Legal Blog:

A Difficult Defence, non est factum

Every so often, a debtor is faced with the inevitable, but holds on to any defence available, no matter how untenable it might be. The non est factum defence, which we have discussed previously (see newsletters of October 2014, October 2011, June 2002, and April 2002), is used when a person signs a debt obligation, but does not understand what was being signed. The latest case in which the debtor raised this defence was Bulut v. Carter, a 2014 decision of the Court of Appeal for Ontario.

Note            

Creditor had various business dealings with debtor. In 2006, debtor’s corporation signed a $300,000 promissory note in favour of creditor. Debtor personally guaranteed the note. In addition, three other members of debtor’s family also guaranteed the note. It seems that creditor did not have faith in the financial ability of debtor’s corporation to repay the note. Creditor’s fears were realised when debtor’s corporation defaulted under the note. Creditor made demand under the note and guarantees in October 2006, a mere six months after the loan was given, and two months later, debtor’s corporation went bankrupt.  

Consideration

Debtor’s corporation claimed that creditor had advanced funds to debtor’s corporation in 2004 and that the 2006 note related to the 2004 advance. Accordingly, debtor claimed that the promissory note and guarantees did not arise out of a fresh advance of money. The trial judge found that creditor had advanced the $300,000 in 2006. In addition, the trial judge and the Court of Appeal noted that the 2006 promissory note was given to ensure that debtor’s corporation could continue to engage in business dealings with creditor. Accordingly, both levels of court held that there was a valid and enforceable promissory note.  

No Knowledge

The real defence arose from the claim of debtor’s family members that, when they signed the promissory note, they did not understand what they were signing. The trial judge accepted that defence and dismissed the action against the family members. Creditor appealed.  

Liar, Liar

            Judges accept or reject a witness’s testimony by asking themselves 2 questions. Is the witness credible (i.e. is the witness telling the truth as the witness recalls it)? If the witness is credible, is the testimony reliable (i.e. is the witness able to make an accurate observation or recall or describe the events properly)?

Judges often review factors that would indicate that a witness’ testimony may be unreliable or untruthful. For example, they may note that the witness’ evidence conflicts with another document, contradicts what the witness previously said, or demonstrates favouritism or bias. They may then say: “when this witness’ testimony differs from other testimony, the other testimony is preferred.” Judges usually refrain from commenting on credibility directly.

However, occasionally a witness’ lies are just so obvious that a judge has to comment. In Wilson v. Semon, a 2014 Ontario Superior Court of Justice decision, the judge could not restrain himself.

Judgment Debtor Examination

             The creditor was attempting to examine the judgment debtor in aid of execution. The creditor was having problems; the debtor was not cooperating. The lack of cooperation was so bad that she had been sentenced to, and served, 30 days in prison for contempt of court. She then re-attended at an examination in aid of execution and, at the creditor’s request, was brought before the same motions judge for the 5^th time.

The debtor knew that she was in trouble when the lead-in to the reasons for decision stated,

“If it was not clear before (which I believe it was), it can now be stated beyond any doubt that Ms. Semon is a liar. She has misled counsel for the Applicant throughout this process about where her money is and where and to whom she has sent it. She has also misled the court, and has demonstrated that her previous apologies to the court for her actions were altogether hollow.”

The judge then went on to describe in graphic detail all the instances in which the debtor lied in her examinations. One of the reasons why she lied, she said, was because she did not want to jeopardise other business opportunities by telling the truth. In other words, the court noted, she did it for the money.

Remedy

The judge would have been more than happy to throw the debtor back into jail, but he was concerned that this would be of little assistance to the creditor. The judge asked the creditor’s lawyer what he wanted. The lawyer replied that he “wants one full, honest, and fair examination of (the debtor).”

Early Bird Gets Paid in Priority!

A creditor commences an action against a debtor and obtains a judgment after a trial. The debtor then appeals and loses. The creditor does its due diligence and tracks down land that the debtor owns. The creditor files a writ of seizure and sale and commences proceedings whereby the land is to be sold to pay the judgment debt. By this time, the judgment debt, including interest, is $200,000 and the costs that the creditor has incurred have ballooned to $110,000. Not to worry, the equity in the land is $320,000 and payday is coming.

Does a Bank Owe a Duty of Care to a Non-customer?

            Does such a duty of care conflict with a bank’s duty of confidentiality to its customer. These issues were discussed in Grossman v. Toronto-Dominion Bank, a 2014 Ontario Superior Court of Justice decision.

Duty of Loyalty

The larger a law firm gets, the more important conflict searches become. The benefit of these searches became apparent to a law firm in Stewart v. Hosack 2014 ONSC 5693 (S.C.J.).

Players

 For many years, the plaintiff, her family, and her business had been clients of a law firm in Simcoe, Ontario. The firm previously represented the plaintiff and her business on 5 matters: the sale of a home, the purchase of a building, a Small Claims Court action, a flood damage claim, and a medical malpractice lawsuit. The firm was currently acting for the plaintiff’s husband, and perhaps her also, on two real estate deals.

A former employee of the plaintiff’s business was criminally charged with uttering a death threat to the plaintiff. Another lawyer (the “criminal lawyer”) in the law firm, who was a friend of the employee’s boyfriend, accepted the employee’s retainer to defend her in the criminal proceedings. The criminal lawyer knew that the plaintiff was the alleged victim of the death threat and that she and her family had been clients of the firm. Regardless, he did not “run a conflict check, make inquiries from other lawyers in the firm, review (the plaintiff’s) files, obtain consent from (the plaintiff), or set up an ethical wall.”

 As an aside, why the judge would comment adversely on the criminal lawyer’s failure to review the plaintiff’s prior files is beyond our comprehension. If those files contained confidential information, the criminal lawyer would not want to know it.

Aha

Something must have clicked within the law firm. Shortly after it accepted the employee’s retainer, the real estate lawyer in the firm withdrew from the real estate transaction on the pretext that the plaintiff had not paid a previous account. In reality, the law firm fired the plaintiff so that the firm could continue to represent the employee. The plaintiff claimed that she did not know about an outstanding account and, cognisant of the law firm’s involvement in the criminal charges, became suspicious of the real reasons for the termination of her retainer.

Story

The criminal lawyer, who was a part owner of the tavern in which the death threat was allegedly made, had, at all times, a video of the incident taken from the tavern’s security system. He provided that video to the Crown about 6 months later. The Crown then laid a 2^nd charge against the employee for criminal harassment.

Will a Court order a Declaration that a Judgment will Survive Bankruptcy?

In a trust claim, it has become commonplace to seek a request for a declaration that, if there is judgment for breach of trust, the judgment will survive the subsequent bankruptcy of the judgment debtor. Will that request for relief ever be granted? This question was answered, in part, in B2B Bank v. Batson, a 2014 Ontario Superior Court of Justice decision.

Background

Section 178(1)(d) of the Bankruptcy and Insolvency Act  states that an order of discharge does not release a bankrupt from a debt arising out of fraud, embezzlement, misappropriation, or defalcation while acting in a fiduciary capacity. Under the trust sections of the Construction Lien Act, when a payor receives money, the payor holds that money in trust for the person with whom it contracted, one rung below it on the construction ladder. Once the payor breaches that trust, the payor falls afoul of section 178(1)(d).

Case

This was not a breach of trust action; it was an action arising out of a cheque kiting scheme perpetrated by a former employee of the bank, but it had the same effect. The defendant consented to judgment being rendered against her; after all, she did the dastardly deed. The plaintiff tried to obtain the declaration regarding bankruptcy. The judge refused to grant it. Why?

The judge held, “The question whether certain claims survive the discharge order does not arise in the context of an application by the bankrupt for a discharge. Rather, it is more properly determined when the creditor subsequently seeks to enforce the pre-existing liability or judgment debt. If the debtor relies on his or her discharge as a basis for resisting enforcement of the pre-bankruptcy liability, the issue of the applicability of the exemptions contained in s. 178(1) should be determined at that time, based upon the established facts (including any previous declaration concerning the source of the liability) as well as the legal regime in force at that time.”

In other words, since the defendant had not yet become a bankrupt, the judge was not going to grant the requested declaration merely on the off chance that the defendant could, in future, assign into bankruptcy.

However, the judge did not allow the creditor to leave empty handed. He stated, he would include a “declaration that the judgment debt arose by reason of the defendant having committed a fraudulent act while acting in a fiduciary capacity, a disposition that is consistent with the scope of available declaratory relief, based on currently existing facts and circumstances.”

Using the CLA s. 39 Right to Obtain Information

The Construction Lien Act is a technical statute; it gives rights to persons who have provided goods or services to an improvement, rights that would not have existed without the Act. The Act sets out various rules and timelines; follow the rules and the timelines and you will be able to take advantage of the rights that the Act gives; fail to do so and your rights may evaporate. This proposition is demonstrated in Dolvin Mechanical Contractors Ltd. v. Trisura Guarantee Insurance Co. a 2014 decision of the Ontario Superior Court of Justice.

Section 39

Section 39 of the Act gives every claimant a right to obtain information, up the construction ladder, regarding contracts that affect it. For example, a sub has a right to obtain from the owner the state of accounts between the owner and the general and copies of all labour and material payment bonds affecting the project. These are important rights. They alert the claimant to a possible breach of trust and add a deep pocket to pay money due to the claimant.

Dispute

The general had not been paying the sub. The sub wrote to the owner, TTC, requesting that TTC pay the sub directly. The sub also had a brief conversation with TTC. Although there were some discrepancies regarding the information TTC gave in the conversation, both parties agreed that TTC always took the position that, because it did not have a contract with the sub, it would only deal with the general. All of this took place in the spring of 2010.

Realising that it would receive no help from TTC, the sub turned its attention to the general. The sub issued a section 39 demand for information from the general, but received no answer. The sub commenced an action against the general and its principal and, ultimately in 2012, the sub obtained a judgment against them for $122,000.