COURT FILE NO.: CV-20-00642177-0000 DATE: 2022-04-14

ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN: ON DECK CAPITAL CANADA, ULC Plaintiff - and – NORTHERN PROTOCOL INC. and AARON WESTON Defendants

Counsel: Jessica Hewlett for the Plaintiff Siddharth Joshi for the Defendants

HEARD: April 6, 2022

PERELL, J.

REASONS FOR DECISION

A. Introduction

[1] In dispensing justice, although judges prefer to decide matters on their merits and not based on technicalities or on the failures of a party to adhere to the Rules of Civil Procedure, judges need to achieve a balance between the court’s preference for substantive justice and society’s need to have a justice system that remains viable and capable to provide substantive justice. In 1196158 Ontario Inc. v. 6274013 Canada Ltd. at para. 37, the Court of Appeal adopted and approved the statement of Justice D.K. Gray in Broniek-Harren v. Osborne at para. 29:

37. The Rules reflect a balance. The litigant does not have an untrammelled right to have his or her case heard. In order to be heard, a case must be processed in accordance with the Rules. By the same token, adherence to the Rules must not be slavish in all circumstances. They are, after all, designed to ensure that cases are heard. Throughout the Rules, the principle is reflected that strict compliance may be dispensed with where the interests of justice require it: see, for example, Rules 1.04(1), 2.01, 2.03, 3.02, and 26.01. The difficult issue, in any particular case, is to determine when non-compliance reaches the point that it can no longer be excused. The Court, and society as a whole, have an interest in ensuring that the system remains viable. If the Rules can be ignored with impunity, they might as well not exist.

[2] In my opinion, in the immediate case, while Associate Justice La Horey had a commendable inclination to have On Deck Capital Canada, ULC’s case decided on the merits, she made errors in principle and overriding errors of fact when she set aside Northern Protocol Inc. and Aaron Weston having been noted in default.

[3] The immediate case is a case “when non-compliance reaches the point that it can no longer be excused”, and the Associate Justice did not properly balance the factors between substantive and procedural justice. She saw failures of service and sharp practice by the Plaintiff’s lawyers, when there was none, and rather where there was indulgent practice. She failed to see all of ignorance, non-compliance, and impertinence by the Defendants in response to proper procedural treatment.

[4] For the reasons that follow, I set aside the Associate Justice’s Order dated June 22, 2021. The nose-thumbing Northern Protocol Inc. and Mr. Weston were properly noted in default. I grant the appeal. On Deck Capital is at liberty to move for a default judgment.

B. Annotated Facts

[5] Aaron Weston is the principal of Northern Protocol Inc. and its holding company.

[6] Northern Protocol and Mr. Weston were the parties to several loan agreements with On Deck Capital. Northern Protocol was the borrower. Mr. Weston provided a personal guarantee of the loan indebtedness. There was a default in loan repayments. At the time of the first default, the outstanding balance was $82,174.32. Sporadic repayments followed. Save for one payment after litigation was commenced, mentioned below, all payments stopped on November 16, 2019.

[7] On May 21, 2020, Daniel Kraus an associate lawyer at Katzman & Associates, who are the lawyers of record for On Deck Capital, sent a demand letter to Northern Protocol and Mr. Weston. Mr. Weston responded. There was correspondence, negotiations, but no resolution.

[8] On June 6, 2020, On Deck Capital commenced an action to collect the outstanding indebtedness. On Deck Capital claimed that the amount outstanding on the loan was $70,974.32.

[9] On June 17, 2020, the Statement of Claim was served on Northern Protocol at its place of business and registered head office. The Statement of Claim was left with Alex Tremblay, an employee of the company. Later in the day, Mr. Weston wrote to Mr. Kraus. Mr. Weston advised that the Defendants would be taking steps to retain counsel. Mr. Kraus responded the next day and asked that a Statement of Defence be filed by July 8, 2020.

[10] Pausing here to comment, on the motion to set aside the noting of default, the Associate Justice was incorrect in concluding that service on Northern Protocol was improper or ineffective. On June 17, 2020, there was effective service on Northern Protocol, and it had had twenty days to deliver its Statement of Defence. Unfortunately, the Associate Justice seems to have been impressed with Mr. Weston’s arguments about service. Mr. Weston, who suffers from the ‘little bit of knowledge is a dangerous thing syndrome,’ was incorrect in thinking that his corporation had not been served. Moreover, and in any event, Mr. Weston told Mr. Kraus that Northern Protocol intended to defend.

[11] On June 17, 2020, it is true that Mr. Weston had not been served in accordance with the Rules of Civil Procedure, but he knew about the action, had a copy of the pleading, and, in any event, he too gave notice of his intent to defend. Rather than being impressed with Mr. Weston’s arguments, the Associate Justice could have made an order pursuant to rule 16.08 validating service on both defendants. Rule 16.08 states:

16.08 Where a document has been served in a manner other than one authorized by these rules or an order, the court may make an order validating the service where the court is satisfied that,

(a) the document came to the notice of the person to be served; or

(b) the document was served in such a manner that it would have come to the notice of the person to be served, except for the person’s own attempts to evade service.

[12] Returning to the narrative, on June 27, 2020, Mr. Weston emailed Mr. Kraus to which Michael A. Katzman, the named partner of the law firm responded. On June 30, 2020 and on July 1, 2020 and on July 2, 2020, there were more exchanges between Mr. Weston and Mr. Katzman. Mr. Weston repeated that he was taking steps to retain counsel and on July 1, 2020, Mr. Katzman wrote to Mr. Weston requesting that the Defendants do file their Statement of Defence.

[13] On July 2, 2020, Mr. Katzman again requested that the Defendants file their Statement of Defence by July 10, 2021, failing which they would be noted in default. Mr. Katzman repeatedly told Mr. Weston that their correspondence was not productive, and that the parties needed to get on with the claim and the defence to it.

[14] Pausing here to comment, Mr. Katzman was not wrong in warning the Defendants of his intention to note them in default, but he was under no obligation to give them a warning. That was a courtesy not an obligation. In so far as Northern Protocol was concerned, it would have been a straightforward matter for Mr. Katzman’s firm to note it in default without notice.

[15] It would, however, not have been a straightforward matter insofar as Mr. Weston was concerned to note him in default because Mr. Weston had not been personally served with the Statement of Claim. In so far as Mr. Weston was concerned, Mr. Katzman’s office would have to seek an order for substituted service or an order validating service. In any event, it was only much later that Mr. Weston was noted in default.

[16] Returning to the narrative, Mr. Weston wrote on July 10, 2021 to state that Mr. Katzman’s reference to timelines was misleading because of the suspension of timelines due to the pandemic. In any event, at this juncture, Mr. Katzman did not note either Defendant in default.

[17] In September 2020, Mr. Weston moved to Mexico. From time to time thereafter, Mr. Weston took the position that he must be served in Mexico, which is another example of a little bit of knowledge being a dangerous thing because it was not categorically true that he had to be served in Mexico.

[18] On September 11, 2020, the suspension of limitation periods and litigation timelines ended.

[19] In the meantime, neither Northern Protocol nor Mr. Weston delivered a Statement of Defence, and on November 23, 2020, Mr. Katzman requisitioned that Northern Protocol be noted in default. On November 25, 2020, Northern Protocol was noted in default.

[20] Pausing here to comment, the Associate Justice in her reasons noted that On Deck Capital’s lawyers did not give the Defendants another warning after litigation timelines resumed. This circumstance seems to have influenced her decision. It ought not to have done so. In addition to ignoring the fact that Mr. Weston had not followed through by delivering a Statement of Defence as he said he intended to do, there never was an obligation on Mr. Katzman to warn the Defendants. Northern Protocol had been served with a Statement of Defence in mid-June. In was now late November. It was Northern Protocol’s responsibility to act in accordance with the Rules of Civil Procedure, and it was not for it to expect or to abuse any courtesies extended to it.

[21] Returning to the narrative, in any event, on December 7, 2020, Mr. Kraus advised Mr. Weston that Mr. Weston’s company had been noted in default. Mr. Katzman inquired whether Mr. Weston would accept service in his personal capacity. On December 7, 2020, Mr. Weston responded with a series of email messages to Mr. Kraus and to Mr. Katzman, the gist of which were to mock the Statement of Claim, to indicate that both defendants had to be served in order for the action to proceed against either of them (yet another instance of imperfect knowledge by Mr. Weston), to indicate that the plaintiff was throwing good money away for which there would be no return, and that in any event, he would just hand the matter off to his lawyers and trustees to establish the appropriate course of action.

[22] Pausing here to comment, once again favourably to the Defendants and unfavourably to On Deck Capital, the Associate Justice apparently accepted Mr. Weston’s assertion that there were problems about service of the pleading on both Northern Protocol and Mr. Weston and she accepted these assertions notwithstanding that Mr. Weston had been in possession of the Statement of Claim for six months with sufficient knowledge of it to mock its merits. His baseless assertions about service apparently led the Associate Justice to err. Northern Protocol had been served and its principal had the pleading on the date of service. Northern Protocol had been advised that it had been noted in default. Northern Protocol might have moved in December 2020 to challenge the noting in default, but it did not.

[23] As for Mr. Weston, he had not been personally served, but he had not been noted in default. He needed to be served, but as described below, not necessarily in Mexico as he tauntingly advised On Deck Capital’s lawyers.

[24] Returning to the narrative, on December 16, 2020, Mr. Weston wrote Mr. Katzman to advise that he was retaining the services of a trustee in bankruptcy and that proceedings would be stayed once filed.

[25] Pausing here to comment, there is evidence here that Mr. Weston advertently is choosing to not defend the actions at least in so far as his corporation is concerned. The associate judge erred by ignoring this evidence in her assessment of whether or not to set aside the noting in default.

[26] Returning to the narrative, Mr. Katzman set about arranging for service on Mr. Weston. He conducted a motor vehicle licence search. It was determined that Mr. Weston had an address at what turned out to be the residence of Galen Weston, who is Mr. Weston’s brother. On January 14, 2021, a copy of the Statement of Claim was served at this residence. As it happens, Mr. Weston may have been in Canada at the time, and he almost immediately received a copy of the Statement of Claim. There was valid and effective service on Mr. Weston.

[27] There followed a series of emails between Mr. Weston and Mr. Katzman about potential settlement, bankruptcy, and a partial payment on account of the debt from the proceeds of a liquidation of the company. On January 21, 2021, Mr. Weston advised again of his intention to retain a trustee in bankruptcy, and he wrote to say that he would pay down the indebtedness.

[28] On January 29, 2021, Mr. Weston electronically transferred $2,212.80 to Mr. Katzman’s office. This was expressly accepted as a without prejudice partial payment.

[29] Around this time, Mr. Weston was getting some legal assistance from lawyer Graham Knight, and on February 2, 2021, Mr. Knight contacted Mr. Katzman to discuss the possibility of partial payments.

[30] On February 10, 2021, at 1:27 pm, Mr. Katzman sent an email to Mr. Knight which said that Mr. Weston had been served in his personal capacity by way of an alternative to personal service. The pleading had been accepted by Mr. Weston’s brother. Mr. Katzman stated that he did not believe that Mr. Weston had moved to Mexico. He said that they would be proceeding to note Mr. Weston in default. He then stated:

In any event, if he does intend to defend the action, it is very important that he file a defence without delay so we can get on with it. If Mr. Weston needs an indulgence to file a Defence please advise immediately so it can be considered. In the absence of hearing from you or from Mr. Weston or from anyone else on his behalf, we will be proceeding as outlined herein.

[31] At 1:32 pm, Mr. Knight replied to Mr. Katzman advising in a one-sentence email message that he had previously acted for Mr. Weston but was not presently retained.

[32] Mr. Katzman responded at 1:49 pm that he had presumed that Mr. Knight had forwarded his email to Mr. Weston, but in any event would be sending his email directly to him given Mr. Knight’s advice that he was not currently retained.

[33] Mr. Katzman did not forward the email to Mr. Weston and instead at 1:37 pm on February 10, 2021, Mr. Katzman submitted a requisition to note Mr. Weston in default.

[34] Six days later on February 16, 2021, Mr. Weston was noted in default.

[35] Pausing here to comment, once again, favourably to the Defendants and unfavourably to On Deck Capital, the Associate Justice was critical of Mr. Katzman’s conduct in immediately requisitioning a default after being informed that Mr. Knight was not acting for Mr. Weston and after offering an indulgence to Mr. Weston if he needed it.

[36] In my opinion, this criticism of Mr. Katzman was unwarranted. Nothing can turn on Mr. Katzman’s conversation with Mr. Knight because Mr. Knight disavowed being retained. Mr. Weston, it seems from his factum, was unaware of the email exchange. Moreover, the conversation with Mr. Knight was meaningless with respect to Northern Protocol, which was already in default. Further, Mr. Weston had had the Statement of Claim from June 2020, and this was eight months later. For eight months, Mr. Weston had done nothing to defend himself or his company notwithstanding his assertions about defending and his protests about or threats about staying proceedings by a petition into bankruptcy. Mr. Weston had been personally served in January 2021, he had known about the action for eight months, he had been mocking On Deck Capital about the Rules of Civil Procedure, and he was at all times aware of the risk of being noted in default. It was quite appropriate for Mr. Katzman to immediately requisition Mr. Weston to be noted in default.

[37] Returning to the narrative, on February 17, 2021, Mr. Kraus wrote to Mr. Weston and asked his input about scheduling a motion for a default judgment, and on February 24, 2021, Mr. Weston’s new counsel David Windrim responded that he would be bringing a motion to have the noting in defaults set aside.

[38] In their proposed Statement of Defence, the Defendants admit that: (a) they entered into the loan agreement; (b) Mr. Weston is the personal guarantor; (c) the loan went into default; (d) the parties negotiated a repayment plan and executed a settlement agreement on February 11, 2019; and (e) they breached the settlement agreement. By way of defence, Mr. Weston alleges that he is not liable by reason of a settlement agreement entered into in February 2019 pursuant to which it was agreed that he would no longer personally guarantee the debts of the corporate defendant. The draft defence also pleads unconscionability and excessive interest rates. In his affidavit for the motion now before the court, Mr. Weston deposes that the Defendants breached the settlement agreement because the Canada Revenue Agency locked Northern Protocol’s bank account, removing its ability to make payment pursuant to the agreement.

[39] On June 22, 2021, Associate Justice La Horey heard the Defendants’ motion to set aside their noting in default. She granted the motion and ordered costs of $4,500 to the Defendants in the cause.

C. Standard of Appellate Review

[40] Associate judges are subject to the same standard of review as Superior Court judges. Typhoon Offshore B.V. v. Jacob, 2022 ONSC 1663 (Div. Ct.); Gupta v. Venka, 2022 ONSC 754 (Div. Ct.); Zeitoun v. Economical Insurance Group, aff’d 2009 ONCA 415. The standard of review on appeal is as set out in Housen v. Nikolaisen, 2002 SCC 33.

[41] Issues of law are about what is the correct legal test. The standard of appellate review for issues of law is correctness. The application of an incorrect legal standard, a failure to consider a required element of a legal test, or an error in principle is an error in law. Housen v. Nikolaisen, 2002 SCC 33 at para. 36. It is an error in law for a judge or tribunal member to fail to provide an explanation of his or her decision that is sufficiently intelligible to permit appellate review. Law Society of Upper Canada v. Neinstein, 2010 ONCA 193 at para. 61; R. v. Sheppard, 2002 SCC 26, [2002] 1 S.C.R. 869.

[42] Issues of fact are about what events took place between the parties. The standard of review for findings of fact is that factual findings ought not to be reversed unless it is established that the trial judge made a palpable and overriding error. The palpable and overriding error test is met if the findings are clearly wrong or can properly be characterized as unreasonable and unsupported by the evidence. H.L. v. Canada (A.G.), 2005 SCC 25 at paras. 55-56. A "palpable" error is one that is obvious, plain to see or clear. Housen v. Nikolaisen, 2002 SCC 33 at paras. 5-6. An "overriding" error is an error that goes to the root of the finding of fact such that the fact cannot safely stand in the face of that error. Schwartz v. Canada at para. 35.

[43] Questions of mixed fact and law are questions about whether the facts satisfy the legal tests. Canada (Director of Investigation and Research, Competition Act) v. Southam Inc.. Where the legal principle is not readily extricable, then the matter is one of mixed law and fact. Housen v. Nikolaisen, 2002 SCC 33 at para. 36. If fact-finding is integral to the ultimate determination of the question, the question is an issue of mixed fact and law. Ferreira v. Esteireiro, 2013 ONSC 4620 at para. 24. The standard of review for findings of mixed fact and law is on a spectrum between correctness and palpable and overriding error. Housen v. Nikolaisen, 2002 SCC 33.

[44] Where an associate justice exercises discretion, the court on appeal must determine whether the correct principles were applied and whether the associate justice misapprehended the evidence such that there is a palpable and overriding error. Typhoon Offshore B.V. v. Jacob, 2022 ONSC 1663 (Div. Ct.); Gupta v. Venka, 2022 ONSC 754 (Div. Ct.).

D. Discussion and Analysis

[45] Although they are not exhaustive and the overriding factor is the interests of justice, for setting aside a noting in default, the major relevant factors are: (a) whether the defendant brought his or her motion without undue delay; and, (b) whether he or she explains why there was a default. Where there is no default judgment, satisfying just these two factors is usually sufficient to justify setting aside the noting of a defendant in default. Bank of Montreal v. Rich, [1985] O.J. No. 1848 (Dist. Ct.); Wieder v. Williams (1976). A third relevant factor is whether the defendant can show a defence on the merits. However, to set aside just the noting in default, only in extreme circumstances of default and delay is a defendant required to show a defence on the merits, and thus, the test that the defendant must meet to set aside the noting in default is lower than the test for setting aside a properly obtained default judgment. Benlolo v. Barzakay, [2003] O.J. No. 602 (Div. Ct.); Metropolitan Toronto Condominium Corp. No. 706 v. Bardmore Developments Ltd. (1991); Axton v. Kent (1991). Motions to set aside a noting of default are frequently granted because it is typically not in the interest of justice to grant judgments based solely on technical defaults, and courts prefer to dispose of proceedings on their merits whenever possible. Czuczman Estate v. St. Demetrius (Ukrainian Catholic) Development Corp., 2016 ONSC 964 at para. 20 (Master); Speck v. Alma Mater Society of Queen’s University Inc., 2015 ONSC 137 at para. 14; Garten v. Kruk at para. 16; Nobosoft Corp. v. No Borders Inc., 2007 ONCA 444 at para. 7. That said, there are cases in which courts have refused to set aside the noting in default. Cheung v. Liu, 2021 ONSC 426; Flintoff v. von Anhalt, 2010 ONCA 786.

[46] In Intact v Kisel, 2015 ONCA 205, at paragraph 14 of its decision, the Court of Appeal stated:

13. When exercising its discretion to set aside a noting of default, a court should assess “the context and factual situation” of the case: Bardmore, at page 284 O.R. It should particularly consider such factors as the behaviour of the plaintiff and the defendant; the length of the defendant’s delay; the reasons for the delay; and the complexity and value of the claim. These factors are not exhaustive. See Nobosoft Corp. v. No Borders Inc., 2007 ONCA 444 at para. 3; Flintoff v. vonAnhalt, 2010 ONCA 786 at para. 7. Some decisions have also considered whether setting aside the noting of default would prejudice a party relying on it: see, e.g., Enbridge Gas Distribution Inc. v. 135 Marlee Holdings Inc., [2005] O.J. No. 4327 (S.C.J.), at para. 9. Only in extreme circumstances, however, should the court require a defendant who has been noted in default to demonstrate an arguable defence on the merits: Bardmore, at p. 285 O.R.

[47] In my opinion, in the immediate case, as revealed by the above annotated account of the facts, the Associate Justice was led into error in the exercise of her discretion and in the application of the law with respect to the setting aside of a noting in default for two main reasons.

[48] First, by not differentiating the situations of the two defendants, which were not tied to where Mr. Weston said he was located, the associate judge misapprehended the facts and misapplied the factors.

[49] Second, by taking seriously Mr. Weston’s boastful and taunting protests about service, she again misapprehended the relevant facts and the misapplied the factors. Mr. Weston’s protests do not withstand scrutiny and ignore that: (a) he had a copy of the Statement of Claim in June 2020; (b) he knew the claim’s substantive contents; (c) he had committed to retaining lawyers to defend the action in June 2020; (d) Northern Protocol had been noted in default in November 2020; and (e) his lawyers did not deliver a draft pleading until March 2021 as part of a motion to set aside the noting in defaults of two defendants.

[50] As a consequence of being led into error, the Associate Justice ignored relevant evidence, without warrant criticized On Deck Capital’s lawyers, and gave undue weight to Mr. Weston’s efforts to shift the blame onto others for the defendants’ respective non-compliance with the Rules of Civil Procedure and their own assurances that they intended to defend a debt collection action. In the circumstances of the immediate case, the non-compliance of each defendant cannot be excused.

E. Conclusion

[51] For the above reasons, On Deck Capital’s appeal is granted. It is at liberty to bring a motion for a default judgment to calculate the indebtedness of the Defendants.

[52] If the parties cannot agree about the matter of costs, they may make submissions in writing beginning with On Deck Capital’s submissions within twenty days of the release of these Reasons for Decision followed by the Defendants’ submissions within a further twenty days.

Perell, J. Released: April 14, 2022