COURT FILE NO.: CV-15-539580
DATE: 20190205
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
LINK & ASSOCIATES INC., Court Appointed Receiver of 1562569 ONTARIO INC.
Plaintiff
– and –
INTEGRAL DEVELOPMENT LLC and THE RYAN GROUP INC.
Defendants
Tim Duncan, for the Plaintiff
Alan P. Gardner, Ian W. Thompson and Jessica M. Starck, for the Defendant Integral Development LLC
HEARD: January 10, 2019
REASONS FOR DECISION
W. MATHESON J.:
[1] The defendant Integral Development LLC moves to set aside a default judgment against it under Rule 19 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194. It has also brought a motion to strike out portions of the affidavit delivered by the plaintiff in response to Integral’s motion to set aside the default judgment. No one appears for the co-defendant The Ryan Group Inc., with which the Receiver has already settled.[^1]
[2] The underlying action arises from a failed commercial real estate transaction. The defendants entered into an agreement to purchase a Mississauga property from 1562569 Ontario Inc. (“156”) for $10 million. The transaction did not close and the property was ultimately sold for $1.85 million. Default judgment was granted against the defendant Integral by order dated January 12, 2016, in the amount of $8.05 million plus interest and costs.
Brief background
[3] In July 2008, HSBC Bank Canada loaned $3.125 million to 156 to assist in financing about 1.6 acres of land in Mississauga, Ontario. The principals of 156 were Frank Bosagri and Trevor Maddern.
[4] In 2012, John Ryan of the defendant The Ryan Group Inc. approached the defendant Integral about a potential purchase of the Mississauga property from 156. Integral is a real estate development company that is incorporated in the state of Georgia, USA, with its head office in Atlanta. Egbert Perry is its Chairman and CEO. Mr. Perry had not previously done business in Canada and agreed to participate because Mr. Ryan had a prior relationship with the seller and he could rely on Mr. Ryan’s familiarity with Canadian land development.
[5] By agreement of purchase and sale dated in 2012, Integral and The Ryan Group Inc. (the “Purchasers”) agreed to purchase the Mississauga property from 156 for $10 million. The Purchasers intended to develop the property into a mixed-use development, including hotels with different types of use and commercial space.
[6] Under the terms of the purchase agreement, any dealings with government bodies had to be conducted by 156 or its agents. 156 retained Mr. Ryan in that regard, through another of his companies called Ryan Associates, to assist in obtaining the required land use approvals from the municipality.
[7] In June 2013, the purchase agreement was amended (the “APS”). As of June 2013, all conditions in the APS had been satisfied except the requirement to obtain an amendment to the land use definition in a related Zoning By-law. The closing of the transaction was contingent on the City of Mississauga amending the land use definition of the By-law in a manner satisfactory to a number of parties, including the Purchaser’s lender, Marriott Hotels, and Concord Hospitality. The APS extended the time to close the transaction to 90 days after the requisite land use amendment was granted.
[8] 156 brought an application before the Committee of Adjustment (“COA”) seeking the requisite land use definition, which required amending the definition of “overnight accommodation” in the By-law. A different amendment was ultimately made after a number of interim steps.
[9] Integral’s main defence is that the ultimate amendment did not satisfy the condition in the APS because it was not satisfactory to the requisite parties. This is disputed by the plaintiff. The plaintiff relies on the role of Mr. Ryan in the events now at issue. It was he who acted as agent for 156 and appeared at the COA. The proceedings describe him as an “authorized agent”, which accords with his role representing 156 under the APS, but also describes him as a “co-owner”, which seems incorrect at least as of that time, on the record before me.
[10] The plaintiff relies on Mr. Ryan’s involvement in the COA proceedings, as shown in the COA decision and some emails, as evidence that all the requisite parties agreed to the ultimate amendment, thus fulfilling the condition in the APS. However, that evidence is not very specific and one of the principals of the seller, 156, wrote to Integral after commencement of this action, indicating that the “revised definition of ‘Overnight Accommodation’ as finally agreed by the City did not meet your requirements or Marriott’s requirements” [emphasis added] (the “Bosagri letter”). Mr. Bosagri, for the seller, went on to confirm in his letter to Integral that the APS conditions “were never met.”
[11] There is therefore a significant dispute about whether the final condition in the APS was satisfied. The alleged failure to satisfy the condition and the related Bosagri letter form the basis of the main defence put forward by Integral in its draft statement of defence.
[12] The COA approval for the amended definition was given on April 17, 2014. No closing proceeded within 90 days or otherwise.
[13] In October 2014, Ryan Associates sued 156 for unpaid fees and obtained a default judgment. Ryan Associates also sued HSBC and registered a lien for fees. By that time, 156 owed HSBC about $4,000,000. Pursuant to its security, HSBC appointed Link & Associates as the private receiver of 156.
[14] In June 2015, Link contacted Integral to discuss the failed property sale, without reply. In November 2015, Link was appointed by the court as receiver of 156, and commenced this action against Integral and The Ryan Group.
Service on Integral
[15] On November 11, 2015, a certified private process server in Georgia attended at the Integral office in Atlanta and left a copy of the statement of claim with Stacy Saunders at reception. This is not disputed, although Ms. Saunders’ job responsibilities are disputed. Only Mr. Perry was the Registered Agent for service on Integral. In any event, Ms. Saunders brought the statement of claim to the attention of Mr. Perry’s assistant of 18 years, Kimberly Franklin. On November 17, 2015, Ms. Franklin attached the document to an email to Mr. Ryan, copying Mr. Perry, under the subject line “1562569 Ontario – Statement of Claim”. Mr. Perry’s evidence is that Ms. Franklin knew “who to funnel things through” and may have made an independent decision to send that email. He does not recall instructing her to do so.
[16] Shortly thereafter, there was a telephone call in which Mr. Ryan told Mr. Perry that he would provide a document from the seller indicating that the defendants had not been expected to close. The next day, November 18, 2015, Mr. Ryan provided Mr. Perry with the Bosagri letter, in which Mr. Bosagri of the seller confirmed that the conditions in the APS had not been met. Mr. Perry did not proceed to retain counsel to address the claim after receiving the Bosagri letter.
[17] There is considerable debate between the parties regarding Mr. Perry’s evidence about when he first read the statement of claim and whether and when he understood that it was a lawsuit against his company rather than a dispute. There is no debate, however, about his receipt of the Bosagri letter shortly after the statement of claim was left at his office. Nor is there any contrary evidence from Mr. Bosagri, disputing the contents of his letter. On this motion, the evidence from this principal of 156 is that the Purchasers’ conditions of the APS were not met.
[18] The Bosagri letter did not come to the attention of the receiver until a much later date, after default judgment had been obtained.
Default judgment
[19] Integral was noted in default on January 12, 2016 and the receiver proceeded to market and sell the Mississauga property. The ultimate sale for $1,850,000 was court-approved and the sale closed on September 15, 2016.
[20] Prior to the sale, the receiver settled this action with the Ryan Group and settled with Ryan Associates as well. The claim by Ryan Associates against HSBC, including its lien claim, was discontinued, as was this action against the Ryan Group, without any payment by either Ryan entity.
[21] In November 2016, the receiver brought a motion for default judgment against Integral. Although it has been described as a preferred or best practice by this court to serve such a motion on the defendant even though in default, the plaintiff did not do so: Doe v. N.D., 2016 ONSC 4920, at para. 16.
[22] The motion for default judgment was granted on January 11, 2017. Before me, the receiver suggested that the motion judge ruled on service but it is apparent from her endorsement that no order was made in that regard, nor is such an order required when a defendant has been noted in default.
[23] The Bosagri letter did not form part of the record on the motion for default judgment because the receiver did not have it at that stage.
[24] The default judgment was not provided to Integral after it was granted. About a year later, Integral received notice of it when learning of steps being taken by the receiver to enforce the judgment in Georgia. Integral promptly retained Ontario counsel and notified the plaintiff of its intention to move to set aside the default judgment.
[25] This motion was originally scheduled for May 2018. The ultimate date for the motion was the result of each side’s responses to steps in the motion, including the motion to strike out portions of the plaintiff’s affidavit, and the request for a long motion date.
Motion to strike out part of the Link affidavit
[26] In response to this motion, the plaintiff delivered an affidavit of Mr. Link. That affidavit contains large sections that are a rather extreme example of argument in an affidavit and unsourced hearsay. For example, it contains a lengthy account of the COA proceedings, in which Mr. Link had no involvement, and is not on information and belief from anyone who was involved, such as Mr. Ryan. Instead, Mr. Link gives an account of what transpired based on documents, including numerous presumptions and inferences, and conclusions that are stated as facts. There are other parts of the affidavit that are challenged as opinion, legal conclusions, speculative, inflammatory or irrelevant.
[27] The plaintiff concedes that the affidavit contains argument, contains some speculation and is “not perfect” but submits that it is no more problematic than the Perry affidavit. The plaintiff submits that I am more than capable of assigning appropriate weight to the evidence and the motion to strike was unnecessary.
[28] Unfortunately, argument often forms part of affidavits although it should not do so. Given the extent of argument in the Link affidavit, and the extent of the unsourced statements in that affidavit, it is not surprising that it drew a motion to strike parts of it out. I agree with the plaintiff that I can address these issues when I weigh the evidence without the need to formally strike it out, and I have done so. However, in denying the defendant’s motion to strike, I note that bringing the motion was a reasonable response to this affidavit.
Analysis
[29] The issues before me are as follows:
(i) whether the default judgment should be set aside as of right, for failure to properly serve Integral under the Hague Service Convention[^2]; and,
(ii) whether, in any event, I should exercise my discretion to set aside the default judgment.
[30] Beginning with the second issue, there is no dispute about the test to set aside a default judgment under Rule 19. The test was summarized by the Court of Appeal in Intact Insurance Company v. Kisel, 2015 ONCA 205, 125 O.R. (3d) 365, at para. 14, as follows:
On a motion to set aside a default judgment …the court considers five major factors, one of which is whether the defendant has an arguable defence on the merits. The five factors are:
(a) whether the motion was brought promptly after the defendant learned of the default judgment;
(b) whether the defendant has a plausible excuse or explanation for the default;
(c) whether the defendant has an arguable defence on the merits;
(d) the potential prejudice to the defendant should the motion be dismissed, and the potential prejudice to the plaintiff 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.
Again, these factors are not rigid rules. The court has to decide whether, in the particular circumstances of the case, it is just to relieve a defendant from the consequences of default: Mountain View Farms Ltd. v. McQueen, 2014 ONCA 194, 372 D.L.R. (4th) 526 (Ont. C.A.), at paras. 48-50.
[31] The plaintiff does not take significant issue with the first factor in this case, and I am satisfied that the motion was brought promptly after the defendant learned of the default judgment.
[32] On the second factor, the plaintiff takes issue with the defendant’s excuse or explanation. I find that the moving party’s explanation or excuse is plausible. In short, the statement of claim was given to this senior executive’s long time executive assistant. She sent it Mr. Ryan for his review, copying Mr. Perry. Messrs. Perry and Ryan had a telephone call, in which Mr. Ryan said that he would provide a document indicating that the defendants had not been expected to close. Mr. Ryan promptly got back to Mr. Perry with the Bosagri letter the next day. The letter was provided by and signed by a principal of the seller (and signatory to the APS on behalf of the seller). The letter specifically referenced the statement of claim. The letter stated that the condition in the APS had not been met. In these circumstances, it is plausible that no further response was needed.
[33] This is not a case where the plaintiff has established that the defendant was “gaming the system” as has occurred in some cases: see, e.g., Canadian Imperial Bank of Commerce v. Petten, 2010 ONSC 6726, 6 C.P.C. (7th) 429, at paras. 7-8. The plaintiff places a lot of emphasis on Mr. Perry’s background. I accept that he is highly educated, experienced and sophisticated. However, such a person may rely on a letter from the seller saying that the condition on his conditional agreement had not been met.
[34] Looking at all the evidence surrounding the delivery of the statement of claim through to the time of the Bosagri letter, while the excuse or explanation is certainly not without some issues, it is plausible.
[35] There is then the issue of whether Integral has an arguable defence. Integral’s main defence, as set out in its draft statement of defence and as argued before me, is that the condition in the conditional APS was not met, as confirmed by the Bosagri letter.
[36] There is no issue that the land use change that was originally requested was not granted. The COA ultimately approved a different amendment. The authenticity of the Bosagri letter is also not challenged before me, and is evidence that a principal of the seller himself said that the sole condition in the APS was not met. The letter was obtained by Mr. Ryan, the agent for the seller, who was extensively involved in the COA proceedings.
[37] The plaintiff submits that the defendant ought to have put forward affidavit evidence from Mr. Bosagri and Mr. Ryan. However, since the authenticity of the letter is not challenged, I do not find that Integral also had to provide an affidavit from either person to rely on the letter received by it.
[38] The plaintiff also relies on emails during the course of the COA proceedings and the COA reasons for decision, arguing that those documents establish that the condition in the APS was met. I note that the COA was not charged with deciding that issue and did not do so. I accept that these documents, to some extent, show that Mr. Ryan represented to the City or the COA that the revised amendment was acceptable to some parties. Yet, his roles are, at least in part, misdescribed in the COA’s reasons, and those reasons are not very specific. The APS states that the amendment had to be satisfactory to Marriott Hotels, Concord Hospitality and the Purchaser’s lender. The reasons for decision do not comprehensively cover all those parties, nor do the emails. Again, the COA was not deciding whether the APS condition had been satisfied.
[39] It is not incumbent on the plaintiff, on this motion, to prove its case. But the materials it put forward do not displace the defendant’s position that it has an arguable defence.
[40] The plaintiff further submits that there is no written documentation to support the evidence that Mr. Ryan terminated the APS, but it is accepted that the APS was conditional to begin with. The issue is whether the condition was met.
[41] The plaintiff submits that Integral has not met its burden of proof on this motion. The plaintiff agrees that the burden is “not akin to that of a defendant moving for summary judgment” but submits that the defendant must put its best foot forward in demonstrating that it has an arguable defence. I agree with these general statements, as employed in the context of a Rule 19 motion: Xpress View Inc. v. Daco Manufacturing Limited (2002), 36 C.C.E.L. (3d) 78 (Ont. S.C.), at para. 11; Helix Interactive Production Ltd. v. 2030123 Ontario Ltd., 2006 CanLII 37881 (Ont. S.C.), at para. 18. The defendant cannot rely on mere allegations or denials. It “need not show that the defence will inevitably succeed” but “must show that [its] defence has an air of reality”: Mountain View Farms Ltd. v. McQueen, 2014 ONCA 194, 119 O.R. (3d) 561, at para. 51; see also, HSBC Securities (Canada) Inc. v. Firestar Capital Management Corp., 2008 ONCA 894, 245 O.A.C. 47, at para. 28. The defendant has met this burden.
[42] I agree that there are potentially conflicting facts in the record before me involving the COA proceedings, statements made by Mr. Ryan, and the Bosagri letter. There is evidence that favours each side. However, it is not the role of a motion under Rule 19 to resolve all conflicting evidence, find the facts and essentially decide the defence on its merits, in order to determine if the defence is arguable. The defendant has shown that its defence that the condition in the APS was not met has the requisite air of reality. The defendant need not, at this stage, show that the defence will succeed.
[43] There is then the issue of prejudice. I agree with the plaintiff that on this type of motion, the issue is relative prejudice. There is normally prejudice for each side. The plaintiff risks losing its default judgment and having to prove its case on the merits. The defendant risks having the judgment stand without having the opportunity to advance its defence on the merits. In this case, there is no special prejudice and I therefore do not give this factor significant weight. Each side would suffer the normal prejudice, significant to each of them.
[44] The last specific factor is the impact on the integrity of the administration of justice. Again, I do not see this as a significant factor in this case. The Rules of Civil Procedure contemplate that default judgment may be set aside. Doing so does not, in and of itself, engage this factor. Although there is a lot of money at stake, the quantum is not itself a factor. There is no extreme pattern of behaviour that by itself engages this factor. Overall, in this case, this factor is subsumed in the overarching question of whether, in the particular circumstances of this case, it is just to relieve Integral from the consequences of default.
[45] In this case, bearing in mind all factors, I conclude that it is just to exercise my discretion and grant the motion. I have considered all of the above factors, bearing in mind that they are not rigid rules. Overall, I conclude that it is just to permit the defendant to defend this commercial claim on its merits. I note that in reaching my decision, I am not making any final decision about the merits of this claim that would be binding on the parties as the proceeding moves forward.
[46] The plaintiff made submissions, in the alternative, about the terms that should apply if the default judgment is set aside. Under subrule 19.08(2), I may set aside the judgment on such terms as are just.
[47] The terms sought by the plaintiff include prepayment of the entire judgment into court or as counsel may agree, security for costs of this action and costs thrown away.
[48] The plaintiff should have its costs thrown away and may make submissions in that regard along with its submissions regarding the costs of the motions before me, as scheduled below.
[49] I am not persuaded that it would be just to make the other requested orders on the record before me. The evidence before me does not establish grounds for concern that the plaintiff needs security for costs or would be entitled to, essentially, prejudgment security for payment of the judgment. The conduct of the defendant does not justify these orders either. I therefore do not impose those terms on this motion, but the plaintiff is free to bring motions seeking that relief in the ordinary course if it wishes to do so.
[50] Given my disposition above, I need not also address the issue about whether the judgment ought to be set aside as of right for failure to comply with the Hague Convention.
Orders
[51] The motion to strike out parts of the plaintiff’s affidavit is dismissed. The motion to set aside default judgment (and the related noting in default) is granted. The defendant shall deliver its statement of defence within 20 days of today.
[52] If the parties are unable to agree on costs of this motion and the plaintiff’s costs thrown away, they shall make their costs submissions on any remaining issues in writing as follows: any party claiming costs shall deliver brief written submissions (up to 5 pages) plus any supporting material by February 22, 2019. The responses to those costs claims shall be made in brief written responding submissions (up to 5 pages) and supporting material, by March 8, 2019.
Justice W. Matheson
Released: February 5, 2019
COURT FILE NO.: CV-15-539580
DATE: 20190205
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
LINK & ASSOCIATES INC., Court Appointed Receiver of 1562569 ONTARIO INC.
Plaintiff
– and –
INTEGRAL DEVELOPMENT LLC and THE RYAN GROUP INC.
Defendants
REASONS FOR DECISION
W. Matheson J.
Released: February 5, 2019
[^1]: Any unqualified references to the defendant in these reasons for decision refer to Integral.
[^2]: The Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters, November 15, 1965, 658 UNTS 163, 20 UST 31.