Superior Court of Justice - Ontario
COURT FILE NO.: 2911/18
DATE: 2020-01-07
RE: Robert Attersley Family Properties Limited, Plaintiff/Responding Party
AND:
Richard H. Gay Holdings Ltd. and L.R.G. Group, Defendants/Moving Parties
BEFORE: Di Luca J.
COUNSEL: Brad Phillips, Counsel, for the Plaintiff/Responding Party
Richard J. Mazar, Counsel, for the Defendants/Responding Parties
HEARD: December 4, 2019
ENDORSEMENT
[1] This is a motion to set aside a default judgment in the amount of $581,787.01 including costs, which was obtained on June 14, 2019 before C.M. Smith J.
[2] Rules 19.03(1) and 19.08(1) of the Rules of Civil Procedure grant the court discretion to set aside a noting in default and default judgment “on such terms as are just.” In considering whether the court should exercise this discretion, the court considers the following factors as discussed in HSBC Securities (Canada) Inc. v. Firestar Capital Management Corporation, 2008 ONCA 894, at para. 17:
a. Whether the defendants brought their motion promptly after learning of the default judgment;
b. Whether the defendants have a plausible explanation for their failure to respond to the statement of claim;
c. Whether the defendants have an arguable defence on the merits;
d. The prejudice that would result from setting aside the default judgment and the prejudice that would result to the defendants from not setting it aside;
e. The effect that the order would have on the administration of justice.
[3] These 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.
Background Facts
[4] Mr. Lawson Gay is the president of the defendant corporations Richard H. Gay Holdings Ltd. (“Gay Holdings”) and L.R.G. Corp. He is in the development business, like his father and grandfather before him.
[5] The plaintiff, Robert Attersley Family Properties Limited [“Attersley”], is a corporation that holds and manages various assets owned by the late Joan Marilyn Attersley and the late Robert Attersley.
[6] Over the years, Lawson Gay and his father borrowed funds from Attersley. The funds were used for property development projects and were secured against certain properties. One such loan was for $700,000, secured by a mortgage on a property located at 1697 Highway #2, Courtice, Ontario [“the property”]. The loan was also secured by a guarantee from the defendant L.R.G. Corp.
[7] This loan was made on April 29, 2011. The mortgage securing the loan matured on May 1, 2013, but was extended until May 1, 2015. In the interim, Gay Holdings sought to increase its credit facility with Royal Bank of Canada and in order to do so, it asked Attersley to postpone its mortgage. In exchange, Gay Holdings agreed to pledge one hundred shares in the capital of Orillia Storage Limited. A pledge agreement was prepared to affect this result.
[8] Michael Armstrong was the executor of Joan and Robert Attersley’s estate, and he was also an officer and director of Attersley. He also acted as counsel to the Gay family and was an officer and director of Gay Holdings. Lastly, he also agreed to act as “pledgeholder” in relation to the pledge agreement. It appears that despite the pledge agreement, Mr. Armstrong returned the pledged shares to Gay Holdings before Gay Holdings repaid the mortgage.
[9] Following a dispute with the Attersley family over issues of financial mismanagement, Mr. Armstrong was removed as an executor of the late Attersley’s estates. Janice Attersley and Dan Carter assumed the role. Janice Attersley also became an Officer and Director of Attersley. It appears that Janice Attersley, perhaps through no fault of her own, had a less than clear picture of Attersley’s finances following the departure of Mr. Armstrong.
[10] On May 12, 2018, Janice Attersley sent a letter to Gay Holdings inquiring about the status of any outstanding loans between the corporate entities. The request to the defendants for assistance in this regard, was necessitated as a result of issues stemming from Mr. Armstrong’s conflicted role and ultimate departure. An exchange of correspondence followed and on June 20, 2018, Janice Attersley wrote again asking for additional documents regarding a mortgage on the property.
[11] On June 26, 2018, counsel for Mr. Armstrong provided Janice Attersley with documentation and information regarding loans to the Gay family and corporations. The defendants were not copied on this correspondence.
[12] On June 29, 2018, Janice Attersley sent an email to Mr. Gay inquiring about repayment of the loan of approximately $500,000 on the property. On July 12, 2018, counsel for Janice Attersley demanded repayment of the loan, which was apparently in good standing at the time. A response was provided by the defendants’ bookkeeper on July 16, 2018, indicating that the loan was in good standing and that the principal amount remaining was $500,000.
[13] The last interest payment on the mortgage was made on August 9, 2018. No payments have been made since.
[14] On August 24, 2018, counsel for Janice Attersley sent a further letter to Gay Holdings noting that there were two additional loans outstanding. The letter requested the defendants to produce documents establishing whether the loans had been repaid. The letter also threatened legal action in the absence of a proper response.
[15] On September 7, 2018, Gay Holdings provided a response to the letter indicating that the mortgage on the property had been registered for $700,000, but that only $500,000 remained owing plus accrued interest from the date of the last post-dated cheque which was August 9, 2018. The letter explained that steps were being taken to pay out the mortgage and a discharge statement was requested. Lastly, the letter indicated that the defendants had not retained counsel and would not do so unless it became “absolutely necessary.”
[16] On October 17, 2018, a statement of claim was issued and a few days later it was served on the defendants. The claim was for the repayment of three loans totalling $1.45 million. The claim also sought vacant possession of the property.
[17] On October 22, 2018, Mr. Gay sent an email to plaintiff’s counsel indicating that he was taking steps to pay out the mortgage on the property and was again requesting a discharge statement.
[18] On October 28 and November 8, 2018, counsel for the plaintiff sent emails to the defendants explaining that it could not rely on information in Mr. Armstrong’s file. As a result, counsel asked that the defendants provide documentation relating to the outstanding loans and repayments. The letter indicated that once the sought-after information was received, the amounts owing could be confirmed and a mortgage discharge statement would be prepared. The latter email indicated “Alternatively, we look forward to receiving your statement of defence by November 12, 2018.”
[19] The requested documentation was provided by the defendants’ bookkeeper to plaintiff’s counsel through to the end of November 2018. Despite a number of requests, a discharge statement was not provided until April 9, 2019. The statement shows a principal amount due of $500,000 plus accrued interest, fees, penalties and legal costs, for a total sum of $568,182.83.
[20] On April 11, 2019, the defendants were specifically advised that if the full amount set out in the discharge statement was not paid by April 26, 2019, steps would be taken to enforce the mortgage and pursue the claim that had been served. No response was received to this correspondence.
[21] On April 30, 2019, the defendants were noted in default for having failed to file a defence. This was done without the defendants’ knowledge.
[22] On June 14, 2019, an ex parte motion for default judgment was brought before C.M. Smith J. While the claim as commenced sought $1.45 million in relation to three loans, the default judgment motion only sought repayment of $500,000, plus various fees and costs outstanding on the initial mortgage of $700,000 that was placed on the property. The plaintiff did not seek default judgment in relation to the balance of the statement of claim.
[23] The default judgment was served on June 21, 2019. On July 3, 2019, the defendants retained counsel to set aside the default judgment. Counsel attended trial scheduling court on July 25, 2019, and the hearing of the motion was set for the fall sittings with a schedule agreed upon by counsel.
Analysis
[24] I next turn to assessing the various factors that guide the exercise of my discretion in setting aside a default judgment.
Did the Defendants Move Promptly Once Learning of the Default?
[25] There is no issue that once the defendants learned of the default judgment they took immediate steps to retain counsel and schedule this motion. While the timing of the motion is several months after the default judgment, that timing appears to be through no fault of the parties but rather related to the time needed to complete examinations and schedule a long motion.
Do the Defendants Have a Plausible Explanation for Failing to File a Statement of Defence?
[26] Prior to the litigation, it appears that the parties enjoyed a lengthy, presumably mutually beneficial, business relationship. It also appears that parties, particularly the plaintiff, was left in the dark about the status of various loans made to the defendants. This is likely related to the role played by Mr. Armstrong, who acted in a number of potentially conflicted capacities prior to his departure.
[27] On the basis of the materials before me, it is clear that the plaintiff was seeking assistance from the defendants to sort out the status of various loans. In this regard, I accept that the defendants spent a fair bit of time providing requested documentation and related items of information to the plaintiff. These efforts were successful. While the claim was initially commenced for $1.45 million, the default judgment was only obtained in relation to $500,000 (of a loan of $700,000), plus interest and related costs.
[28] An inference arises that the plaintiff did not know how much it was truly owed when it commenced the litigation. A further inference arises that the plaintiff learned how much it believed it was owed as a result of the provision of information from the defendants.
[29] Once the claim was filed, the provision of documentation continued. The defendants also repeatedly requested a payout statement which was not provided for many months.
[30] In his evidence, Mr. Gay acknowledges that he knew he needed to file a statement of defence, though he notes that he did not agree with “the numbers” in the statement of claim and was engaged in exchanges of correspondence attempting to address the issue. He also decided to put off retaining counsel in the hope of settling the matter, though he agreed that he could readily have obtained legal advice.
[31] There is no issue that the defendants are relatively sophisticated business types who have been involved in a long-standing business relationship with the plaintiff for many years. The defendants also have experience with private mortgages and their workings. The defendants decided not to file a statement of defence because they disagreed with the quantum sought in the statement of claim. They ignored, or at least did not formally comply with an ultimatum that was sent on April 9, 2018. That said, the defendants were confronted with an action claiming $1.45 million, when the reality was that they owed approximately $500,000 plus interest. They produced documentation and information which satisfied the plaintiff that this was indeed the case. They sought a payout statement so that they could arrange to re-finance the mortgaged property and payout the loan.
[32] The defendants were engaged. They had provided information to the plaintiff that resulted in a significant portion of the claim not being pursued. There were exchanges of correspondence and eventually the delivery of a discharge statement.
The defendants were not served with the default judgment motion. Once a defendant has been noted in default, they are no longer entitled to service of documents. However, in certain circumstances, the better practice is to place the defaulting party on notice, see Elekta Ltd. v. Rodkin, 2012 ONSC 2062. In this case, if the default judgment had proceeded on notice, the defendants may well have responded and in all likelihood the matter could have been resolved at that stage, especially in view of the live issues, as will next be discussed.
[33] In all of these circumstances, in my view, the assessment of this factor is not clearly in favour of or against the defendants.
The Merits of the Defence
[34] The defendants accept, subject to one legal issue, that $500,000 in principal and interest in accordance with the terms of the mortgage is properly owed to the plaintiff. The mortgage has long since matured and remains outstanding. No interest payments have been made since the last post-dated interest only cheque was negotiated.
[35] The one legal issue relates to the Bankruptcy Act. In their motion materials, the defendants argue that the claim for the funds secured by the mortgage is a nullity because the plaintiff failed to comply with the notice provision of section 244 of the Bankruptcy Act. This section is a statutory reflection of the common law principle that a secured creditor must give a debtor reasonable notice before moving to enforce a security. The provision of reasonable notice gives a debtor an opportunity to correct a default and/or arrange or re-arrange its financial affairs. There is no issue that the notice was not given in this case. The issue raised, therefore, is whether the failure to give the notice invalidates or nullifies the action.
[36] This argument can be dealt with briefly. Even assuming that the failure to serve notice under section 244 of the Bankruptcy Act renders the action a “nullity”, there is no evidence that either of the defendants are “insolvent persons” as defined in the Act. The evidence is to the contrary. Gay Holdings is not insolvent. There is no suggestion in any of the materials that either of the corporate entities are insolvent. At best, they simply decided not to pay the money owed, though they admit that money for the accrued interest has been put aside in the event that it is to be paid to the plaintiff. That does not amount to insolvency, however defined. Moreover, to accept the argument that the plaintiff should have served the notice under the Bankruptcy Act out of an abundance of caution would turn the notice into an empty formality. There is no merit to this argument.
[37] On that basis, I find that there is no substantive defence to the amount claimed in relation to the mortgage principal and accrued interest.
[38] That leaves approximately $50,000 in costs and charges that were included in the default judgment. This amount can be broken down into two components. First, the plaintiff claimed approximately $26,500 in fees and penalties in relation to the defaults on the mortgage. In this regard, while the defendants acknowledge that the mortgage terms contain provisions permitting certain charges, they argue that many of the charges imposed were either improper or inflated. They further submit that the improper or inflated charges resulted in violations of sections 8 and 10 of the Interest Act, that the charges were not calculated properly and that some of the charges relate to occurrences that were beyond the control of the defendants, in particular, the expropriation of a portion of the property.
[39] Second, included in this disputed amount is a claim for legal costs in the amount of approximately $25,000 that was awarded by C.M. Smith J. on the default judgment motion. The defendants argue that the costs claimed in relation to enforcing the mortgage are excessive, particularly in view of the fact that the action was commenced in relation to a number of debts that ultimately were discovered to have been paid off in part and in full. The defendants note that they should not be responsible for any costs incurred by the plaintiff in relation to the bulk of the claim that was not pursued. The defendants further note that there are no particulars provided supporting why the costs in this amount were incurred.
[40] In terms of a defence on the merits, I am satisfied that there are some arguments in relation to the penalties and charges imposed by the plaintiff. The defendants were charged a penalty for failing to provide proof of insurance and for failing to provide proof of tax payments, though it appears that when the information relating to insurance and tax payments was requested, it was provided. The defendants were charged a penalty for a partial sale of the land, though as they point out a portion of the land was expropriated, and while it was technically “sold”, the sale was not something they had control over. The defendants were charged a penalty for failing to provide post-dated cheques, though it appears that they did provide post-dated cheques up to a point. Lastly, the basis for the imposition of the three-month interest penalty and one-month interest penalty is unclear. At this stage, I do not need to be convinced that the defendants have a strong case or that they are likely to succeed. Rather, it is sufficient to find that they have an arguable case and I so find. To be clear, however, it appears that some amount will be owed for penalties and charges, though it may not be the entire amount claimed.
[41] In terms of the costs awarded by C.M. Smith J., I agree with the defendants that they should not be held responsible for costs relating to the portions of the claim that were ultimately not pursued. In the absence of details relating to the costs ordered, I am in no position to assess how the costs were apportioned in relation to the significantly narrowed claim on which default judgment was granted.
The Potential Prejudice to the Parties
[42] The plaintiff argues that it will be prejudiced if this motion is allowed. In particular, the plaintiff notes that the property has been reduced in size due to expropriation, that further encumbrances have been placed on the property and, lastly, that additional security in the form of pledged shares has long since disappeared. Taken together, these facts suggest that the plaintiff’s loan is not secured as was initially contemplated, and is now at risk.
[43] The defendants note that the property has been recently appraised at a value greatly in excess of all combined encumbrances and further, that the interest owing under the mortgage has been put aside in a separate account. As such, the defendants argue that there is no prejudice to the plaintiff.
[44] In my view, neither side will suffer any significant or real degree of prejudice based on the outcome of this motion. I am satisfied that the loan remains properly secured given the value of the property. The amount in actual dispute is small relative to the amount of the mortgage. The parties are relatively sophisticated enterprises who are not going to be significantly impacted by the outcome of this motion one way or the other.
The Impact on the Administration of Justice
[45] There is no issue that a party that decides not to engage in the court process by failing to file a statement of defence should face the consequences, particularly where the decision was tactical or intentional and where there is no apparent merit to a defence against the claim. The court process should not instantly bend to accommodate a party that decides late in the day that perhaps the better course would have been to participate in the process. That said, where circumstances warrant, the administration of justice is fostered by permitting recourse to the process that perhaps should have been taken at first instance.
[46] In this case, a factor of concern is that the motion for default judgment was brought without notice. The parties have a long history. Mr. Gay was engaged in discussions with the plaintiff and had taken steps at his expense to clarify what the status of various loans were as between the parties. Indeed, he appears to have provided the plaintiff with enough information to answer a significant portion of the claim as commenced. He also requested discharge statements on more than one occasion.
[47] While I accept that Mr. Gay perhaps should have retained counsel earlier, and perhaps should have heeded the warnings that the plaintiff would be taking steps to advance its claims, I accept that this is not a scenario where Mr. Gay simply decided that the best thing to do would be to ignore the claim and hope it would go away.
[48] On the whole, I find that this factor tips in favour of the defendants.
Balancing of Factors
[49] When I consider all the factors that guide my exercise of discretion in this case, I am satisfied that I should set aside the default judgment in part. I find that the defendants acted diligently once they became aware of the default judgment. I am also satisfied that the history between the parties and the context and narrative of the dispute provide an adequate explanation for why a statement of defence was not filed. I view prejudice as an essentially neutral factor either way. Lastly, this is not a case where the administration of justice will be adversely impacted by setting aside the default, particularly in view of the way the claim was initially framed.
[50] On the evidence before me, I find that the most pertinent factor guiding the exercise of my discretion is the merits of the defence. I am not satisfied that the defendants have met the test for setting aside the default judgment in relation to the principal and accrued interest on the mortgage. I reach this conclusion because there is no arguable defence available to the defendants in response.
[51] As such, I find that the judgment for $500,000 in principal and $29,563.36[^1] in accrued interest to June 14, 2019 should not be set aside, and remains extant and subject to continuing interest at a rate of 7.5% per annum in accordance with the terms of the mortgage.
[52] In terms of the penalties and charges and any interest thereon, I am satisfied that I should exercise my discretion to set aside the default judgment. There is an arguable defence to at least some portion of these charges and penalties. When this arguable defence is balanced against the other factors, I am satisfied that the outcome tips in favour of setting aside this portion of the default judgment.
[53] I am also satisfied that the costs portion of the default judgment should also be set aside. The plaintiff would have been entitled to reasonable and proportionate costs relating to the enforcing the mortgage on the property – as opposed to the claim as originally framed. There appears to be a valid concern about the reasonableness of the costs order relating specifically to the mortgage in issue. The materials before me provide no assistance in determining this issue.
[54] As a result, the balance of default judgment, including costs, is set aside.
[55] Going forward, I invite submissions from the parties on the following issues:
a. Costs attributable to the portion of the default judgment that was not set aside.
b. Costs in relation to this motion, including any relevant offers to settle.
[56] The parties can make these further submissions in writing, directed to my attention through my judicial assistant, Diane Massey (diane.massey@ontario.ca). Written submissions of no more than 5 pages in length shall be submitted within 14 days of the release of this Endorsement.
[57] In view of the relatively modest amount that remains in issue, I urge the parties to reach a compromise that avoids further legal expense and use of court resources.
Justice J. Di Luca
Date: January 7, 2020
[^1]: I am assuming that this figure represents the interest on the principal only (and not interest on any penalties and charges) as of the date of the default judgment. If I am incorrect in this assumption, I invite the parties to advise accordingly.