Court File and Parties

COURT FILE NO.: CV-15-539874-0000

DATE: 2024-07-02

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: PETER VIGNJEVIC, DR. PETER M. VIGNJEVIC MEDICINE PROFESSIONAL CORPORATION, JOHN BUJAN, DONNA AIKEN and GAYLE MEEHAN, Plaintiffs

AND:

SCOTT REEVES, REEVES FINANCIAL SERVICES INC., REEVES FINANCIAL ADVISORS LTD., REEVES GROUP SOLUTIONS LTD., REEVES PORTFOLIO MANAGEMENT INC., REEVES PRIVATE WEALTH INC., INFINITA CAPITAL MANAGEMENT CORPORATION, FUNDEX INVESTMENTS INC. and JEFFREY DAVIS, Defendants

BEFORE: Akazaki J.

COUNSEL: David Di Paolo, Caitlin Sainsbury, Maureen Doherty, and Brianne Taylor, for the Defendant, FundEX Investments Inc.

HEARD: July 2, 2024

ENDORSEMENT

INTRODUCTION

[1] The defendant FundEX seeks default judgment on its crossclaim against Scott Reeves and his various shell companies.

[2] In the main action, the plaintiffs previously obtained default judgment against the Reeves defendants. Rule 19.02 deemed that he admitted the plaintiffs’ fraud allegations against him. The plaintiffs were clients of FundEX. Until his termination from employment, FundEX employed Reeves as the salesperson who managed the plaintiffs’ accounts. Reeves received the plaintiffs’ money, in some instances their life savings, and converted it to his own use.

[3] The plaintiffs’ claim against FundEX pleaded Reeves’ apparent authority as agent for FundEX and FundEX’s breach of its duty to supervise him. Before FundEX settled with the plaintiffs, it defended that claim. It was not deemed to have admitted the allegations against it. FundEX’s statement of defence and crossclaim carefully avoided any unintended admissions under rule 25.07. Except for its admission that Reeves was its employee, FundEX pleaded a general denial.

[4] FundEX’s boilerplate crossclaim against the Reeves defendants consisted of the following:

1. prayer for relief for contribution, indemnity, and costs
2. incorporation of the facts in the defence
3. repetition of its denial of the plaintiffs’ claim against it
4. an alternative pleading that “if FundEX is found liable to the Plaintiffs in the main action then it seeks contribution and indemnity from its co-defendants”
5. reliance on the Negligence Act, R.S.O. 1990, c. N.1, as amended

[5] FundEX eventually settled with the plaintiffs and paid them a total of $2,299,086.64. By then, FundEX had also spent $676,683.69 in legal costs. By consent order, Associate Justice Josefo implemented the settlement by dismissing the action against FundEX in all respects except to continue FundEX’s crossclaim against the Reeves defendants. FundEX then noted the Reeves defendants in default of the crossclaim. FundEX now seeks default judgment against the Reeves defendants for indemnity in respect of the settlement, plus costs.

[6] In the motion record, FundEX filed an affidavit from employee Christina Lockyer. She essentially accepted FundEX’s liability to the plaintiffs. A notable admission in para. 9 of the affidavit was the legal admission that “All of Reeves’ actions in advising the plaintiffs about investments fell within his actual or apparent authority as a FundEX representative.” Ms. Lockyer also stated that, two weeks after the plaintiffs started the action, Reeves entered personal bankruptcy. He was subsequently discharged. She then provided information about the settlement and the continuation of the crossclaim.

[7] The court must therefore decide whether FundEX is entitled to default judgment to recover indemnity for the monetary settlement with the plaintiffs. This requires me to consider:

1. the procedure on motion for default judgment
2. the legal basis for recovering indemnity for the settlement from the Reeves defendants

[8] FundEX’s motion is dismissed for having failed to establish grounds for default judgment, because the crossclaim failed to plead the material facts entitling it to claim indemnity for the settlement. However, justice requires the court to afford it an opportunity to amend the crossclaim and relaunch the motion. My detailed reasons follow.

1. PROCEDURE FOR MOTION FOR DEFAULT JUDGMENT

[9] A motion for default judgment entails an outcome without trial where a defendant fails to answer the claimant’s claim and allegations. The deemed admissions of fact, as well as the conclusions of law flowing from them, must justify the respondent’s liability to the moving party. The evidence, provided it supports a valid pleading, helps the court exercise its discretion about the remedy, in this case the assessment of damages. Rule 19 provides the framework for this path to judgment without trial:

a. Rule 19.09 applies to crossclaims, as if the crossclaiming defendant were a plaintiff against a co-defendant.

b. Clause 19.02(1)(a) deems a defaulting defendant to the crossclaim to have admitted the truth of the allegations in the crossclaim.

c. The crossclaiming defendant in this case can then avail itself of rule 19.05 to move for judgment against the defaulting co-defendant.

d. Subrule 19.05(2) requires a motion for judgment for an unliquidated sum to be supported by an affidavit. Under subrule 19.05(3), the judge considering the motion may grant judgment, dismiss the claim, or order that it proceed to trial.

e. Rule 19.06 requires the pleadings in the crossclaim to entitle the moving party to judgment. If the pleadings to not create the entitlement, the court cannot grant judgment.

[10] Clause 19.02(1)(a), subrule 19.05(2), and rule 19.06 together mean the purpose of the affidavit is to substantiate unliquidated damages. The court needs evidence to fix the amount. Affidavit evidence cannot make up for the failure of the crossclaim to plead the case based on the settlement.

[11] The logic of a default proceeding is the choice of a defendant not to participate in proceedings. Such a defendant can assess the validity of a claim and elect not to defend it. In theory, he should be able to trust the judiciary to turn away a motion for default judgment if the pleading does not disclose a legally valid claim under rule 19.06. The claimant must then return to the drawing board, serve the defendant with a more adequate pleading, and to wait again for the defendant to defend the reconstituted claim. Pleadings of a conclusory nature cannot be considered admitted for the purpose of the legal analysis: Paul’s Transport Inc. v. Immediate Logistics Limited, 2022 ONCA 573, at para. 77. Default judgment curtails the need for trial, but the procedure itself does not afford short cuts.

[12] Before leaving this topic, I observe rule 28 contains its own provisions regarding default proceedings. Rule 28.07 provides that default in respect of a defence to crossclaim entitles the crossclaiming defendant to bring a motion for default judgment. This is essentially the same as the combined operation of rules 19.05 and 19.09. Subrule 28.06(5) provides that a defendant who does not defend a plaintiff’s claim against the crossclaiming defendant is bound by any order or determination made in the main action between the plaintiff and the crossclaiming defendant. Rule 28 duplicates but does not change the procedure under rule 19.

2. LEGAL BASIS FOR RECOVERY OF SETTLEMENT FROM REEVES DEFENDANTS

[13] I must therefore consider whether the crossclaim supports FundEX’s claim for indemnity in respect of the settlement. While the path to judgment may have appeared intuitive or obvious from FundEX’s perspective, I will explain how the pleadings fall short.

[14] Before turning to the pleadings in the crossclaim, I will canvass the available legal theories of which FundEX could avail itself to obtain the judgment it seeks on the motion. Several legal principles could allow defendants settling claims with plaintiffs to recover contribution and indemnity from others. The principle Ontario courts most frequently encounter for recovery of contribution and indemnity for a settlement is the statutory remedy under the Negligence Act, s. 2 (italics added):

2. A tortfeasor may recover contribution or indemnity from any other tortfeasor who is, or would if sued have been, liable in respect of the damage to any person suffering damage as a result of a tort by settling with the person suffering such damage, and thereafter commencing or continuing action against such other tortfeasor, in which event the tortfeasor settling the damage shall satisfy the court that the amount of the settlement was reasonable, and in the event that the court finds the amount of the settlement was excessive it may fix the amount at which the claim should have been settled. R.S.O. 1990, c. N.1, s. 2.

[15] Although the section uses the word “tortfeasor,” the idea of joint and several liability under the comparative fault statutes is problematic in the case of fraud because the element of deceit can undermine theories of fault against other defendants. However, if the language of the section applies to the recovery of a tortfeasor who is not guilty of fraud from the actual fraudster, the legislation is available: Lepine v Sherwood Park Dodge Chrysler Jeep Ltd., 2018 ABPC 12, at para. 184. Fraud by an employee and negligent supervision on the part of the employer can coexist, if the employer failed to employ systems to detect irregular practices. In the financial services industry, where these actors handle client funds, the mixture of these torts can fit the wording of s. 2. This right of action might appear to fit the crossclaim. It doesn’t.

[16] FundEX’s crossclaim depends on it being found liable to the plaintiffs. The settlement ensures such a finding will never occur. The claim for indemnity based on a court finding appears in s. 1 (italics added):

1. Where damages have been caused or contributed to by the fault or neglect of two or more persons, the court shall determine the degree in which each of such persons is at fault or negligent, and, where two or more persons are found at fault or negligent, they are jointly and severally liable to the person suffering loss or damage for such fault or negligence, but as between themselves, in the absence of any contract express or implied, each is liable to make contribution and indemnify each other in the degree in which they are respectively found to be at fault or negligent. R.S.O. 1990, c. N.1, s. 1.

[17] Section 1 does not apply to a claim for recovery of the settlement, because FundEX’s liability arises from the settlement agreement and not from vicarious responsibility for the Reeves defendants. For the following reasons, the court cannot shoehorn a s. 1 pleading to fit the requirements of s. 2, if the essential fact of the settlement is missing.

[18] Before leaving this point, I need to consider whether the bankruptcy or the employment relationship posed any impediment to FundEX’s reliance on s. 2. Because the plaintiffs’ factual pleadings against the Reeves defendants were restricted to fraud and embezzlement, there is no issue that bankruptcy posed an impediment to liability, since the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, s. 178(1)(d), exempted such actions from any release or stay.

[19] I appreciate the dismissal of the motion based on the pleading defect may seems to prioritize form ahead of substance. Not even the liberal construction required under rule 1.04 can permit the court to ignore the express requirement in rule 19.06 that the pleading must support the cause of action on which the moving party seeks judgment. There is no way of circumventing that basic rule of our adversarial system, that the formal document must state the case against the other party, even in absentia.

CONCLUSION

[20] I therefore dismiss the motion for default judgment, on the basis that the crossclaim, including the statement of defence incorporated therein, does not disclose the material facts of the claim on which FundEX seeks judgment against the Reeves defendants. This order is without prejudice to FundEX amending the statement of defence and crossclaim to plead the necessary facts supporting its claim for indemnity based on the settlement. I will not map out how FundEX’s lawyers should craft such an amendment, because that is their role and not the court’s.

[21] If a formal order is required, the registrar is directed to sign an order in accordance with the following directions:

1. The motion is dismissed, without prejudice to a second motion for default judgment if the defendants Scott Reeves, Reeves Financial Services Inc., Reeves Financial Advisors Ltd., Reeves Portfolio Management Inc. Reeves Private Wealth Inc., and Infinita Capital Management Corporation, do not file a defence to an amended crossclaim (“Reeves defendants”).
2. FundEX is hereby granted leave to amend the statement of defence and crossclaim. FundEX shall serve the amended statement of defence and crossclaim on the Reeves defendants, either personally or by an alternative to personal service.
3. If the Reeves defendants are again noted in default of the crossclaim, FundEX will again serve an updated motion record for default judgment.
4. If the Reeves defendants do not seek a case conference within 20 days of being served with the motion for default judgment, FundEX may set the motion down for hearing in writing.
5. Justice Akazaki is not seized of the matter but is not disqualified from hearing the second motion for default judgment against the Reeves defendants.
6. FundEX’s costs of the motion on a full indemnity basis are to be added to the costs to be determined in the subsequent motion for default judgment.

Akazaki J.

Date: July 2, 2024