COURT FILE NO.: CV-08-00535-0000

DATE: 2022 08 09

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Royal Bank of Canada v. Streetsville Eyecare Inc., and Diljeet Kalsi

BEFORE: Fowler Byrne J.

COUNSEL: James M. Satin, for the Plaintiff

James P. McReynolds, for the Defendant Diljeet Kalsi

HEARD: May 12, 2022

E N D O R S E M E N T

[1] There are two motions before me.

[2] The Royal Bank of Canada (“RBC”) seeks an order compelling the Defendant Diljeet Kalsi (“Kalsi”) to attend an examination in aid of execution on behalf of herself and the Defendant Streetsville Eyecare inc. (“Streetsville”).

[3] Kalsi has brought a motion seeking to set aside the default judgment dated February 10, 2020, and an order dismissing the action as against her.

[4] These motions are made complex by the fact that Kalsi had declared bankruptcy pursuant to the Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3 (“BIA”) just before the Statement of Claim was issued and remained an undischarged bankrupt when default judgment against her was obtained.

I. Issues

[5] The following issues must be decided:

a) Does the fact that the RBC commenced an action and served Kalsi, after her assignment in bankruptcy, render the action as against her a nullity, or is it an irregularity that can be rectified?

b) If the action is an irregularity, how can it be rectified?

c) If the action is rectified, should default judgment as against Kalsi be set aside?

d) If default judgment is set aside, should the action be dismissed?

e) If the action stands, is the RBC entitled to enforce its judgment as against Kalsi while she is an undischarged bankruptcy, after her trustee was discharged?

II. Facts

[6] The relevant facts of this case are not contested.

[7] The Defendant Kalsi was the former officer and director of Streetsville. On or about June 22, 2006, Streetsville entered into an agreement with the Plaintiff, the RBC for a credit facility of $140,000 plus a Visa card for $10,000. Kalsi guaranteed that loan up to $150,000, with interest.

[8] RBC states that on January 29, 2008, it demanded payment of the loan, the Visa card and an overdraft, in full. Neither Streetsville nor Kalsi paid the debt. Perhaps seeing her potential exposure, on February 8, 2008, Kalsi made a personal assignment in bankruptcy. Killen Landau & Associates Ltd. was appointed as trustee in bankruptcy. At that time, she ceased being an officer and director of Streetsville.

[9] On February 20, 2008, RBC commenced an action as against Streetsville and Kalsi, for the sum of $147,820.31 plus interests and costs.

[10] Kalsi and Streetsville were served on February 20, 2018, by personal service. Given that she had just made an assignment in bankruptcy, she took no steps to defend the action on her own behalf. She also took no steps to have Streetsville defend the claim. Over the intervening years, she claims to have lost the Statement of Claim or had forgotten about it. Despite the passage of time, she admits it was possible that she was served.

[11] The RBC’s action against Streetsville continued. Streetsville was noted in default and, on April 7, 2008, RBC obtained default judgment as against Streetsville in the sum of $149,362.06 plus costs and interest.

[12] With respect to the claim against Kalsi, the RBC made a claim in her bankruptcy on March 17, 2008 for the full amount of the debt. It took no further steps as against Kalsi at that time.

[13] The trustee in bankruptcy started its work on Kalsi’s assignment. On October 7, 2008, the trustee filed an opposition to Kalsi’s discharge.

[14] Fast forward ten years. Little evidence was given as to what occurred over that ten-year period, except that Kalsi was working with her accountant to file her income tax returns from 2014 to 2020 and to arrange for payment of her large debt to the Canada Revenue Agency (“CRA”).

[15] On November 14, 2018, Kalsi’s discharge hearing was scheduled. Unfortunately, notice of the hearing went to her previous address, so she was unaware of the meeting and did not attend. As a result, at her hearing the presiding Master, as she was known then, made the following endorsement:

B. not present. No order. The B. has still not fulfilled duties.

[16] Several months later, on June 14, 2019, the trustee in bankruptcy obtained its own discharge from the file, but Kalsi remained undischarged from her bankruptcy. The RBC was advised of this on August 14, 2019.

[17] On November 8, 2019, the RBC filed a motion in writing and without notice, seeking to note Kalsi in default and obtain default judgment as against her. In the affidavit in support of this motion, RBC disclosed that it had served Kalsi on February 20, 2008. It also disclosed that Kalsi had made an assignment in bankruptcy and made the Notice of the Bankruptcy an exhibit to the affidavit, showing the assignment in bankruptcy to have occurred on February 8, 2008. It also disclosed that it made a claim in her bankruptcy. Finally, the court was advised that Kalsi did not show up at her discharge hearing, that she remains undischarged, that the trustee in bankruptcy was discharged, and that RBC was now entitled to move ahead and collect on its debt. No leave was ever sought under the BIA, nor did the affidavit material filed disclose this.

[18] On January 17, 2020, RBC decided to change lawyers and retained Mr. Satin. Given that Mr. Satin was not on the record until at least January 17, 2020, it is not clear how his motion record, dated November 8, 2019, was filed.

[19] Nonetheless, in or about February 2020, the RBC served Kalsi with a Notice of Change, indicating that Mr. Satin was retained. When Kalsi received the Notice of Change, she retained Ms. Samra. Ms. Samra contacted Mr. Satin and advised that she had no pleadings and asked that he take no steps until which time they had a change to speak the following week. On February 10, 2020, Mr. Satin responded, indicating that he could chat the following week. He also asked if Kalsi would be making a payment, and that the debt was approximately $150,000. On February 17, 2020, Ms. Samra responded to Mr. Satin indicating that she could speak that week but stated that she believed Kalsi was bankrupt and that the trustee had dealt with the debt.. On February 18, 2020, Mr. Satin responded, advising Ms. Samra that Kalsi was never discharged, but that the trustee had been. As a result, the RBC was entitled to pursue recovery of its debt. Mr. Satin stated that if Kalsi was not proposing a payment, he would be taking enforcement steps without any further notice. On February 25, 2020, Ms. Samra advised Mr. Satin that she was no longer able to confirm her instructions. She indicated that Mr. Satin should speak to Kalsi directly. Neither Kalsi nor any lawyer on her behalf made an offer of payment.

[20] On February 10, 2020, the RBC received back from the court the order it requested, noting Kalsi in default, with default judgment against her in the sum of $147,820.31 plus costs and interests. RBC proceeded with enforcement.

[21] On May 14, 2021, Kalsi was served with a Notice of Examination in Aid of Execution for herself and Streetsville, scheduled for June 3, 2021. On June 2, 2021, Kalsi’s lawyer requested an adjournment. The date was adjourned, but Kalsi’s lawyer would not agree to a further date, given that Kalsi’s bankruptcy proceedings were unresolved. Accordingly, on October 4, 2021, the RBC brought this motion to compel Kalsi to attend an examination in aid of execution on her behalf and on behalf of Streetsville. Cross-examinations took place in February 2022.

[22] Around the same time, in the fall of 2021, Kalsi applied for her discharge. In support of that application, on October 5, 2021, Kalsi swore an affidavit advising that she has addressed all outstanding issues in her bankruptcy and that she has entered into a payment plan with the CRA to pay off what is owing. She is to pay to the CRA $1,290 per month from October 31, 2021 until September 30, 2023. Also, in support of her discharge, the trustee withdrew its opposition to Kalsi’s discharge. The RBC states that it now intends to oppose Kalsi’s discharge.

[23] A hearing took place before the Associate Judge Jean on November 18, 2021. On that day, the Associate Judge Jean adjourned Kalsi’s hearing sine die, pending the fulfillment of all of Kalsi’s post bankruptcy CRA obligations. Kalsi was also ordered to file all of her Notices of Assessment and proof of payment, along with other information. Despite Kalsi’s obligation to make payments to the CRA until September 2023, her counsel advised that he was attempting to appear before the Associate Judge in the first quarter of 2022 and ask, given that payments are ongoing, that Kalsi be granted an absolute or conditional discharge at that time. As of the date of this motion, Kalsi did not yet obtain such an appointment before the Associate Judge.

[24] Kalsi brought her motion to set aside the default judgment on February 25, 2022. This was approximately two years after her former counsel, Ms. Samra, had email communication with Mr. Satin who advised that they were pursuing the enforcement of a debt of $150,000.

[25] Kalsi states that this action is fourteen (14) years old. She no longer has the company books and records with which to defend herself. She claims irreparable prejudice as a result of the delay and asks that the action be dismissed.

III. Analysis

A. Is the Action a Nullity or an Irregularity?

[26] The relevant sections of the BIA are as follows:

69.3 (1) Subject to subsections (1.1) and (2) and sections 69.4 and 69.5, on the bankruptcy of any debtor, no creditor has any remedy against the debtor or the debtor’s property, or shall commence or continue any action, execution or other proceedings, for the recovery of a claim provable in bankruptcy.

(1.1) Subsection (1) ceases to apply in respect of a creditor on the day on which the trustee is discharged.

69.4 A creditor who is affected by the operation of sections 69 to 69.31 or any other person affected by the operation of section 69.31 may apply to the court for a declaration that those sections no longer operate in respect of that creditor or person, and the court may make such a declaration, subject to any qualifications that the court considers proper, if it is satisfied

(a) that the creditor or person is likely to be materially prejudiced by the continued operation of those sections; or

(b) that it is equitable on other grounds to make such a declaration.

[27] Clearly, the RBC should not have commenced, without leave, the action as against Kalsi. I must determine whether the action is a nullity in its entirety or only an irregularity that can be salvaged after the fact.

[28] After reviewing the law in this area, I find that, in the event an action is started against a person who has declared bankruptcy, it is only an irregularity that can remedied.

[29] Although quite old, the case of Trusts and Guarantee Co. v. Brenner, 1932 CanLII 14 (ON CA), [1932] O.R. 245 (Ont. C.A.), affirmed in part in 1933 CanLII 14 (SCC), [1933] S.C.R. 656, remains the leading authority. In that case, the Defendants to the action made an assignment in bankruptcy. Sometime thereafter, a claim was commenced against them. The Defendants pleaded in their defence that they made this assignment and that the matter could not proceed. The trial nonetheless proceeded and the trial judge found the Defendants liable, and the Defendant Brenner particularly, guilty of fraud.

[30] In considering the impact of the bankruptcy, the Court of Appeal for Ontario found that the action, trial, and judgment were wholly irregular and against the express prohibition of the statute. The court’s first instinct was to allow the appeal and dismiss the action entirely. Instead, the court was persuaded that it had the authority to grant leave, nunc pro tunc, to the Plaintiffs to bring and proceed with the action. In so doing, the court relied on the case of Blais v Bankers’ Trust Corp. (1913), 1913 CanLII 296 (Alb.Q.B.) which held that the commencement of such an action is only irregular and not void. In allowing the judgment to stand, the court determined that the Plaintiffs were not entitled to the amount of the judgment, but, rather, could use it as evidence of the amount to which they may rank up on the estate of the bankrupt. In Trusts, it did not appear that the trustee in bankruptcy had been discharged.

[31] In Keeling (Re) Kazantzis and Kachanis v. Keeling, [1976] O.J. No. 1623 at para.1, the court determined that the failure to obtain leave to proceed with an action does not make the writ a nullity, but a defect that can be cured by the court by granting the necessary leave nunc pro tunc. In so determining, the Justice Henry relied on Trusts.

[32] In Ross (Re), [2003] O.J. No. 6042, the Defendant had declared bankruptcy in February 1993. The trustee was discharged in 1997. The claim was commenced in 2002. At that time, the bankrupt was still undischarged, and remained so for approximately 10 years. The court found that upon an assignment in bankruptcy, a stay was put in place. It remained in effect only until the trustee is discharged or an order under s.69.4 of the BIA is granted: paras. 13-14. The court continued that in the event it incorrectly interpreted the relevant sections, the court would have granted leave nunc pro tunc to continue the action pursuant to s.69.4, applying the test set out therein: para. 18.

[33] Finally, in Canadian Pacific Railway Co. v. Peric, [2005] O.J. No. 5245, at para. 8-9, the court determined that although a claim was commenced after a bankruptcy, the action does not become a nullity. It may proceed if the stay imposed by s.69.3(1) of the BIA is lifted.

[34] Kalsi relies on Dutch Canadian Kent Credit Union Ltd. v. Sprik (Trustee of), [1981] O.J. 2245, (Ont. H.C.). In that case, the defendants make an assignment in bankruptcy in April 1980. The Plaintiff commenced an action in October 1980, where they sought foreclosure, possession, and payment on the covenant.

[35] In that case, the court recognized that the BIA does not require a secured creditor to obtain leave in order to realize upon its security. The Plaintiff had subsequently abandoned its claim for a personal remedy and only pursued the foreclosure and possession. The court stated that had there been a claim for a personal judgment only, and no leave was obtained, then the remedy is not a rectifiable irregularity. Rather, the action becomes a nullity. The court went on to say, though, that the whole action did not become a nullity where there are various claims, severable and distinct, not all of which require leave to proceed: paras. 17-18.

[36] This last statement by the High Court for Ontario assists the RBC. In the case before me, the Statement of Claim that was issued sought relief as against Kalsi, which required leave, and relief against Streetsville, which was not bankrupt. When proceedings are commenced against a bankrupt and a non-bankrupt, leave to proceed may be granted so that the liabilities of all parties may be determined in the same proceeding: Wagman, Re,1977 CarswellOnt. 70; 23 C.B.R. (N.S.) 240 (Ont.SC) at para. 6-9, aff’d 1978 CarswellOnt 186; 28 C.B.R (N.S.) 179 (Ont. C.A.).

[37] These two latter cases support the concept that the action commenced against a bankrupt can be continued with leave, granted after the fact.

[38] The decision of Micallef v. Dodig, 2009 CanLII 72091 (Ont.Div.Crt.) appears to support the position that a claim commenced after the defendants declared bankruptcy would result in a nullity. A closer reading, though, shows that this is not necessarily the case.

[39] In this case, the Plaintiff was not aware of the bankruptcy when it issued its claim. The Defendant did not defend, and because the matter was case managed, the registrar dismissed the entire action because neither was a defence filed, nor was a final order obtained within 180 days from the commencement of the action. Approximately one year later, the stay under the BIA was lifted.

[40] New counsel was retained in 2007 and relied on the service of the claim in 2003. When the Defendant tried to file their statement of defence, they were advised that the matter had been dismissed as abandoned. The Plaintiff then brought a motion to have the dismissal order set aside.

[41] The Master hearing the motion dismissed the motion, mostly because the Plaintiff waited four years before the motion was brought and provided no explanation for this delay. The Master also rejected the argument that the Registrar lacked jurisdiction to make the dismissal order due to the automatic stay under s.69.1 of the BIA, finding that the Registrar’s power to dismiss an action was unaffected by that stay.

[42] On appeal, the Divisional Court stated that a stay under the BIA arises automatically when a debtor files a bankruptcy, and it prohibits a claimant from starting or continuing an action for a claim that is provable in bankruptcy. The stay arises in law and continues until the trustee is discharged: para. 38.

[43] The Divisional Court continued that if a party wished to lift the stay, they had to seek leave under s.69.4 and satisfy the test set out therein which ensures that one creditor is not given an advantage over another: paras. 39-40.

[44] No leave was sought in that matter, but the court determined that “justice is more reliably achieved” by treating an order by the Registrar that dismissed an action in the face of the stay as a nullity and setting it aside as of right. Interestingly, no mention was made of the action itself being a nullity, although it, too, was commenced after the stay was in place. It appears, though, that the decision of the Divisional Court to declare the dismissal order a nullity was an alternative finding. It first determined that the Master made an overriding and palpable error in exercising his discretion to not set aside the dismissal under the common law. If that was incorrect, the court determined the nullity gave the same result. The dismissal order was overturned and the action was permitted to proceed. Clearly, the Divisional Court intended that the matter proceed on its merits.

[45] Accordingly, I find that the law as set out in Trusts remains binding and that an action commenced or pursued in the face of a bankruptcy is a curable irregularity. As a result, the RBC action is not a nullity.

B. How is the Irregularity Cured?

[46] Lifting a stay can clearly rectify an irregularity as described herein. This can be done by discharging the trustee or by an order granting the RBC leave to proceed nunc pro tunc.

[47] This has already been indicated above in Ross. In addition, in Re Frost, 2021 NSSC 296, [2021] N.S.J. No. 485, the court found that once the trustee in bankruptcy has been discharged, the stay is lifted and the creditors can pursue their remedies. If that is the case, they need not seek independent orders to “lift” the stay under s.69.4.

[48] In Canada (Attorney General) v. Ramjag 1995 CarswellAtla 70, at para. 22, the court found that if the trustee is discharged, a party does not have to apply under s.69.4 for leave. If the trustee has not been discharged, s.69.4 will apply to s.69.3(1).

[49] In this case, the trustee was clearly discharged. Accordingly, the RBC does not need leave to proceed nunc pro tunc. After the discharge of the trustee, the RBC was free to pursue its judgment. Had the trustee not been discharged, I do not believe the RBC would have been granted leave nunc pro tunc, as it is unlikely to have satisfied the tests set out in s.69.4.

C. Should Default Judgment as against Kalsi be set aside?

[50] Kalsi argues that default judgment should be set aside as against her for the following reasons:

a) the RBC did not obtain leave under s.69.3(1) of the BIA;

b) The RBC did not fully disclose in its ex parte motion materials that no leave was obtained under the BIA;

c) The RBC failed to comply with the Rules of Civil Procedure when seeking default judgment;

d) The RBC did not serve the Statement of Claim, especially not after Kalsi’s trustee in bankruptcy was discharged.

[51] For the reasons set out above, the RBC did not require leave. Accordingly, the lack of leave was not a material fact that needed to be disclosed to the judge who signed the default judgment.

[52] I do find, though, that the RBC failed to follow the Rules of Civil Procedure when it requested default judgment from the court. For that reason, the judgment should be set aside.

[53] Rule 37.07(1) states that unless the Rules provide otherwise, motion materials are to be served on any person who will be affected by the Order. Rule 37.07(2) states that a motion may be brought without notice if it is “impracticable or unnecessary.” If an order is made on a motion without notice, unless the court orders otherwise, the moving party shall serve the order and the motion materials used at the hearing on the party affected: r.37.07(4). Finally, where it appears that a motion made without notice should have been served but was not, the court can dismiss the motion, adjourn the motion and order service, or direct that the order be served: r.37.07(5).

[54] According to r.18.01, once served with a Statement of Claim, a party must serve their defence or a Notice of Intent to Defend within 30 days. A Notice of Intent to Defend will give the defendant an additional ten days to defend.

[55] If the Defendant does not defend with in that time, the Plaintiff can file the affidavit of service and require the registrar to note the defendant in default: r.19.01(1). If a party is noted in default, and not until then, the party is not entitled to notice of any further step in the proceeding, unless the court orders otherwise: r.19.02(3).

[56] On the facts before me, I find that the Plaintiff did not comply with the rules when bringing its motion for judgment. As the default judgment dated February 10, 2020, indicates, Kalsi was not noted in default until this order was signed. As a result, up to the date when the noting in default occurred, Kalsi was entitled to notice of this motion. It is uncontested that the motion materials were not served on Kalsi. Furthermore, neither Kalsi nor her counsel were ever advised about the motion in the email communications they exchanged with RBC counsel at the time. Service was not dispensed with in the default judgment.

[57] This contrasts with the Judgment of April 7, 2008, which was against Streetsville alone. That Judgment clearly states that the Defendant was already noted in default when the default judgment was signed. Accordingly, service was not required.

[58] This failure to serve the Motion materials is sufficient reason to set aside the default judgment. This is particularly the case given that ten years had passed since the Statement of Claim was served, bankruptcy proceedings have been ongoing – albeit somewhat stalled – and Kalsi had no reason to believe that the RBC would be pursuing her again.

[59] This interpretation of the Rules is supported in Elekta Ltd. v. Rodkin, 2012 ONSC 2062. At paragraph 10 of his reasons, Justice D. M. Brown, as he was then known, ordered that the Plaintiff provide notice to a defaulting defendant under r.19.02(3) to allow the judge hearing the motion for judgment to be satisfied that the defaulting defendant was provided with proper notice of the claim and motion pending for judgment. He stated:

Although once noted in default a party is not entitled to notice of a motion for default judgment, by far the better practice is to serve the default judgment motion materials on the defendant in any event (emphasis mine).

[60] In addition, the case law in the past several years has indicated that the best practice is that notice be given in default proceedings: Casa Manila Inc. v Iannuccilli, 2018 ONSC 7083 at paras. 16-17.

[61] In the motion for default judgment, the RBC did not seek an order to dispense with service, nor did it lead any evidence as to why service was impracticable or unnecessary before Kalsi was even noted in default. RBC also gave no reason for why the default judgment and the supporting motion materials were not served on Kalsi until April 2022, after Kalsi’s motion to set aside had been brought.

[62] The objective of the Rules is to secure the just, most expeditious and least expensive determination of every civil proceeding on its merits. A liberal interpretation of r.19.02(3) is a tool in doing so. A motion for default judgment or an uncontested trial ought to be the last step in the action, not the precursor to a motion to set aside a default judgment due to inadequacy of notice, or a motion to set aside or vary a trial judgment due to a party’s failure to attend through lack of notice. To a plaintiff seeking a judgment on default, notice is not a nuisance: it is the key to the default judgment’s viability: Casa Manila at para. 17.

[63] Accordingly, the default judgment should be set aside.

[64] Kalsi alleges that the delay in this action causes extreme prejudice to her and that it should be dismissed for delay.

[65] I disagree. It is premature to determine whether this action should be dismissed. Kalsi should be compelled to serve a Statement of Defence in which to plead this delay. RBC is entitled to respond in a Reply. The issue of delay can be better explored in the discovery phase of this action.

E. Can the RBC Enforce its Judgment at this Time?

[66] Given that the Judgment was set aside as against Kalsi, RBC is not entitled to an examination in aid of execution with respect to her. However, the RBC is entitled to an examination of Streetsville, and Kalsi – as the last officer and director – appears to be the best representative. She shall be compelled to attend on behalf of the company.

IV. Costs

[67] At the hearing of the motion, counsel for Kalsi submitted that an appropriate costs award for these motions would be $4,040 for RBC’s motion and $2,964 for Kalsi’s motion, payable to the successful party. Counsel for RBC concurred.

[68] The RBC was partially successful in that their action was not found to be a nullity and that they obtained an order to examine Streetsville, but it was not found to be entitled to examine Kalsi. Kalsi was also successful in that the judgment was set aside, but the action was not dismissed as against her.

[69] Considering my decision herein and the divided success, each party should bear their own costs.

V. Conclusion

[70] For the foregoing reasons, I make the following orders:

a) The stay of this action that arose by reason of the assignment in bankruptcy of Kalsi on February 8, 2008, is lifted as of June 14, 2019, subject to any further order of the bankruptcy court;

b) The RBC is entitled to pursue its action as against Kalsi as long as the stay is lifted; otherwise, it may only pursue Kalsi within the bankruptcy proceedings;

c) The default judgment as against Kalsi, dated February 10, 2022, is set aside;

d) Kalsi shall serve and file her Statement of Defence within 20 days of this order;

e) Kalsi shall attend an examination in aid of execution on behalf of Streetsville only, at a time and place set by RBC; and

f) Each party shall bear their own costs; and

g) The remainder of the motions are dismissed.

Fowler Byrne J.

DATE: August 9, 2022

COURT FILE NO.: CV-08-00535-0000

DATE: 2022 08 09

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Royal Bank of Canada v. Streetsville Eyecare Inc., and Diljeet Kalsi

COUNSEL: James M. Satin, for the Plaintiff

James P. McReynolds, for the Defendant Diljeet Kalsi

ENDORSEMENT

Fowler Byrne J.

DATE: August 9, 2022