COURT FILE NO.: CV-23-0193-000 /CV-23-0225-000 DATE: 2023-09-22

ONTARIO SUPERIOR COURT OF JUSTICE

B E T W E E N: CV-23-0193-000

Brown’s Clearwater West Lodge Inc. Plaintiff

J. Lester, J. Kirk and D. Silver for Brown’s Clearwater West Lodge Inc., 539644 Ontario Inc., Brian Whalley and Aniela Jane Hannaford

• and -

Caroline Manon Labonte and the Estate of Barry William Brown Defendants

M. Cupello for Caroline Manon Labonte, aka Carolle Manon Labonte, aka Carolle Manon Brown and the Estate of Barry William Brown

B E T W E E N: CV-23-0225-000

Carolle Manon Labonte aka Carolle Manon Brown Plaintiff

-and-

539644 Ontario Inc., Brian Whalley and Aniela Jane Hannaford Defendants

HEARD: September 13, 2023, at Thunder Bay, Ontario via Zoom

Mr. Justice J.S. Fregeau

Reasons On Motion

The Background to the Motions

[1] There are two actions and two motions before the court. In the first action (CV-23-0193-000), Brown’s Clearwater West Lodge Inc. sues Caroline Labonte and the Estate of Barry William Brown. In the second action (CV-23-0225-000), Ms. Labonte sues 539644 Ontario Inc., Brian Whalley, and Aniela Jane Hannaford.

[2] On August 5, 2021, Ms. Labonte and the Estate of Barry William Brown agreed to sell, and 2840840 Ontario Inc. agreed to purchase, all the issued and outstanding shares in the capital of 539644 Ontario Inc. (the “Share Purchase Agreement”).

[3] The Share Purchase Agreement effectively transferred control of an outdoor adventure and lodging business in Atikokan, Ontario from Ms. Labonte to 2840840 Ontario Inc. This transaction closed on or about August 18, 2021.

[4] On November 1, 2022, 2840840 Ontario Inc. and 539644 Ontario Inc. amalgamated into Brown’s Clearwater West Lodge Inc. (“Brown’s Clearwater”). The defendants in CV-23-0225-000, Brian Whalley and Aniela Hannaford, are the directors and shareholders of Brown’s Clearwater.

[5] In these reasons, the purchaser in the Share Purchase Agreement will be referred to as Brown’s Clearwater and the vendor(s) as Ms. Labonte.

[6] The Share Purchase Agreement provided that the purchase price of $3,100,000.00 was to be paid by Brown’s Clearwater on closing as follows:

1. By deposit in the amount of $150,000.00;
2. By Brown’s Clearwater assuming certain liabilities as set out in the Share Purchase Agreement; and
3. By promissory note in the amount of $2,735,471.00 on certain terms and conditions as outlined in the Share Purchase Agreement, namely a vendor take-back mortgage which required Brown’s Clearwater to make monthly payments of $12,000.00 to Ms. Labonte.

[7] In the first action, Brown’s Clearwater alleges that Ms. Labonte breached the terms of the Share Purchase Agreement in numerous, material ways, including but not limited to failing to deliver relevant files and failing to transfer relevant accounts to it.

[8] As a result of the alleged breaches of contract, on or about February 1, 2023, Brown’s Clearwater ceased making mortgage payments owing to Ms. Labonte under the vendor take-back mortgage. It alleges that Article 6.9 of the Share Purchase Agreement gave it a contractual right to set off alleged damages against the amounts owing to Ms. Labonte under the vendor take-back mortgage.

[9] Article 6.9 of the Share Purchase Agreement states:

Right of Set-Off Each of the Purchaser and the [Vendor] shall have the right to satisfy any amount from time to time owing by it to the Vendors by way of set-off against or otherwise credited against amounts payable by the Vendor [Ms. Labonte] to the Purchaser pursuant to this Agreement.

[10] Brown’s Clearwater alleges that the unproven breaches of the terms of the Share Purchase Agreement by Ms. Labonte constitute “amounts payable by the Vendors to the Purchaser pursuant to [the Share Purchase Agreement]”.

[11] On May 11, 2023, Brown’s Clearwater commenced the first action against Ms. Labonte, seeking general damages as compensation for the alleged breaches of the Share Purchase Agreement (the “Share Purchase Action”) and punitive damages. The Statement of Claim in the Share Purchase Action was served on May 15, 2023.

[12] Shortly after service of the claim in the Share Purchase Action, counsel for Brown’s Clearwater had a telephone conversation with counsel for the Ms. Labonte in which Ms. Labonte’s counsel indicated that she intended to commence an action against Brown’s Clearwater for their failure to make the mortgage payments on the vendor take-back mortgage. Counsel for Brown’s Clearwater suggested, however, that the mortgage claim was better advanced as a counterclaim in the Share Purchase Action.

[13] Counsel for Ms. Labonte did not agree and insisted that the mortgage payments be brought up to date. Ms. Labonte then commenced the second action, a mortgage action on June 1, 2023 (the “Mortgage Action”). Counsel for Brown’s Clearwater accepted service of the Statement of Claim in the Mortgage Action on June 15, 2023.

[14] On June 22, 2023, counsel for Brown’s Clearwater suggested to counsel for Ms. Labonte that the Share Purchase Action and the Mortgage Action be consolidated. Counsel for Ms. Labonte refused to consent to consolidation of the actions and requested the delivery of the Statement of Defence of Brown’s Clearwater in the mortgage action no later than July 5, 2023.

[15] On July 10, 2023, counsel for Ms. Labonte, without further prior notice to counsel for Brown’s Clearwater, proceeded to note Brown’s Clearwater in default and obtain Default Judgments in the Mortgage Action.

The Nature of the Motions

[16] Brown’s Clearwater is the moving party on the two motions before the court. In the Share Purchase Action, Brown’s Clearwater requests an order that the Share Purchase Action and the Mortgage Action be consolidated. In the Mortgage Action, Brown’s Clearwater requests an order: (a) setting aside the default judgments obtained by Ms. Labonte on July 10, 2023; (b) setting aside the noting in default for both default judgments; and (c) setting aside all enforcement steps taken pursuant to the default judgments.

The Position of Brown’s Clearwater

The Motion to Consolidate

[17] Brown’s Clearwater submits that Ms. Labonte has breached and/or continues to breach the terms of the Share Purchase Agreement and that it has suffered damages because of these breaches. Brown’s Clearwater contends that on or about February 1, 2023, it exercised its contractual right of set-off pursuant to Article 6.9 of the Share Purchase Agreement and ceased making the $12,000.00 monthly payments to Ms. Labonte under the vendor take-back mortgage as a result of Ms. Labonte’s alleged breaches. Brown’s Clearwater then commenced the Share Purchase Action when the alleged breaches continued and/or were not remedied.

[18] Brown’s Clearwater submits that Ms. Labonte’s Statement of Defence and Counterclaim in the Share Purchase Action alleges that the decision of Brown’s Clearwater to exercise its contractual right of set-off pursuant to Article 6.9 is invalid.

[19] Brown’s Clearwater further submits that Ms. Labonte commenced the Mortgage Action, wherein she alleges default under the terms of the Share Purchase Agreement’s vendor take-back mortgage, in direct response to the Share Purchase Action.

[20] Brown’s Clearwater submits that the Share Purchase Action and the Mortgage Action both stem from the Share Purchase Agreement and the conduct of the parties leading up to and following the closing of the transaction. Brown’s Clearwater further submits that both actions are inextricably linked and share common questions of fact and law.

[21] Brown’s Clearwater contends that: (a) the factual and circumstances of the two actions falls squarely within the provisions of Rules 6.01(1)(a) and (b); (b) both actions are still in the pleading stage; and (c) consolidation now will save expense and avoid multiplicity of pleadings and proceedings.

The Motion to Set Aside Default Judgment

[22] Brown’s Clearwater submits that it is a generally accepted principle that courts will always strive to see that issues between litigants are resolved on their merits whenever that can be done with fairness to the parties.

[23] Brown’s Clearwater further submits that binding jurisprudence from the Ontario Court of Appeal has established that the Noting in Default, Default Judgments and writs arising therefrom should be set aside as a matter of right without inquiry into the merits in a case where a plaintiff’s counsel obtains default judgment despite knowledge that litigation is being actively defended.

[24] Brown’s Clearwater notes the following chronology:

1. The Share Purchase Action was commenced on May 11, 2023, and served on Ms. Labonte May 15, 2023;
2. The Mortgage Action was commenced on June 1, 2023 and counsel for Brown’s Clearwater accepted service of the claim on June 15, 2023;
3. On June 29, 2023, Brown’s Clearwater served its motion to consolidate; and
4. On July 10, 2023, Ms. Labonte, without notice, commenced default proceedings in the Mortgage Action.

[25] Brown’s Clearwater submits that it was completely unreasonable for Ms. Labonte’s counsel to note it in default without notice to its counsel, when counsel was actively engaged and when Ms. Labonte’s counsel knew Brown’s Clearwater intended to defend the Mortgage Action pending the outcome of its motion to consolidate the two actions.

[26] In light of the above, Brown’s Clearwater submits that the default judgments, noting in default and all writs resulting therefrom should be set aside as of right, without any inquiry into the merits of its defence to the Mortgage Action.

The Position of Ms. Labonte

The Motion to Consolidate

[27] Ms. Labonte submits that she has a valid mortgage that is in default and that is the subject matter of the Mortgage Action. Ms. Labonte contends that the issues in the Share Purchase Action have nothing to do with the obligation of Brown’s Clearwater to honour its commitment under the vendor take-back mortgage.

[28] Ms. Labonte submits that Brown’s Clearwater has brought this motion to consolidate the Share Purchase Action and the Mortgage Action to delay enforcement of the mortgage and delay the prosecution of the Mortgage Action and that it should thus be dismissed.

The Motion to Set Aside Default Judgment

[29] On the hearing of this motion, counsel for Ms. Labonte appropriately acknowledged the inevitability of the Default Judgments, the Noting in Default and any writs flowing from default proceedings being set aside. However, Ms. Labonte submitted that pursuant to Rule 19.03 (1), the noting of default may be set aside on such terms as are just.

[30] Ms. Labonte submits that approximately $2,600,000.00 remains outstanding on the vendor take-back mortgage and that Brown’s Clearwater is clearly in default of its obligations under that mortgage, having suspended the $12,000.00 per month payments on February 1, 2023. Ms. Labonte submits that she has, and will continue to, suffer extreme prejudice if this vendor take-back mortgage is not brough up to date.

[31] Ms. Labonte contends that Article 6.9 of the Share Purchase Agreement does not give Brown’s Clearwater the right to suspend the payments on the vendor take-back mortgage as a set-off for alleged breaches of the agreement. The mortgage is in default, yet Brown’s Clearwater continues to operate and receive the financial benefits of the operation, according to Ms. Labonte.

[32] Ms. Labonte therefore submits that, on the facts of this case, it is just that the noting of default be set aside on the condition that Brown’s Clearwater forthwith pay all arrears outstanding on the vendor take-back mortgage and that Brown’s Clearwater continue to make all mortgage payments as they come due.

Discussion

The Motion to Set Aside Default Judgments

[33] It is obvious that the default proceedings in the Mortgage Action must be set aside. Counsel for Ms. Labonte has conceded that this is the case, and in my view, has acknowledged that Brown’s Clearwater should not have been noted in default in circumstances where opposing counsel had accepted service of the claim in the Mortgage Action and Ms. Labonte’s counsel was aware that the claim was being actively defended.

[34] It follows that Ms. Labonte’s request for terms to be attached to the setting aside of default proceedings, namely that the vendor take-back mortgage be brought into good standing and that all future payments on this mortgage be made as they come due, must be dismissed.

[35] It is reasonable to infer that the noting in default of Brown’s Clearwater was a tactical maneuver taken in an attempt to force Brown’s Clearwater into paying mortgage arrears and resuming mortgage payments on the vendor take-back mortgage. This may or may not have been the case. Nevertheless, in my view, given all the circumstances, attaching the requested terms to the setting aside of default proceedings would condone what was done by Ms. Labonte. Settled law on this issue establishes that the default proceedings should be set aside as of right.

[36] Where a judgment has been obtained irregularly, other than where the irregularity is a minor technical defect, the defendant has an absolute right to have the judgment set aside without having to show a defence on the merits, and the court should not impose terms in granting leave to defend the action. FS Partnership v. Mr. Refuel, 2021 ONSC 4480; Schreiber v. Mulroney, [2007] O.J. No. 3040 (S.C.J.); Benlolo v. Barzakay, [2003] O.J. No. 602 (Div. Ct.); Bank of Montreal v. Rich, [1985] O.J. No. 1848 (Div. Ct.); Martin v. Evans (1917), 39 O.L.R. 479 (App. Div.).

[37] I therefore decline to impose the terms requested by Ms. Labonte to the setting aside of default proceedings.

[38] An order shall issue:

1. Setting aside the Default Judgment (debt or liquidated demand) issued on July 10, 2023;
2. Setting aside the Default Judgment (recovery of possession of land) issued on July 10, 2023;
3. Setting aside the noting in default obtained by Ms. Labonte on July 10, 2023; and
4. Setting aside any writs, executions or notices of garnishment obtained and filed in respect of the Default Judgments issued on July 10, 2023.

The Motion to Consolidate

[39] Rule 1.04(1) states that the Rules of Civil Procedure shall be liberally construed to secure the just, most expeditious and least expensive determination of every civil proceeding on its merits.

[40] Section 138 of the Courts of Justice Act, R.S.O. 1990, Chap. C.43, directs that, as far as possible, multiplicity of legal proceedings shall be avoided.

[41] Rule 6.01 provides as follows:

6.01(1) Where two or more proceedings are pending in the court and it appears to the court that, (a) they have a question of law or fact in common; (b) the relief claimed in them arises out of the same transaction or occurrences or series of transactions or occurrences; or (c) for any other reason an order ought to be made under this rule, the court may order that, (d) the proceedings be consolidated, or heard at the same time or one immediately after the other; or (e) any of the proceedings be, (i) stayed until after the determination of any other of them, or (ii) asserted by way of a counterclaim in any other of them. (2) In the order, the court may give such directions as are just to avoid unnecessary costs or delay and, for that purpose, the court may dispense with service of a notice of listing for trial and abridge the time for placing an action on the trial list.

[42] I am persuaded that the requirements of Rule 6.01(1) (a) and (b) are met.

[43] The Share Purchase Action and the Mortgage Action arise, firstly, from the Share Purchase Agreement and, secondly, from Brown’s Clearwater invocation of Article 6.9 of the Share Purchase Agreement to justify non-payment on the vendor take-back mortgage which precipitated the Mortgage Action. The actions also have questions of law and fact in common.

[44] Further, I conclude that many of the factors to be considered on a motion to consolidate, as set out in 1014864 Ontario Ltd. v. 1721789 Ontario Inc., 2010 ONSC 3306, at para. 17, are present in the circumstances of this case:

• The issues in each action are interwoven;
• Damages in the two actions may overlap;
• There would be a significant overlap of evidence and of witnesses in the two actions;
• The parties and the lawyers are the same;
• Both actions are at the pleading stage;
• The motion for consolidation was brought as early as possible in the proceedings; and,
• The trial of both actions together would not result in any undue procedural complexities.

[45] A consideration of these factors in the context of these two actions weighs in favour of the Share Purchase Action and the Mortgage Action being consolidated and I so order on the following terms and conditions.

[46] The Share Purchase Action (CV-23-0193-000) and the Mortgage Action (CV-23-0225-000) shall be consolidated and proceed within Court File No. CV-23-0225-000. Ms. Labonte’s Statement of Claim in the Mortgage Action shall serve as the Statement of Claim in the consolidated action. Although the Mortgage Action was commenced second and could have been advanced by counterclaim, in the circumstances of the immediate case, the more authentic counterclaim is the Share Purchase Action.

[47] The Statement of Defence of Brown’s Clearwater in the consolidated action shall be filed within 20 days of the date of the release of these reasons. The claim of Brown’s Clearwater in the Share Purchase Action shall be advanced as a counterclaim in the consolidated action and filed within 20 days of the release of these reasons.

[48] Finally, I order that the costs of these two motions be to Brown’s Clearwater in any event of the cause. Brown’s Clearwater is not making its mortgage payments but its entitlement to set off that debt remains to be determined and its claim for costs is a matter to determined in its defence of the mortgage action and in its counterclaim; however, regardless of success or failure in that defence or counterclaim, Brown’s Clearwater should not have been noted in default and the actions should have been consolidated on consent.

“Original signed by”

The Hon. Mr. Justice J.S. Fregeau

Released: September 22, 2023