LINDSAY COURT FILE NO.: CV-19-00000066-000

DATE: 20230831

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Sieta & Pikes Development Limited and Elise Blouin (Also known as Susan Elizabeth Blouin), Plaintiffs

AND:

2573138 Ontario Ltd. and Marguerite Alfred and Granville Cadogan, Defendants

BEFORE: The Honourable Justice S.E. Fraser

COUNSEL: Andrew D. Pelletier, Counsel for the Plaintiffs

Granville Cadogan, Counsel for the Defendants

HEARD: June 13, 2023

ENDORSEMENT

A. Nature of the Motion

[1] The Plaintiff Elizabeth Blouin is an undischarged bankrupt. After bankruptcy, she incorporated Sieta & Pikes Development Limited (Sieta & Pikes). Some time after that, the Plaintiffs sued the Defendants. The Defendants did not file a statement of defence within the prescribed time and were noted in default.

[2] On September 24, 2019, the Plaintiff Ms. Blouin sought leave to represent Sieta & Pikes and, on the same day, sought and obtained default judgment.

[3] The Defendants 2573138 Ontario Ltd. (“257”) and Marguerite Alfred ask that I set aside the default judgment.

[4] The other defendant Granville Cadogan is a lawyer and counsel for 257 and Ms. Alfred. He has not brought a motion to set aside the default judgment.

[5] The Plaintiffs argue that Mr. Cadogan cannot both be a Defendant and counsel for the other Defendants, asserting that he will likely be a witness in this proceeding and that the Rules of Professional Conduct of the Law Society of Ontario prohibit a lawyer from being both a witness and an advocate.

[6] The Defendants also bring a motion that the Plaintiffs have no legal capacity to bring this motion or this action, such that it is a nullity. The Plaintiffs argue that this is an irregularity, which can be cured.

[7] The motions were set to be heard on the same date and the parties agreed that they should be heard in a blended fashion, each raising concerns about the capacity of the other to assert their claims. This presented a bit of a conundrum, about which to hear first, because of the impact on the other.

[8] I first deal with the motion to set aside the default judgment. In this, I must consider whether Mr. Cadogan can act for the Defendants in bringing this motion. However, in so doing, I must consider whether the Plaintiffs have the legal capacity to challenge Mr. Cadogan’s retainer. I must also consider whether Mr. Cadogan’s conduct presents a concerns for the administration of justice.

B. Background Facts

[9] The facts giving rise to this action are convoluted and matter little to the issues that I have to decide. I provide only the detail necessary to decide these issues.

(i) Ms. Blouin’s Bankruptcy

[10] The Plaintiff declared bankruptcy on April 20, 2007. An order setting the terms for her discharge was made on July 16, 2008. The discharge order required Ms. Blouin to pay the Trustee $12,888.42 to obtain an absolute discharge.

[11] The Trustee was discharged on January 18, 2022. Jordan Rumanek, a Licensed Insolvency Trustee, was contacted by Ms. Blouin on August 23, 2022. Mr. Rumanek has brought an application in writing at the Superior Court of Justice in Bankruptcy and Insolvency requesting, among other things, that he be re- appointed as trustee of Ms. Blouin’s estate. That has not occurred yet.

(ii) Default Judgment

[12] On May 29, 2019, the Plaintiff Ms. Blouin caused a statement of claim to be issued in this matter on behalf of both Plaintiffs. The Plaintiffs state that the claim was served on July 2, 2019 and that the Defendants were noted in default on August 2, 2019.

[13] I pause to note that the Corporate Profile Report dated July 12, 2019 lists Blouin as the sole director such that she purported to direct Sieta & Pikes, while bankrupt and the sole director.

[14] The Plaintiffs have produced two affidavits of service from a process server which state that the Defendants Ms. Alfred and 257 were served on June 27, 2019 and Mr. Cadogan on July 2, 2019. Ms. Alfred admitted in her affidavit that at the time service was effected, the addresses were her residence and the address of Mr. Cadogan. No affidavits of service supporting that the Defendants were served with the judgment were filed, although Ms. Blouin alleges she told Mr. Cadogan in November, 2019 and that he replied that he would have it overturned. The motion for default judgment was brought ex parte, which while technically permitted, the better practice is to serve the Defendants (See Casa Manila Inc. v. Iannuccilli, 2018 ONSC 7083).

[15] On September 24, 2019, Ms. Blouin obtained leave of the court to represent the corporation Sieta & Pikes Development Limited (Sieta & Pikes). She also obtained default judgment on that day. There is no reference in the court’s endorsements to Ms. Blouin’s bankruptcy. The Defendants allege that she did not disclose it.

[16] That judgment appears to have been brought to the attention of the Defendants on August 9, 2022, following which the Defendants Ms. Alfred and 257 moved promptly to set it aside. They say they were not served with the Statement of Claim.

C. Can Mr. Cadogan Act?

[17] Rule 5.2 of the Law Society of Ontario’s Rules of Professional Conduct prohibit a lawyer from testifying or submitting their own evidence before a court or tribunal.

[18] Rule 3.4 of the Rules of Professional Conduct prohibit a lawyer from acting when in a conflict of interest except as permitted by the Rules. Conflict is defined by the Rules as an actual conflict but also a risk of a substantial one (see Rule 3.4-1 and Rule 1.1-1). The concern is that even a well-intentioned lawyer might not realize that their conduct has been compromised where there is a risk.

[19] The Defendants’ counsel argues that the Plaintiffs’ motion is an abuse of process intended to prevent the hearing of this issue on the merits.

[20] I agree that the Plaintiffs do not appear to have capacity to bring this motion as Ms. Blouin is an undischarged bankrupt, for reasons discussed further below. Yet, it concerns the administration of justice, and I must consider whether Mr. Cadogan is in breach of the Rules and whether there is risk that his conduct will negatively impact the administration of justice.

[21] The considerations involved in removing a lawyer from the record were set out at para. 35 Forsyth v. Blue Rock Wealth Management Inc., 2015 ONSC 6666, which adopted the approach taken by the Divisional Court in Essa Township v. Guergis et al, 15 O.R. (3d) 573, 1993 8756. They are:

• the stage of the proceedings;

• the likelihood that the witness will be called;

• the good faith (or otherwise) of the party making the application;

• the significance of the evidence to be led;

• the impact of removing counsel on the party’s right to be represented by counsel of choice;

• whether trial is by judge or jury;

• the likelihood of a real conflict arising or that the evidence will be “tainted”;

• who will call the witness if, for example, there is a probability counsel will be in a position to cross-examine a favourable witness, a trial judge may rule to prevent that unfair advantage arising;

• the connection or relationship between counsel, the prospective witness and the parties involved in the litigation.

[22] I note the proceedings are at an early stage. I also observe that the litigation brought by Sieta & Pikes and Ms. Blouin against Mr. Cadogan appears to be tactical. On the face of the allegations, there appears to be no duty of care owed by Mr. Cadogan to Sieta & Pikes or Ms. Blouin. They take issue with how he carried out the instructions of the Defendants, Ms. Alfred and 257.

[23] On the issue before me, I do not see any risk that Mr. Cadogan’s evidence is necessary. Mr. Cadogan has not given evidence on this motion. It may be that at a later stage of the proceeding that he will be called upon to testify, but that is not the case now. I do not find a violation of Rule 5.2 on this motion and I do not see a substantial risk in the further.

[24] As for a conflict, while the proceedings are at an early state, the Defendants’ interests are aligned and there is no actual or appearance of conflict at present.

[25] I am mindful that the Defendants Ms. Alfred and 257 have the right to be represented by counsel of choice. The impact of removing Mr. Cadogan at this stage will further delay this matter getting heard on the merits. There appears to be merit to the Defendants’ argument that Ms. Blouin is an undischarged bankrupt and thus has no capacity to bring this litigation on her own behalf or on behalf of the Corporation of which she claims to be a Director.

[26] Looking down the road, there is some risk that Mr. Cadogan may be called to give evidence. At present, his interests are aligned with the other Defendants who he represents. The facts do not warrant removal. Mr. Cadogan’s representation on this motion neither impairs nor reflects badly on the administration of justice. This does not mean that his retainer might present problems further down the road. This is a remote risk in my view, not a substantial one.

[27] I decline to remove him and dismiss the Plaintiffs’ motion to do so.

D. Should the Default Judgment be Set Aside?

[28] I next turn to the Defendants’ motion to set aside the default judgment.

[29] The test for setting aside default judgment involves the application of five factors: Mountainview Farms Ltd. v. McQueen, 2014 ONCA 194, at paras. 48-50, Intact Insurance Company v. Kisel, 2015 ONCA 205, at para. 14). The ultimate task is to determine whether it is in the interests of justice to make the order. The factors are not to be treated as rigid rules, rather, “the court must consider the particular circumstances of each case to decide whether it is justice to relieve the Defendant from the consequences of his or her default”. The five factors are:

(a) whether the motion was brought promptly after the Defendant learned of the default judgment;

(b) whether there is a plausible excuse or explanation for the Defendant’s default in complying with the Rules;

(c) whether the facts establish that the Defendant has an arguable defence on the merits. In this regard, the Defendant needs to show that there is arguable merit to the defence, not that it will succeed;

(d) the potential prejudice to the moving party should the motion be dismissed, and the potential prejudice to the respondent should the motion be allowed; and

(e) the effect of any order the court might make on the overall integrity of the administration of justice.

[30] The Defendants have satisfied me that the default judgment should be set aside. It is true that almost four years passed between judgment being made and this motion being heard. However, the correspondence filed on this motion suggests that when Ms. Blouin’s solicitor served the judgment in August, 2022 upon the Defendants, they moved quickly to set it aside. This is the second appearance on their motion which was first brought before Justice Dawe on January 17, 2023, at which time the motions were adjourned to this date.

[31] I am also concerned that Ms. Blouin did not disclose her bankruptcy to the court when she sought default judgment. There is no reference in either the endorsement granting her leave to represent Sieta & Pikes, or the decision granting judgment, that she was an undischarged bankrupt. While I do not have that full record before me, there is no reference to it either in her request to represent the corporation or for default judgment that she was a bankrupt person.

[32] The Defendants have a defence on the merits. Their assertion that the Plaintiffs have no capacity to bring this action is a strong one. Indeed, if permitted to assert it, it could dispose of the action if they are indeed correct that the action is a nullity rather than something requiring a cure.

[33] There are other issues with the judgment both in terms of whether the facts plead warrant the judgment and the quantum of damages.

[34] In addition, the Defendants allege both that Ms. Alfred was a director of Sieta & Pikes that Ms. Blouin removed her in breach of Article 2 of the Articles of Incorporation for Sieta & Pikes and that the Defendant Alfred is a 10% shareholder in Sieta & Pikes and did not authorize the action commenced by Ms. Blouin pursuant to the Articles of Incorporation of Sieta & Pikes.

[35] While there is prejudice to the Plaintiffs, in my view the prejudice weighs more heavily with the Defendants who raised serious concerns about the capacity of the Plaintiffs to commence this litigation.

[36] For these reasons, I find that it is in the interests of justice to set aside the judgments obtained by the Plaintiffs against 257 and Ms. Alfred. As I said at the outset, Mr. Cadogan does not move to set aside the default judgment.

E. Can the Defendants’ Motion Regarding the Plaintiffs’ Capacity Proceed?

[37] While the Defendants could not take any step in the proceeding given the default judgment, now that I have set it aside, I can deal with their motion regarding the Plaintiffs’ capacity to commence this action.

[38] The Plaintiffs have argued that the Defendants cannot bring this motion regarding capacity, given the default judgment. Now that I have set it aside, it makes no sense for me to require the Defendants to bring this motion on another day. That is at odds with judicial economy and Rule 1.04(1) which requires that “[t]hese rules shall be liberally construed to secure the just, most expeditious and least expensive determination of every civil proceeding on its merits.”

[39] I will therefore consider the Defendants’ motion.

F. Is the Proceeding a Nullity?

[40] The Defendants move under Rule 21.03(1)(b) to stay or dismiss this proceeding as the Plaintiffs have no legal capacity to commence it.

[41] Under s. 71 of the Bankruptcy and Insolvency Act, R.S.C. 1985, C.B-3, (“BIA”), the consequence of assignment is the loss of the right to deal with or dispose of property. Subject to the rights of secured creditors, that right passes to the trustee named in the bankruptcy order.

[42] Relying on s. 71 of the BIA, they assert that Ms. Blouin as an undischarged bankrupt cannot commence or continue this claim and has no capacity to direct the litigation on behalf of the corporate Defendant Sieta & Pikes.

[43] In Wallace v. United Grain Growers Ltd., 1997 332 (SCC), [1997] 3 S.C.R. 701, the Supreme Court of Canada delineated the effect of s. 71:

The clear wording of the statute indicates that, upon assignment into bankruptcy, the bankrupt relinquishes his ability to deal with both existing and after-acquired property, all of which vests in the trustee in bankruptcy. As property has been defined under the Act to include things in action, it appears that an undischarged bankrupt has no capacity to maintain an action for breach of contract.

[44] None of the exceptions in s. 67(1) of the BIA apply here.

[45] This action is property within the meaning of the BIA such that it vests with the trustee. In Vetro v. Canadian National Exhibition Assn., 2014 ONSC 4324, affirmed 2015 ONCA 87, Justice Roberts, as she then was, found that an action commenced by an undischarged bankrupt in relation to property that vests in the trustee is a nullity and that an undischarged bankrupt has no capacity to maintain an action. She dismissed the action as an abuse of process.

[46] That analysis applies here. This action is for breach of contract, negligence, breach of trust, breach of fiduciary duty and unjust enrichment. Ms. Blouin has no capacity to bring that claim or direct the corporation to bring that claim.

[47] The Plaintiffs argue that Ms. Blouin’s bankruptcy is a defect that can be cured and that, once the trustee in bankruptcy is reappointed, the matter can be rectified.

[48] The Plaintiffs do not contest that Ms. Blouin is an undischarged bankrupt. The Plaintiffs rely on Stec v. Blair, 2021 ONSC 6212, for authority that the matter could be rectified. However, in that case, the trustee has reassigned the matter, which was a family law matter, back to the undischarged bankrupt.

[49] Further, the Defendants assert that s. 4 of the Business Corporations Act, R.S.O. 1990, c. B.16 (“OBCA”) prohibits a bankrupt person from incorporating a corporation and s. 118(1)(4) disqualifies a person who has the status of bankrupt from being a director of a corporation. I accept that this is the case.

[50] I am satisfied on the material before me that the Plaintiff Ms. Blouin was an undischarged bankrupt when she commenced this action on her own behalf and on behalf of Sieta & Pikes as sole director. She remains an undischarged bankrupt.

[51] As a bankrupt person can neither incorporate a corporation nor be a director, there has been a breach of the OBCA. I accept that the consequence of this is that Sieta & Pikes had no capacity to bring this claim. The claim is therefore a nullity and I dismiss the action as an abuse of process.

G. Costs

[52] If the parties are unable to agree on the quantum of costs for this motion by September 29, 2023, I will receive written submissions of no more than three pages, along with bills of costs and offers to settle. The Defendants shall provide their cost submissions within 10 days following September 29, 2023 and the Plaintiffs may respond within a further 10 days. There will be no reply.

Justice S.E. Fraser

Date: August 31, 2023