. See Bank of Montreal v. Duguid, 2000 5710 (ON CA), [2000] O.J. No. 1356.

[22] The issue of independent legal advice is, however, a live one. On the facts of the case as set out by the defendants, they barely spoke to Mr. Henders. Mr. Henders did not make any inquiries of them nor offer any advice. He purportedly met and spoke privately with Mr. Waylett, then purportedly simply instructed the defendants to sign the mortgage documents.

[23] There are a number of live questions raised by the proposed pleadings. Was Mr. Waylatt, in law, the agent of the lenders? Was the mortgage agreement unconscionable on its face? Is a certificate of independent legal advice, on its own, enough to shield the lenders from any liability?

[24] It is not necessary for the defendants to establish that they will ultimately be successful in the action. They need only satisfy the court that their defence has an air of reality. In my view, they have met that modest threshold.

[25] As Rule 1.04(1) states, the Rules of Civil Procedure are to be "liberally construed to secure the just, most expeditious and least expensive determination or every civil proceeding on its merits." [emphasis mine]. In my view, the interests of justice point strongly towards setting aside the default judgment and allowing the defendants to defend this case on its merits. The balance of prejudice also points towards granting the relief sought.

[26] In the result, the motion is granted. The default judgment is set aside. The defendants shall have 15 days in which to serve and file their defence.

[27] The plaintiffs’ counsel asked for two orders, should I be inclined to set aside the default judgment. First, that I limit the defendants to defending only that part of the claim that involves funds not actually advanced by the lenders; in other words, to the impugned fees. The assertion is that the lenders have an equitable claim to recover at least the funds actually advanced to the defendants. Second, that I impose an order that the defendants keep the first mortgage in good standing.

[28] I am not prepared to make either order. The first order sought would effectively amount to my ordering partial summary judgment on the plaintiffs’ claim. I do not have a sufficient evidentiary record before me to make such an order. In terms of the first mortgage, the defendants already have a legal obligation to keep it in good standing. My order would add nothing to that obligation. I understand that the first mortgage is presently in good standing. If that changes, there are remedies available to the plaintiffs to pursue.

Costs

[29] In the normal course, costs follow the event. The defendants have been successful and are entitled to their costs. Costs are generally measured on a partial indemnity basis: Bell Canada v. Olympia & York Developments Limited et. al. (1994), 1994 239 (ON CA), 17 O.R. (3d) 135 (C.A.). In special circumstances, costs may be awarded on a higher scale, but those cases are exceptional and generally involve circumstances where one party to the litigation has behaved in an abusive manner, brought proceedings wholly devoid of merit, and/or unnecessarily run up the costs of the litigation: Standard Life Assurance Company v. Elliott (2007), 2007 18579 (ON SC), 86 O.R. (3d) 221 (S.C.J.).

[1] In exercising the discretion to fix costs, the court is directed to consider those factors set out at Rule 57.01. It is, however, now well-settled that the overarching principles to be observed in the exercise of the court’s discretion to fix costs are fairness, proportionality and reasonableness: see Beaver v. Hill, 2018 ONCA 840; Boucher v. Public Accountants Council for the Province of Ontario (2004), 2004 14579 (ON CA), 71 O.R. (3d) 291 (C.A.); and Moon v. Sher (2004), 2004 39005 (ON CA), 246 D.L.R. (4th) 440 (C.A.).

[30] This motion would have been unnecessary but for the precipitous actions of the plaintiffs’ counsel in obtaining default judgment. I am, in the circumstances, prepared to fix costs on a substantial indemnity basis. In my view a fair and reasonable amount is $7,000.00, all inclusive, payable by the plaintiffs within 30 days.

Boswell J.

Date: October 2, 2019