Court File and Parties

COURT FILE NO.: CV-21-049 DATE: 2023/03/02 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: JOHN SHILLINGTON, Plaintiff - and – MARTIN STOVER and MARTY JAMES MERRILL STOVER and ABC INC. c.o.b. MARTY STOVER FINANCIAL and MARTY STOVER FINANCIAL and EMPIRE LIFE INVESTMENTS INC. and MOHAVE SIERRA HOLDINGS LTD. and MILLION DOLLAR ROUND TABLE, Defendants

B EFORE: Regional Senior Justice Calum MacLeod

COUNSEL: Tiffany Sillanpaa, for the moving party defendant, MDRT Kevan Wylie, for the plaintiff, responding party

HEARD: February 23, 2023

DECISION AND REASONS

[1] This is a motion brought by one of the defendants, Million Dollar Round Table (MDRT) to strike the statement of claim against it as disclosing no cause of action. The motion is brought pursuant to Rule 21.01 (1) (b). As an alternative, the moving party seeks dismissal of the action for delay pursuant to Rule 24.

[2] For the reasons that follow, I am granting the order. The claim against MDRT will be struck out without leave to amend.

Background and History of the Litigation

[3] The plaintiff states that over a number of years he invested funds with the defendant Stover, who was an investment advisor and Certified Financial Planner affiliated with the defendant Empire Life. The plaintiff further alleges that in 2018, he was induced by Mr. Stover to invest $60,000.00 under the belief that the funds would be securely invested with Empire Life but in December of 2019, he discovered that $25,000.00 paid to the defendant Mohave Sierra Holdings had been lost. He claims that Mr. Stover defrauded him of this amount and misrepresented that Sierra was affiliated with Empire Life.

[4] According to the Statement of Claim, the defendant MDRT is a trade association of insurance professions [sic] and a not-for-profit corporation registered in Illinois, in the United States of America. It is alleged that Mr. Stover was a member of MDRT and that a fraudulent letter sent by Mr. Stover in 2019 contained the MDRT emblem.

[5] On February 18, 2021, the plaintiff launched this action for the recovery of his $25,000.00 investment as well as aggravated and punitive damages. He sued Mr. Stover and the Stover controlled entities who perpetrated the fraud or received the funds. He also sued Empire Life with which Mr. Stover was affiliated and under whose auspices he was operating, and he sued MDRT which is an organization in which Mr. Stover was or purported be a member.

[6] I pause to note, that while $25,000.00 is a substantial amount for an individual to lose, it is well within the limits of the Small Claims Court ($35,000) and it is only the additional unquantified claims for aggravated and punitive damages which could exceed that amount. The action was brought under the Rule 76 simplified procedure, which applies to actions under $200,000.00. Rule 76 mandates procedures that are streamlined, speedy and proportionate to the amount in dispute.

[7] MDRT was served with the Statement of Claim on May 21, 2021 and filed a Notice of Intent to Defend on June 10, 2021. It filed a lengthy statement of defence and crossclaim on June 30, 2021. Empire Life also defended. The Stover defendants did not.

[8] It does not appear that anything significant occurred in the action until the late fall of the following year. On October 26, 2022, MDRT changed counsel and on November 9, 2022, its counsel launched this motion. The record was served on November 23, 2022. The Stover defendants were noted in default on December 9, 2022, although this had been attempted on August 12, 2022, but for some reason this had been unsuccessful.

[9] No party took any of the steps that are supposed to occur automatically under Rule 76. No affidavits of documents were delivered. No settlement meeting took place. No discoveries have been completed and the action has not been set down for trial. It is only at the pleadings stage.

[10] On January 19, 2023, counsel for the plaintiff sought dates for discovery and mediation but those have not proceeded in the face of this motion.

The Issues to be Determined

[11] Rule 21.01 (b) permits the court to strike out a pleading which discloses no cause of action against a defendant. The purpose of this is surgical in nature. Assuming all of the facts in the Statement of Claim to be true, if there is no basis for finding liability against the moving party, the motion should be granted.

[12] The question is whether on the face of the pleading, the action against this defendant is impossible of success.

[13] Rule 21.01 (2) requires a motion under Rule 21 to be brought promptly. The plaintiff argues that because the defendant delivered a Statement of Defence and waited almost two years from the time it was served with the claim, the motion should be denied. If it is granted, the plaintiff asks for leave to amend the claim to address any deficiency. The question is firstly whether the court should entertain the Rule 21 motion at this time and secondly whether the plaintiff should be given time to cure the problem if the motion is granted.

[14] The defendant also moves to dismiss the action against it for delay pursuant to Rule 24. That is a rule that permits a defendant to move to dismiss an action for want of prosecution if certain steps have not been taken and the plaintiff has delayed inordinately in moving the matter forward. The question is whether in the context of a Rule 76 proceeding, on the facts of this case, such a motion can be granted on the second anniversary of launching the action.

Analysis and Rulings

[15] No evidence is admissible on a Rule 21.01 (1) (b) motion and the order will not be granted lightly. The court should strike a claim only if it is “plain and obvious, assuming the facts pleaded to be true, that the pleading discloses no reasonable cause of action” against the moving party. [1] There are nuances to this test. The court will not accept facts that are merely bald conclusions unsupported by material facts or facts that are patently ridiculous or incapable of proof. At the same time, the pleading must be read generously and if it has any chance of succeeding, the action must be allowed to proceed. [2]

[16] When the motion was argued, counsel had neglected to include the Statement of Claim in question in the motion materials. Now that I have heard the arguments and reviewed the pleading in detail, I have no hesitation in finding that taking the Statement of Claim in isolation and reading it at its highest, there is no prospect of success against this defendant.

[17] Obviously, the plaintiff has a strong case against the primary defendant, Stover who is alleged to have defrauded the plaintiff and misled him as to the nature of this particular investment. [3] One can readily understand why Empire Life is a defendant given the allegation that Mr. Stover was affiliated with Empire Life and operated under its auspices. [4] Suing an organization such as MDRT is another thing altogether. Such a claim, even if properly pleaded, is objectively a difficult case. Claiming that an organization to which the wrongdoer belongs or purports to belong owes a duty care to an investor requires the plaintiff to establish a number of highly specific facts that are simply not pleaded.

[18] It is difficult to make such a case because this is a claim for pure economic loss in which the plaintiff must first establish a duty of care on the basis of proximity, foreseeability and reliance. Even if that hurdle is crossed, the courts have been reluctant to extend liability for individual losses to regulators or statutorily recognized organizations let alone voluntary associations.

[19] The Supreme Court of Canada declined to extend a private law duty of care to the Registrar of Mortgage Brokers in Cooper v. Hobart, 2001 SCC 79 despite the fact that the Registrar had failed to suspend a mortgage broker promptly once it was aware of potential wrongdoing. [5] In Morgis v. Thomson Kernaghan & Co., the Court of Appeal upheld the refusal of a motions judge to permit a plaintiff to add the Investment Dealer’s Association (IDA) to a claim for investment dealer’s negligence. This is despite the fact that the IDA had regulation of its members as part of its mandate and was recognized by the Ontario Securities Commission.

[20] A duty of care by a voluntary association of professionals to members of the public doing business with its members is not a category that is automatically recognized in law. The extension of liability to this defendant would require establishing a private law duty of care on a full “Anns Kamloops” analysis. [7] If properly pleaded, this is an analysis that cannot be appropriately completed at the pleadings stage, but the pleading must contain sufficient material facts for the court to conclude that (even if it is a long shot) the claim could succeed. This is not the case here.

[21] The Statement of Claim only mentions this defendant in three paragraphs other than the prayer for relief. In paragraph nine, it is alleged that the defendant Stover was a member of MDRT. In paragraph 14, it is alleged that the fraudulent letter sent on Stover Financial Letterhead with an Empire Life cover page contained the MDRT emblem. In paragraph 24, it is alleged that “Empire Life and MDRT were negligent”.

[22] Particulars in paragraph 24 include an assertion that the defendants were “negligent in their selection, hiring, training and supervision” of Stover, failure to put in place a system to supervise Stover, failure to put in place a monitoring system, that they knew or should have known that their reputation was being used to add an air of credibility to a dishonest or fraudulent scheme, that they knew or ought to have known that the plaintiff would rely on their reputation, and ignoring “clear evidence that the type of scheme” being perpetrated by Stover “was widely known to investment professionals”.

[23] A pleading of negligence is a conclusion. It cannot stand alone and it is necessary to plead the material facts upon which the plaintiff relies in attempting to establish its claim. At a minimum, the plaintiff will have to establish the existence of a duty of care, a failure to meet the standard of reasonable care and a causal connection between the breach and the damages suffered by the plaintiff. While some duties and standards, such as the duty of motorists to other users of the road and the duty to operate a motor vehicle with appropriate care, need little explanation, a plaintiff attempting to establish a novel duty must plead with more robust particularity. Certainly, it is inadequate just to assert that the defendant is liable without any facts to support the claim.

[24] Nowhere in this pleading is there a specific allegation that MDRT had a duty of care to the plaintiff or material facts that would give rise to such a duty. Nowhere are there material facts pleaded which would justify the conclusion that MDRT had any role or responsibility in “hiring, training and supervision” nor that MDRT had assumed any role in regulating, policing or monitoring its members. There is not even an allegation that the plaintiff knew anything about MDRT or had any understanding of the role of MDRT beyond seeing the logo on a letter written to him after the alleged fraud had already occurred. There are no allegations against this defendant which would justify an award of punitive damages and the defendant pleads no basis for an award of aggravated damages.

[25] Had this motion been brought immediately after the Statement of Claim was served and before delivering a defence, I would have granted it without hesitation. What gives me pause in this case is the Statement of Defence and the delay in bringing the motion. It is necessary to consider the impact of those two factors.

[26] The plaintiff argues that the defendant should not be allowed to bring a Rule 21 motion because it did not move promptly. Rule 21.02 states that “a motion under rule 21.01 shall be made promptly and a failure to do so may be taken into account by the court in awarding costs.” While the effect of this subrule is to discourage delay in bringing such a motion, it is also apparent that one response to such a delay to consider it in awarding costs. Another response is to refuse to hear the motion in appropriate circumstances.

[27] Jurisprudence establishes that egregious delay in bringing such a motion may be grounds for the court to refuse to entertain it. In general, however, it is in the interests of justice to avoid unnecessary time being spent by judicial officers on pleadings that raise no cause of action. [8] Further, it would be “antithetical to the aim of litigation efficiency to insist that a claim that has no chance of success cannot be the subject of a rule 21 motion because of delay, and must be brought to trial” or to a summary judgment motion. [9] In any event, I would not consider the delay in bringing this motion to be inordinate because nothing had taken place in the litigation in the year prior to launching the motion and it was brought within days of the defendant retaining new counsel. The plaintiff cannot argue that it has done anything substantial in reliance upon the defence because the action remains at the pleadings stage.

[28] A potentially more vexing problem is the Statement of Defence and its contents. The delivery of a defence is a step that can engage Rule 2.02. That rule reads that no motion shall be brought to attack “a proceeding or a step, document or order” without leave of the court if the “moving party has taken any further step in the proceeding after obtaining knowledge of the irregularity”. The purpose of this rule is to prevent a party which has taken fresh steps in a pleading from later attempting to rely upon a procedural or technical defect. This is reinforced by the wording of Rule 2.01 and Rule 1.04. It might, for example, be unjust to permit a defendant which has pleaded to a claim to later argue that it could not understand the claim or requires particulars.

[29] The delivery of a defence is not fatal in all circumstances. There is jurisprudence from the Court of Appeal to the effect that provided the statement of defence raises the issue, simply filing a defence will not be a bar to a subsequent Rule 21 motion.

“…. While generally a defendant should move to strike a claim as disclosing no reasonable cause of action before filing a statement of defence, in some instances a defendant may bring such a motion without leave even after delivering a defence. One such instance is where it is obvious from the defendant's pleading that the defendant takes issue with the sufficiency of the plaintiff's claim.” [10]

[30] In this case, the defendant pleaded that the “within action is frivolous, vexatious and /o otherwise an abuse of process … and ought to be stayed or dismissed.” The defendant also denies that it had any authority to regulate or enforce professional standards or that it had any knowledge of the investments in question. The defendant denies that any losses sustained by the plaintiff were caused by any breach of duty for which the defendant was at law responsible.

[31] I do not consider the statement of defence to be a “fresh step” requiring leave but in any event, I would grant leave because of the futility of requiring the defendant to remain as a defendant if there is no prospect of the plaintiff succeeding on the facts as pleaded.

[32] I mentioned that the Statement of Defence asserts that the action against MDRT is frivolous, vexatious and an abuse of process. But the defence also makes a number of positive assertions about the defendant which are absent from the claim. For example, the defendant itself pleads that it has a code of ethics and by-laws that each of its members must pledge to follow. The defendant pleads that members must renew this pledge annually when they renew their annual membership and also have an obligation to report complaints or proceedings against the member. The defendant also states that the right to use the trademarks and logo of the defendant are revoked when a membership expires or is terminated. The defendant pleads that Mr. Stover had been a member in good standing until 2016, after which he was no longer a member.

[33] It is an interesting question whether these facts should also be considered in determining whether to strike the Statement of Claim. I have concluded that it is unnecessary to answer that question definitively in the context of this motion. Firstly, the motion was not argued on that basis. Secondly, even if the facts in the defence are treated as admissions and included in the claim, I do not think they go far enough.

[34] Although the plaintiff fails to plead that MDRT exercised any control over its members or had any kind of regulatory obligation, the admissions in the defence demonstrate that MDRT did impose ethical obligations on its members and did purport to limit the use of its trademarks and logo to members in good standing. Those facts might be ingredients for asserting a duty of care to the end user clients such as the plaintiff, but they do not go far enough.

[35] As shown by the Cooper v. Hobart, 2001 SCC 79 and Morgis v. Thomson Kernaghan & Co. decisions cited above, even if there is a regulatory function assumed by or imposed upon an organization, that does not automatically translate into a private law duty of care to individual investors. There must be, at minimum, detrimental reliance which should have been foreseeable. No such facts are pleaded. To the contrary, the plaintiff pleads that he had invested with Mr. Stover for several years before the fraud occurred. Nothing is pleaded that could lead to the conclusion the plaintiff relied upon the fact that Mr. Stover was a member of MTRD.

[36] Assuming without determining that I should treat the facts pleaded in defence as if they were included in the claim, the claim against this defendant should still be struck under Rule 21.

[37] In this case I would not grant the plaintiff leave to amend. Because this is a Rule 76 case and because the plaintiff has done nothing to advance it towards trial, it would simply be disproportionate to permit the plaintiff at this stage in the proceeding to amend the claim in pursuit of a highly speculative cause of action against MDRT. Those amendments would further delay the action, further increase the costs and might even have the effect of reopening the pleadings against the defendants noted in default and Empire Life.

[38] Had the plaintiff realistically wished to amend the pleading, the plaintiff could have done so well before now or could have come to court with a draft amended pleading. I appreciate that the plaintiff took the position there was nothing wrong with the Statement of Claim but had the plaintiff taken the time to consider what it would need to plead to advance a cause of action against this defendant, the deficiencies would have been readily apparent. Without a draft pleading, any leave to amend the statement of claim could simply give rise to a further round of pleadings motions under Rule 26. I have no confidence that this would be a useful exercise, but it is certain that leave to amend will engender further delay and drive up the costs.

[39] Proportionality and delay militate against giving the plaintiff the opportunity to rehabilitate this claim. There is also the motion to dismiss the action under Rule 24.

[40] Rule 24 permits a defendant to move to dismiss an action for delay if the defendant itself is not in default under any of the rules and certain events listed in the rule have not taken place. The onus is on the moving party to prove that the drastic remedy of dismissal is appropriate however unless the action is more than five years old, in which case the onus is reversed under subrule 24.01 (2). As this action is only two years old, the moving party must show that the delay is “inordinate”, “inexcusable” and prejudices the defendant’s ability to put forward its case. [11]

[41] That is a difficult burden to meet and arguably the defendant is in breach of its own obligations under the rules because it has not delivered an affidavit of documents as required by Rule 76.03. I would probably not dismiss this action for delay under Rule 24 considered in isolation from the deficiencies in the pleading. I would more likely fix a timetable for the remaining steps in the action.

[42] Delay, however, is a factor in the exercise of my discretion not to permit a hypothetical amendment. Rule 76 cases are supposed to move quickly towards efficient resolution or adjudication. Rule 76.03 requires the prompt and automatic delivery of an affidavit of documents along with copies of all Schedule A documents. Rule 76.08 requires a settlement meeting within 60 days. Rule 76.09 (1) requires a Rule 76 case to be set down within 180 days of receiving the first statement of defence. The defendant shares some of these obligations or is authorized to take steps if the plaintiff fails to do so. Nevertheless, the fact that the plaintiff has taken no steps to advance the claim or even until recently to note the Stover defendants in default tells against permitting the plaintiff to now recast the pleadings in pursuit of what would be (even then) a complex and difficult claim.

Conclusion

[43] In conclusion, the motion to strike the claim against this defendant is granted. While I would not dismiss the action for delay under Rule 24, I consider the delay to be a material consideration in determining whether to grant leave to amend the claim. As discussed earlier, that is not the only consideration. Leave to amend is refused and the action will be dismissed against MDRT.

Costs

[44] The defendant seeks costs of the motion and costs of the action. There is a certain irony when I review the costs outline because according to the outline, the defendant has already incurred actual costs in defending this action which are equivalent to the plaintiff’s loss of $25,000.00. Whether that was wise or whether it is justified need not concern me. The question is what costs the plaintiff should bear as a consequence of losing this motion and unsuccessfully pursuing an action against this defendant.

[45] The defendant put in a complete statement of defence and delayed bringing this motion. Rule 21.02 makes this a factor to be considered in fixing the costs. If the defendant has incurred many thousands of dollars in defending against an action that has not gone beyond the pleadings stage, it should not have been necessary to do so had the motion been brought promptly.

[46] I fix the costs at $6,500.00.

Result

[47] In the result, an order will go striking the claim against the defendant MDRT and dismissing the action against it with costs fixed at $6,500.00.

Mr. Justice C. MacLeod Date: March 2, 2023

Footnotes

[1] See R. v. Imperial Tobacco Canada Ltd., 2011 SCC 42, [2011] 3 SCR 45 [2] See Trillium Power Wind Corporation v. Ontario (Natural Resources), 2013 ONCA 683 [3] Stover has not defended the action. [4] I make no comment on the strength of that claim. Empire Life took no part in this motion. [5] Cooper v. Hobart, 2001 SCC 79, [2001] 3 SCR 537 [6] Morgis v. Thomson Kernaghan & Co., 65 OR (3d) 321 (CA) [7] Kamloops (City of) v. Nielsen, [1984] 2 SCR 2 [8] See The Dominion of Canada General Insurance Company v. Nelson, 2023 ONSC 386 (Div. Ct.) and authorities cited therein. [9] See Brummell v. Ontario (Attorney General), 2014 ONCA 828 [10] Potis Holdings Ltd. v. The Law Society of Upper Canada, 2019 ONCA 618 @ para 14 [11] See Sickinger v. Krek, 2016 ONCA 459 @ para. 30