Court File and Parties

COURT FILE NO.: CV-20-84513 DATE: 20230126 SUPERIOR COURT OF JUSTICE

B E T W E E N:

DH PARTNERSHIP LTD Plaintiff (Responding Party)

- and –

10313149 CANADA INC, JIEMIN HONG and JIANPING WU Defendants (Moving Parties)

BEFORE: Regional Senior Justice Calum MacLeod

COUNSEL: Michael Lesage, for the defendants (Moving Parties) Kathleen Jin, for the plaintiff (Responding Party)

HEARD: September 8, 2022

DECISION AND REASONS

[1] This is a motion by the defendants to set aside a default judgment obtained by the plaintiff in a mortgage action. Default judgement was granted by Justice Muszynski on a motion brought without notice after the defendants had been noted in default.

[2] There is no dispute that the defendants were served personally with the statement of claim and failed to defend the action in a timely manner. The question is whether the default judgment should be set aside so that the defendants are allowed to deliver a defence and counterclaim. A second question is what terms to impose if the motion is granted.

The Test for Setting Aside Judgment

[3] In the circumstances of this case, the governing Rule is Rule 19.08 (2) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, which provides that “a judgment against a defendant who has been noted in default that is obtained on a motion for judgment on the statement of claim under Rule 19.05 or that is obtained after trial may be set aside or varied by a judge on such terms as are just.” The rule is discretionary, and the court may impose terms. Jurisprudence has established the factors to be considered.

[4] The ultimate question is whether the interests of justice favour granting the order or allowing the judgment to stand. The defendant seeking the order must provide a plausible explanation for failing to defend the proceeding, must show that the defendant moved promptly on becoming aware of the judgment and must demonstrate that, on the facts, the proceeding appears to be defensible. The court will then consider the prejudice to each party and the overall impact on the administration of justice in granting or withholding the requested order. [1] Mountain View Farms Ltd. v. McQueen, 2014 ONCA 194, 119 O.R. (3d) 561, 372 D.L.R. (4th) 526, 56 C.P.C. (7th) 133 (Ont. CA)

[5] This is not a rigid formula. Ordinarily, every civil proceeding in Ontario should be determined on its merits and not merely on procedural grounds. [2] Rule 1.04, Rules of Civil Procedure, R.R.O. 1990, Reg. 194 On the other hand, time limits in the rules exist for a reason and there is a strong public interest in ensuring that litigation is resolved in a timely manner. These principles stand in contrast to each other and require a case-by-case analysis to achieve a just result. [3] Hamilton (City) v. Svedas Koyanagi Architects Inc, 2010 ONCA 887, 104 O.R. (3d) 689, 2 C.P.C. (7th) 114, 328 D.L.R. (4th) 540 (Ont. CA)

Background

[6] The issue before the court is enforcement of a $400,000.00 debt incurred by the corporate defendant and guaranteed by the individual defendants who are husband and wife. The plaintiff seeks repayment of the principal amount together with accrued interest and costs and also seeks to enforce the mortgage and other security pledged as collateral.

[7] The defendants make various allegations about how the mortgage came to be granted and I will describe these later when I summarize the facts they seek to plead as defences. There is no doubt however that the plaintiff lent the corporate defendant $400,000.00 at the request of Ms. Wu in late 2019.

[8] It was intended to be a short-term loan secured by a mortgage on property owned by the corporation and located at 517 Rideau Street in Ottawa. The interest rate was 15 percent per annum. There were personal guarantees and a pledge of further security against lands owned by the individual defendants in Quebec and British Columbia.

[9] The loan was to have been repaid on March 5, 2020. It is undisputed that it has not been paid. The plaintiff started this action on September 18, 2020, and served a notice of sale under mortgage shortly thereafter.

[10] This is not a case in which default judgment was signed by the Registrar days after the time for defending had expired. Firstly, Mr. Wu was served personally on September 23, 2020, at his residence in British Columbia. The process server deposed that Ms. Hong was at home, but refused to come to the door. There were various subsequent attempts to serve Ms. Hong before she was finally served personally on October 31, 2020, in the presence of a police officer.

[11] The defendants did not defend the action. They made no payments. The defendants were noted in default on January 29, 2021. The defendants brought a motion for default judgment (without notice) in writing which came before Justice Corthorn on June 28, 2021. A motion was required rather than signing judgment at the counter because the plaintiffs sought extraordinary relief including orders to place liens on the Quebec and B.C. properties and injunctive relief requiring the defendants to cooperate with them. The court declined to grant the order for reasons set out in the endorsement.

[12] The plaintiff then placed the matter on a motion list and was finally successful in obtaining default judgment along with declaratory and injunctive relief on March 1, 2022. The reasons for granting the order are set out in the endorsement of Justice Muszynski bearing that date.

[13] It is significant that the affidavit material before my colleague, persuaded her that the defendants had not only ignored the legal proceeding, but had also ignored their obligations under the mortgage. She found that the defendant had not made any payment of principal or interest since the mortgage came due on March 5, 2020. She found that the defendants were personally served and had failed entirely to respond to the litigation. On that basis, the court granted the judgment the defendants now seek to set aside.

Explanation for Failing to Defend

[14] In this case, the defendants were likely aware of the proceeding as early as September 23, 2020, when Mr. Wu was given a copy of the statement of claim. It is his evidence that he gave a copy of the claim to Ms. Hong and left it to her to deal with it. In any event, all defendants had been personally served by October 30, 2020. This is not in doubt. And it is undisputed that no defence was filed prior to the plaintiff noting the defendants in default at the end of January 2021.

[15] Mr. Wu attests that he did not realize the matter concerned him because he did not realize he was being sued personally, he is not an officer or director of the corporation, and he believed his wife was looking after these affairs.

[16] For her part, Ms. Hong states that she did not understand that personal service required her to do anything. She assumed that because both parties had been negotiating through lawyers, the plaintiff would contact her lawyer. She spoke to her lawyer who had not received a copy of the statement of claim, but she did not send a copy because she assumed a copy would be sent to the lawyer by the plaintiff’s lawyer. Ms. Hong also attests that she was involved in a car accident around that time.

[17] Failure to read documents and ignorance of the law or legal procedure is generally insufficient to relieve a party of the legal consequences if they fail to comply with their obligations. [4] CHC Casinos Canada Limited v. Luo, 2015 ONSC 3 This is particularly so for reasonably sophisticated businesspeople with access to legal advice. If the defendants were in any doubt about the significance of the document, they could (and should) have forwarded it to their legal counsel.

[18] On the other hand, default judgment and loss of the right to defend is a drastic outcome. The evidence that the defendants misunderstood their obligations and their failure to defend was unintentional is uncontradicted.

[19] This explanation for failing to defend is a barely plausible explanation particularly when it is combined with evidence suggesting the defendant Hong had been purposely evading service, when there had been several demand letters and a notice of sale. Nevertheless, it may be sufficient to open the door to relief if the other factors weigh sufficiently in their favour. There is no evidence that they consciously decided not to defend the action and have now changed their minds. [5] The court made such a finding in Martosh v. Horton, 2005 CarswellOnt 6729, [2005] O.J. No. 5005 (SCJ) and see Schill & Beninger Plumbing & Heating Ltd. v. Gallagher Estate for authority that an intentional refusal to defend is a bar to such a motion.

Moving Promptly

[20] As described above, it took the defendants more than three months and two motions to obtain judgment. The defendants were unaware of this activity because the motions were brought without notice but they would have had all of that time to obtain legal advice and to prepare a defence.

[21] It is Ms. Wu’s evidence that she became aware of the default judgment in March of 2022 when she found a notice from the court in her email junk mail folder. She immediately launched this motion to set it aside. A draft notice of motion was prepared and motion dates sought from the court on March 24, 2022. On March 29, 2022, Ms. Jin was consulted and agreed to the September 8 return date.

[22] There is no doubt the defendants brought this motion within days of becoming aware of the judgment and counsel agreed on the first mutually available date to argue the motion. This factor is easily satisfied.

Defence on the Merits

[23] A defence on the merits is really the heart of the question. If there is a strong and cogent defence then provided there is some explanation for failing to defend and the motion is brought reasonably promptly, a court should be highly reluctant to deprive the defendant of the right to be heard. [6] Laredo Construction Inc. v. Sinnadurai On the other hand, if the defence is weak, complicated or speculative, allowing a defendant to reopen the case may appear to be an unfair tactic to delay the inevitable. [7] Manotick Concrete Ltd. v. Boissonneault, 2019 ONSC 4827

[24] In this case, there is no basis at all for the corporate defendant to deny liability for the principal amount of the loan or to deny that the loan was secured by a mortgage on the Rideau Street property which it owns. If there is a defence, it relates to the personal guarantees, the pledging of additional security, the interest rate and other terms of the loan.

[25] In the proposed statement of defence and in the affidavit evidence, the defendants set out the history of financing. They allege that they had originally borrowed funds from a different lender in 2017. They further allege that their then friend and lawyer, Haiyan Zhang, had assisted them to find the lender and then acted on both sides of the transaction. Subsequently, they allege the original financing was replaced with another lender also located by Ms. Zhang and that later loan also secured by a mortgage on Rideau Street, but with no personal guarantees.

[26] In 2019, the defendants state they were planning to refinance with a bank and believed they would be able to do so with a 4 percent interest rate. They then allege they sought advice from Ms. Zhang and were introduced to Mr. Lee, the principal of the plaintiff. [8] I note that in his affidavit, Mr. Lee states that he and Ms. Wu had been friends for years so this allegation will be disputed.

[27] The defendants then assert that they were misled by what amounts to a series of misrepresentations or “bait and switch” into abandoning the search for bank financing and agreeing to accept a loan from the plaintiff. They allege that although they were originally led to believe the loan would be a short-term interest free loan, they were put in the position where they had no choice but to accept more onerous terms. Specifically, they had to give the personal guarantees and agree to a 15 percent interest rate, to pay fees to a person represented to be a mortgage broker and pay other fees as a condition of the loan. They say they paid a $30,000 retainer to Ms. Zhang.

[28] They further allege that in March, when the loan was due, they sought an extension and tendered a cheque for $5,000 for interest. The cheque was rejected and the plaintiff demanded 25 percent interest as a condition of extending the loan. They allege that they were subsequently subjected to harassment and abuse by Mr. Lee.

[29] The defendants seek to rely on unconscionability, seek an order rectifying the mortgage and seek a setoff for fees paid under false pretences. They also seek to counterclaim against the plaintiff, Mr. Lee, Tiffany Yang (who was the mortgage broker with an expired licence) and Ms. Zhang.

[30] There are a number of problems and limitations with the proposed defence and counterclaim. Firstly, as noted above, there is no doubt that the defendant corporation borrowed the principal amount of $400,000.00 and is obligated to repay it. And there is no doubt that the loan was secured by a mortgage over the Rideau Street property owned by the corporation. The counterclaim, taken at its highest, claims damages of $200,000.00 and some of those damages are sought against non parties. In other words, it is not a complete defence.

[31] The allegations, however, are sufficiently serious that they may provide a defence for the individual defendants on the personal guarantees. In addition, at least with respect to the claims for professional negligence, breach of fiduciary duty and breach of contract against Ms. Zhang, certain aspects of the proposed counterclaim could be pursued in a separate action even if the default judgment is not set aside.

[32] While it is the position of the plaintiff that this counterclaim should be pursued in a separate action even if the default judgment is set aside, the claim against Ms. Zhang and against Ms. Yang is quite intertwined with the allegations raised as a defence. All of the same evidence and most of the same issues will be required and those claims rely upon the same set of facts as the proposed defence.

[33] In my view, the defendants should be given a limited opportunity to defend this action. This can be achieved by partially setting aside the default judgment and by imposing strict terms on the right to defend. Pursuant to Rule 19.08 the court may set aside or vary a default judgment in order to permit a defence. What the judge cannot do is to treat the motion to set aside as if it is a summary judgment motion and make a final determination on the merits. [9] Mountain View Farms Ltd, note 1, supra @ para 57 - 62

[34] I have concluded that the corporation may have a defence in relation to the interest rate and certain other charges, but the default judgment against the corporation should otherwise be enforceable. The plaintiff will have the right to enforce the mortgage, but will be required to hold back the amounts it claims for pre-judgment and post-judgment interest or any additional costs of enforcement. In accordance with the terms of the mortgage, the costs awarded by Justice Muszynski will remain enforceable.

[35] I will set aside the default judgment against the individual defendants as they may have a defence to the personal guarantees. I will impose terms. They must pay the costs of this motion. They must undertake not to sell or encumber their B.C. and Quebec properties and provide security. Of course, this will not be necessary if the debt is fully extinguished by enforcement against the corporation.

Conclusion and Order

[36] In summary, the plaintiff is clearly entitled to judgment against the corporate defendant for a minimum of $400,000.00 and remains entitled to enforce the security against the property. The only real issue raised in the proposed defence is whether the corporation should be liable for the full amount of the accrued interest at the 15 percent rate specified in the mortgage.

[37] Accordingly, I will not set aside the default judgment against the corporation and the plaintiff will be entitled to take possession of the security and to proceed with its power of sale unless the defendant pays the principal amount due under the mortgage to the plaintiff, pays the costs awarded in the default judgment to the plaintiff and pays the amounts of the pre-judgment and post-judgment interest awarded in the judgment plus any additional disputed amount claimed for enforcement costs into court.

[38] In the event the plaintiff proceeds with power of sale and the net proceeds of sale are more than the amount set out in paragraph 1 a) of the default judgment, and the costs awarded in paragraph five of the judgment, the plaintiff shall retain in trust an amount sufficient to satisfy the amounts awarded for pre-judgment interest and post-judgment interest together with any disputed enforcement costs or shall pay them into court pending further order or agreement.

[39] Notwithstanding the default judgment, the corporate defendant may move to set aside the pre-judgment and post-judgment interest components of the judgment and may challenge costs of enforcement (other than the amount awarded under the default judgment) if the individual defendants are successful in proving the allegations made in the statement of defence or counterclaim.

[40] The default judgment will be set aside against the individual named defendants providing the defendants comply with the following terms: a. The defendants shall undertake in writing not to alienate or further encumber the properties in British Columbia or Quebec without notice to the plaintiff. The defendants shall cooperate in registering a caution, certificate of pending litigation or equivalent document against those properties. b. The defendants shall pay costs of this motion to the plaintiff fixed at $10,000.00 within 15 days.

[41] Upon complying with these terms, the defendants Wu and Hong may file a statement of defence substantially in the form set out in the notice of motion. They may also include a counterclaim if they elect to pursue it.

Justice C. MacLeod Date: January 26, 2023