Court File and Parties
Court File No.: CV-16-560268-00CP Court File No.: CV-16-561293-00CP Court File No.: CV-16-565287-00CP Date: 2023-02-14 Ontario Superior Court of Justice
Court File No.: CV-16-560268-00CP And Between: ARLENE MCDOWELL, Plaintiff -and- FORTRESS REAL CAPITAL INC., FORTRESS REAL DEVELOPMENTS INC., EMPIRE PACE (1088 PROGRESS) LTD., BUILDING & DEVELOPMENT MORTGAGES CANADA INC., ESTATE OF ILDINA GALATI by its Trustee in Bankruptcy CROWE SOBERMAN INC., DEREK SORRENTI, SORRENTI LAW PROFESSIONAL CORPORATION and MICHAEL CANE, Defendants Proceeding under the Class Proceedings Act, 1992
Court File No.: CV-16-561293-00CP And Between: SANDRA MEDLAND, Plaintiff -and- FORTRESS REAL CAPITAL INC., FORTRESS REAL DEVELOPMENTS INC., ADI DEVELOPMENTS (LINK) INC., ADI DEVELOPMENT GROUP INC., BUILDING & DEVELOPMENT MORTGAGES CANADA INC., ILDINA GALATI, FFM CAPITAL INC., ROSALIA SPADAFORA, SAUL PERLOV, DEREK SORRENTI and SORRENTI LAW PROFESSIONAL CORPORATION, Defendants Proceeding under the Class Proceedings Act, 1992
Court File No.: CV-16-565287-00CP And Between: THE ESTATE of BRYAN MADRYGA, BY HIS ESTATE ADMINISTRATOR REBECCA SHAW, Plaintiff -and- FORTRESS REAL CAPITAL INC., FORTRESS REAL DEVELOPMENTS INC., FORTRESS KEMPENFELT BAY DEVELOPMENTS INC., HARMONY VILLAGE-LAKE SIMCOE INC., CITY CORE DEVELOPMENTS INC., BUILDING & DEVELOPMENT MORTGAGES CANADA INC., ESTATE OF ILDINA GALATI by its Trustee in Bankruptcy CROWE SOBERMAN INC., DEREK SORRENTI, SORRENTI LAW PROFESSIONAL CORPORATION, GRANT EDWARDH APPRAISERS AND CONSULTANTS LTD. and IAN G. MCLEAN, Defendants Proceeding under the Class Proceedings Act, 1992
Counsel:
- Margaret Waddell, for the Plaintiffs
Heard: Motions in writing.
Before: Perell, J.
Reasons for Decision
[1] Class Counsel in three proposed class actions have delivered a 554-page motion record seeking Orders directing the Court Registrar to note three corporate defendants in default.
[2] It would be all of tedious and fruitless to minutely detail how it comes about that it takes a 554-page evidentiary record to note three corporate defendants in default, so I shall only provide enough detail to explain why I am dismissing the Plaintiffs’ motions without prejudice to the Plaintiffs serving the three defendants in accordance with rules 16.02 (1)(c) and 26.04 (1) of the Rules of Civil Procedure [^1], which state:
RULE 16 SERVICE OF DOCUMENTS
General Rules for Manner of Service
Originating Process
16.01 (1) An originating process shall be served personally as provided in rule 16.02 or by an alternative to personal service as provided in rule 16.03.
(2) A party who has not been served with the originating process but delivers a defence, notice of intent to defend or notice of appearance shall be deemed to have been served with the originating process as of the date of delivery.
Personal Service
16.02 (1) Where a document is to be served personally, the service shall be made,
Corporation
(c) on any other corporation, by leaving a copy of the document with an officer, director or agent of the corporation, or with a person at any place of business of the corporation who appears to be in control or management of the place of business;
Alternatives to Personal Service
Where Available
16.03 (1) Where these rules or an order of the court permit service by an alternative to personal service, service shall be made in accordance with this rule.
Acceptance of Service by Lawyer
(2) Service on a party who has a lawyer may be made by leaving a copy of the document with the lawyer or an employee in the lawyer’s office, but service under this subrule is effective only if the lawyer endorses on the document or a copy of it an acceptance of service and the date of the acceptance.
(3) By accepting service the lawyer shall be deemed to represent to the court that the lawyer has the authority of his or her client to accept service.
Service by Mail to Last Known Address
Service on a Corporation
(6) Where the head office, registered office or principal place of business of a corporation or, in the case of an extra-provincial corporation, the attorney for service in Ontario cannot be found at the last address recorded with the Ministry of Public and Business Service Delivery, service may be made on the corporation by mailing a copy of the document to the corporation or to the attorney for service in Ontario, as the case may be, at that address.
Substituted Service or Dispensing with Service
Where Order May be Made
16.04 (1) Where it appears to the court that it is impractical for any reason to effect prompt service of an originating process or any other document required to be served personally or by an alternative to personal service under these rules, the court may make an order for substituted service or, where necessary in the interest of justice, may dispense with service.
Effective Date of Service
(2) In an order for substituted service, the court shall specify when service in accordance with the order is effective.
(3) Where an order is made dispensing with service of a document, the document shall be deemed to have been served on the date of the order for the purpose of the computation of time under these rules.
Service on Lawyer of Record
16.05 (1) Service of a document on the lawyer of record of a party may be made,
(a) by mailing a copy to the lawyer’s office;
(b) by leaving a copy with a lawyer or employee in the lawyer’s office;
(c) […]
(c.1) […]
(d) Revoked: O. Reg. 689/20, s. 15 (1).
(e) by sending a copy to the lawyer’s office by courier; or
(f) by e-mailing a copy to the last e-mail address for service provided by the lawyer or, if no such e-mail address has been provided, to the lawyer’s last known e-mail address in accordance with subrule 16.06.1 (1), but, where service is made under this clause between 4 p.m. and midnight, it is deemed to have been made on the following day.
Service by Mail
Manner of Service
16.06 (1) Where a document is to be served by mail under these rules, a copy of the document shall be served by regular lettermail or by registered mail.
Service by E-mail
Required Information
16.06.1 (1) The e-mail message to which a document served by e-mail in accordance with these rules is attached shall include,
(a) the sender’s name, address, telephone number and e-mail address;
(b) the date and time of transmission; and
(c) the name and telephone number of a person to contact in the event of a transmission problem.
Where Document Does Not Reach Person Served
16.07 Even though a person has been served with a document in accordance with these rules, the person may show on a motion to set aside the consequences of default, for an extension of time or in support of a request for an adjournment, that the document,
(a) did not come to the person’s notice; or
(b) came to the person’s notice only at some time later than when it was served or is deemed to have been served.
Validating Service
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.
Proof of Service
Affidavit of Service
16.09 (1) Service of a document may be proved by an affidavit of the person who served it (Form 16B).
Lawyer’s Certificate
(1.1) A lawyer may prove service of a document by a lawyer’s certificate of service (Form 16B.1) if the lawyer served the document or caused it to be served and is satisfied that service was effected.
Lawyer’s Admission or Acceptance Sufficient Proof
(3) Where a lawyer admits or accepts service of a document on behalf of a party, the lawyer’s written admission or acceptance of service is sufficient proof of service and need not be verified by any other proof of service.
Service of Amended Pleading
Service on Every Party to Action and Related Actions
26.04 (1) An amended pleading shall be served forthwith on every person who is, at the time of service, a party to the main action or to a counterclaim, crossclaim or third party claim in the main action, unless the court orders otherwise.
(2) Proof of service of an amended pleading other than an originating process shall be filed forthwith after it is served.
Amended Originating Process
(3) Where an amended pleading is an originating process,
(a) it need not be served personally on a party who was served with the original pleading and responded to it; and
(b) it shall be served personally or by an alternative to personal service under rule 16.03 on an opposite party who has not responded to the original pleading, whether or not the party has been noted in default.
[3] The explanation of why I am dismissing the Plaintiffs’ motions may begin by observing that the noting of the three defendants is not a trivial matter.
[4] Fortress Real Capital Inc., Fortress Real Developments Inc., and Fortress Kempenfelt Bay Developments Inc. (collectively the “Fortress Defendants”) are being sued on behalf of investors in failed syndicated mortgage loans on land development projects.
a. Arlene McDowell, the Plaintiff in what is known as the Progress action, claims $25 million plus pre-judgment and post-judgment interest at the rate of 8% per annum for the investors. [^2]
b. Sandra Medland, the Plaintiff in what is known as the Sutton action, claims $25 million plus pre-judgment and post-judgment interest at the rate of 8% per annum for the investors. [^3]
c. The Estate of Bryan Madryga, by his Estate Administrator Rebecca Shaw, the Plaintiff in what is known as the Harmony/Simcoe action, sues for $25 million plus pre-judgment and post-judgment interest at the rate of 8% per annum for the investors. [^4]
[5] The Progress, Sutton, and Harmony/Simcoe actions began 2016, so in addition to the $75 million in damages being claimed, there is still a growing interest claim of more than $36 million. This is mega-million dollar litigation.
[6] The explanation of why I am dismissing the motions may continue by observing that improperly noting defendants in default is a constant irritant or source of misery under the Rules of Civil Procedure.
[7] Once a defendant is noted in default, the typical next step is to obtain a default judgment from the registrar for liquidated damages claims and to move for a default judgment for unliquidated claims. However, not infrequently, the defendant will then bring a motion to have the default judgment set aside. Those motions, which are the bane of existence of the default procedure, will be successful if the defendant is able to prove that there is some procedural irregularity, of which a preeminent example is the defendant demonstrating that he, she, or it was not properly served with the statement of claim, which is an originating process. This prospect of a dude default judgment is envisioned by rule 16.07, which is set out above.
[8] It is, of course, a fundamental tenet of civil procedure that a defendant must be given notice of the claim and must be provided with an opportunity to defend. In the snakes and ladders game of civil procedure, having a default judgment set aside as dude is a long snake slide from the top of the board to the starting squares where the litigation game begins anew.
[9] In the immediate case, Class Counsel has made: (a) at least five failed attempts to have the Fortress Defendants noted in default of defence in the Progress action; (b) at least three failed attempts to have the Fortress Defendants noted in default of defence in the Sutton action; and (c) at least two failed attempts to have the Fortress Defendants noted in default in the Harmony/Simcoe action.
[10] Ten failed requisitions to note the Fortress Defendants in default, and in their 554-page evidentiary record and accompanying factum, Class Counsel blames the fastidious court registrar’s staff for officious nitpicking and improperly refusing to note the Fortress Defendants in default. The court staff, of course, is not here to defend itself, but my review of the 554-page evidentiary record reveals to me that the criticism of the court staff is all of unfair, unwarranted, and ungrateful.
[11] The criticism is unfair because the factual circumstances of the run up to the numerous requests for a noting in default were complex and unusual and the procedural background was very far from routine for either Class Counsel or for the court staff. And given that the noting in default would be the precursor to a motion for certification for judgment purposes and for default judgments for hundreds of millions of dollars, the court staff is to be commended not dissed for fastidiousness.
[12] It is an oversimplification, but the complicated background to the numerous failed attempts to note the Fortress Defendants is as follows.
[13] In 2016, the Plaintiffs commenced four actions against the Fortress Defendants and numerous other defendants. The four actions included the Progress, Sutton, and Harmony/Simcoe actions. The fourth action was known as the Collier Centre action. A fifth action, the Orchard action, against the Fortress Defendants was added in 2017. I was assigned to case manage the five actions.
[14] There is no doubt that the Fortress Defendants were served with the original Statements of Claim in the Progress, Sutton, and Harmony/Simcoe actions, which were accepted by their then lawyers of record, Norton Rose Fulbright.
[15] In 2016, the Fortress defendants did not deliver Statements of Defence but represented by counsel, they joined company with the numerous other defendants in pleadings motions heard in 2017. On the pleadings motions, I struck several causes of action, but I granted the Plaintiffs leave to deliver an amended Statement of Claim within forty days. [^5] My Orders provided that the amended pleading could be delivered to the defendants’ lawyers of record.
[16] An amended pleading was not delivered within forty days. Rather, the Plaintiffs appealed. The appeal was decided in 2019. [^6] Within forty days of the Court of Appeal’s decision, the Plaintiffs delivered an Amended Statement of Claim. There is no doubt that the Amended Statement of Claim was served on the Fortress Defendants’ lawyers of record.
[17] At some time, the Fortress Defendants changed their lawyer of record to RAR Litigation, and after the Court of Appeal decision, the Fortress Defendants did not deliver a Statement of Defence, but the Plaintiffs did not note the Fortress Defendants in default.
[18] Until April 2021, the Fortress Defendants, represented by counsel attended the case management conferences with respect to the five actions. During this period, no pleading was delivered, and no effort was made to note the Fortress Defendants in default.
[19] On April 23, 2021, the Fortress Defendants’ then lawyers of record, RAR Litigation, were removed as the Fortress Defendants’ lawyer of record in the Progress, Sutton, and Harmony/Simcoe actions.
[20] As required by the Removal Orders, the Orders were served on the Fortress Defendants by regular mail and by email to the work email address for Vince Petrozza, one of its officers, on April 23, 2021. The Orders required the Fortress Defendants to appoint a new lawyer of record within thirty days after service of the Orders, or to obtain and serve an Order under rule 15.01(2), granting them leave to be represented by a person other than a lawyer. The Removal Orders stated that failure to appoint new counsel could lead to the Court striking out the defences. Of course, that part of the pro forma Order was somewhat meaningless because no defences had been filed by the Fortress Defendants in the Progress, Sutton, and Harmony/Simcoe actions.
[21] None of the Fortress Defendants complied with the terms of the Removal Orders removing RAR Litigation, from the record. Nor have the Defendants ever delivered a Statement of Defence. Since May 2021, the Fortress Defendants have not responded to any communications from the Plaintiffs’ lawyers.
[22] In June of 2021, Class Counsel began their agonizing mission to have the Fortress Defendants noted in default in the Progress, Sutton, and Harmony/Simcoe actions failing to defend the actions. As noted above, the court staff rejected the requisitions.
[23] Class Counsel’s first effort to note the Fortress Defendants in default was based on the Amended Statement of Claim that had been served in 2019 within forty days of the Court of Appeal’s decision on the pleadings motions and on the circumstance that the Fortress Defendants had not complied with the Removal Orders.
[24] For present purposes, it is not necessary to opine whether or not the court staff was correct in rejecting the requisitions made on these first efforts because Class Counsel decided to deliver a Second Fresh as Amended Statement of Claim. This meant that pursuant to rule 26.04 the Fortress Defendants would in any event have to be served with the originating process afresh.
[25] The Second Fresh as Amended Statements of Claim were prepared and served on the Fortress Defendants. The Harmony/Simcoe pleading was amended on October 7, 2021 and served by email on the Fortress Defendants on October 12, 2021. The Sutton pleading was amended on January 25, 2022 and served by regular mail on the Fortress Defendants on February 9, 2022. The Progress pleading was amended on May 16, 2022 and served by regular mail on the Fortress Defendants on May 19, 2022.
[26] After the service by email and regular mail, the Fortress Defendants failed to defend these three Actions within 20 days after service of the Second Fresh as Amended Statements of Claim. The Plaintiffs attempted again to have the Fortress Defendants noted in default and seven miserable failures followed for which Class Counsel blames court staff.
[27] My review of the 554-page motion record, however, indicates that Class Counsel has only itself to blame for its misery in its seven further attempts to have the Fortress Defendants noted in default. Court staff gave the following reasons for denying the requisition:
Other Reason(s): I am unsure when these parties became parties to this action. You did not provide reasons why you mailed the documents to the parties rather than personal service, nor did you provide a corporate report showing the addresses. Please resubmit all documents with changes and provide a copy of the claim/amended claim showing when they became parties to the action.
Other reason(s): (1) There is a discrepancy with the title of proceedings. Upon re-submission, please provide a copy of the "Second Fresh As Amended Statement of Claim" for reference as to the correct title. (2) Please note, the corporate searches should form part of the Affidavit of Service.
Other reason(s): The Affidavit of Service, Exhibit A & B is not signed and commissioned.
Other reason(s): Attempts made by personal service not indicated in the affidavit of service. Please provide copies of document served. Only one law firm should be listed on the backpages of the materials.
Other Reason(s): I cannot see where they were served the first amended claim, which was filed within 6 months of the original claim. Also, you do not state in your affidavit why you served the documents by mail. Did you attempt service previously request; Please make necessary changes before they can be noted in default.
Other Reason(s): The Order you have provided dates back to 2017 and appears to be regarding the first Amended Claim and doesn't state for all subsequent documents in this file.
Other reason(s): Amended Originating Process - 26.04 (3) Where an amended pleading is an originating process, (b) it shall be served personally or by an alternative to personal service under rule 16.03 on an opposite party who has not responded to the original pleading, whether or not the party has been noted in default. The SOC was issued Sep 27, 2016, amended Oct 11, 2016. Service on the corporate defendants, FORTRESS REAL CAPITAL INC and FORTRESS REAL DEVELOPMENTS INC. by email on Oct 13, 2016 is not in accordance with Rule 16.01 or Rule 16.03 (2) + (3). The clerk/Registrar does not possess the same discretion as a Justice or Associate Justice of this Court. The clerk must be guided by and strictly adhere to the Rules of Civil Procedure. Per Rule 16.03 (2) + (3), the lawyer would have to endorse his/her acceptance on a copy of the Amended Statement of Claim. Please note, at the date of service of the first Amended SOC the Fortress defendants had not ? responded? to the original pleading. According to court computer records, no Notice of Intent to Defend has ever been filed for these defendants The Plaintiff is at liberty to bring a motion to address service issues or take other steps deemed appropriate. Thank you.
[28] The major sources of the problems in the Progress, Sutton, and Simcoe/Harmony actions in noting the Fortress Defendants in default seems to be that instead of resorting to the simplicity of rule 16.02 (1) (c), which provides that a corporation may be served by leaving a copy with an officer of the corporation, Class Counsel:
a. ignored rule 26.04 (3), which stipulates that because an amended pleading is an originating process it shall be served on an opposite party who has not responded to the original pleading, whether or not the party has been noted in default;
b. insisted that they could rely on the direction I made in the 2017 pleadings motion Order, which provided that service of the amended pleading could be made by email on the parties’ lawyers of record; and or
c. insisted that they could rely on rule 16.03 (6), which provides that where the head office or principal place of business of a corporation cannot be found at the last address recorded with the Ministry of Public and Business Service Delivery, service may be made on the corporation by mailing a copy of the document to the corporation at that address.
[29] In my opinion, the court staff was correct: (a) in not ignoring rule 26.04; (b) in rejecting reliance on the service direction I made in the 2017 pleadings motion, especially since it was patent that the Fortress Defendants no longer had lawyers of record and because the Plaintiffs had started afresh with a Second Fresh as Amended Statement of Claim; (c) in doubting that the provisions of rules 16.03 (6) and 26.04 (1) had been satisfied by the affidavits provided by Class Counsel and (d) in being nitpicking fastidious especially because the noting in default was the obvious precursor to a mega-million default judgment.
[30] For the above reasons, the Plaintiffs’ motions are dismissed.
[31] By way of a postscript, I note that incongruously, Class Counsel were successful in having the Fortress Defendants noted in default with respect to the Collier Centre action. On November 9, 2022, which is after the Fortress Defendants were noted in default, the Collier Centre action pleading was amended. Notwithstanding rule 24.06, the Fortress Defendants were not served with the Second Fresh as Amended Statement of Claim. As a suggestion, Class Counsel should fix this irregularity.
Released: February 14, 2023 Perell, J.
Footnotes
[^1]: R.R.O. 1990, Reg. 194. [^2]: Ms. McDowell invested in syndicated mortgages in three Fortress development projects. She invested $180,000: $80,000 in the Collier Centre project, $25,000 in the Progress project, and $75,000 in the Orchard project. [^3]: Ms. Medland invested $118,100 in two Fortress syndicated mortgages. In 2014, she invested $59,000 in the Sutton development with her husband, Leonard Medland. Mr. Leonard died on December 31, 2014. In 2015, Ms. Medland invested $59,100 in a second syndicated mortgage against the Sutton project. [^4]: Rebecca Shaw is the Litigation Administrator for the Estate of Bryan Madryga. The late Mr. Madryga, who passed away in 2021, invested $+ in two Fortress syndicated mortgages, Harmony Simcoe and Orchard. [^5]: McDowell v. Fortress Real Capital Inc., 2017 ONSC 4789; Martino v. Fortress Real Capital Inc., 2017 ONSC 4790; Madryga v. Fortress Real Capital Inc., 2017 ONSC 4792; McDowell and Aversa v. Fortress Real Capital Inc., 2017 ONSC 4791. [^6]: McDowell v. Fortress Real Capital Inc., 2019 ONCA 71.