Atlantic (HS) Financial Ltd v Punjabi, 2017 ABQB 087

Court of Queen’s Bench of Alberta Citation: Atlantic (HS) Financial Ltd v Punjabi, 2017 ABQB 087 Date: 20170208 Docket: 1401 08290 Registry: Calgary Between: Atlantic (HS) Financial Ltd. Plaintiff - and - Ram Punjabi and Sneha Punjabi Defendants _______________________________________________________ Memorandum of Decision of A. R. Robertson , Q.C., Master in Chambers _______________________________________________________ Introduction [ 1 ] This is an application to set aside a noting in default in a foreclosure action. The defendants argue that they have a limitations defence.

The defendants also apply under Rule 6.3 to have the proceedings transferred to the Judicial Centre of Edmonton because that is where the land is located. The plaintiff agrees that if a defence is allowed then the action should be transferred to Edmonton. [ 2 ] I have concluded that the application to set aside must be dismissed. Background [ 3 ] The mortgage was an “interest only” mortgage initially registered over four properties. The mortgage security was lost as against three other properties because the properties have been taken in foreclosure proceedings brought by prior mortgagees.

The property against which it remains registered is the defendants’ residence. It is a second mortgage. I am told that it is in a “precarious” equity position. [ 4 ] No defence was filed when the proceedings were first started on July 30, 2014. The statement of claim was served on Mr. Punjabi on August 22, 2014 and on Mrs. Punjabi on September 25, 2014 according to the affidavits of service on file. They contacted legal counsel on September 8, 2014. On that date he wrote the usual request for the courtesy of no default proceedings without prior

notice. [5] Plaintiff’s counsel honoured that request. On October 3, 2014, he contacted the lawyer who had written him. He was lookingfor a defence, but the lawyer responded that he had not been provided with further instructions. The defendants did not show anyintention to defend until over two years later, in December, 2016. [6] The plaintiff did not take steps for a while after serving the claim.

Since it was not in first position on any of the properties itwaited while the prior mortgagees took steps, although apparently foreclosure proceedings on prior mortgages did not start right away. [7] The plaintiff noted the defendants in default in January 2016.

It occurred without prior notice to the lawyer who had initiallybeen retained by the defendants, because (as mentioned) on October 3, 2014 he had told plaintiff’s counsel that he was not acting, and inFebruary 2015 he had told the plaintiff’s appraiser (who was then trying to arrange for interior access) that he was not acting for thedefendants. [8] In January 2016 plaintiff’s counsel brought an application for a redemption order. Out of an abundance of caution, plaintiff’scounsel served the lawyer who had initially been approached by the defendants.

He again responded that he was not representing thedefendants and would not accept service. However, plaintiff’s counsel had also taken the step of serving documents on the defendantspersonally. [9] That redemption order application was never heard. It was adjourned several times for settlement discussions.

They beganFebruary 29, 2016 when the defendant’s counsel wrote to say that he had obtained instructions, but settlement discussions ended August17, 2016, when the plaintiff made a settlement offer but received no response. [10] I am told that the focus of those discussions revolved around the amount of equity that the plaintiff had protected by itsmortgage. No issue was raised about a legal defence to the claim. No request to set aside the noting in default was made in the context ofsettlement discussions.

The Requirements for a Successful Application to Set Aside [11] Defence counsel argues that the test for this application is that set out in David M Gottlieb Professional Corporation v Nahal,2011 ABQB 355 at paragraph 68, and that decision was upheld by the Court of Appeal at 2012 ABCA 88. [12] At para. 68, the Chambers Judge said that in such an application an applicant must show: 1. an adequate explanation as to why a statement of defence was not delivered; 2. whether there was any delay in applying to set aside the default and, if so, whether there was a satisfactory explanation accounting forthat delay; and 3. whether the material discloses a meritorious defence, that is, a triable issue of fact or law. [13] However, although the Court of Appeal affirmed the Chambers Judge’s decision it commented that the facts in Gottlieb were“extraordinary” (para. 17) and the Court specifically declined to rule on the test for setting aside (para. 10). [14] The question of whether there is an arguable defence requires a close look at the facts and the law applicable to them.

This isaddressed below. All of the prior cases are in agreement that there must be some arguable defence shown. The focus on this applicationis whether the defendant must show an intention to defend at the relevant time, whether the application was made promptly, and therelative importance of the different parts of the test. [15] The applicable test as described in the Court of Queen’s Bench in Gottlieb does not specifically discuss an intention to defendduring the 20 days following the service of the statement of claim.

The learned Chambers Judge said that the defendant must show “anadequate explanation as to why a statement of defence was not delivered”, but in some cases this requirement is described as being one toshow “the default of making defence was unintentional” (Don Reid Upholstery Ltd v Patrie, (AB KB), 173 A.R. 233,332 Alta. L.R. (3d) 281) or that “the defendant must have had an intention to defend upon being served with the statement of claim”(Reynolds’ Plumbing

(80) Ltd v Barlow, (AB KB), [1995] A.J. No. 281, 168 A.R. 159.) [16] The applicable test for a set aside application was described in Palin v Duxbury 2010 ABQB 833 as follows: [T]he defendants must show that: (

a) they have an arguable defence; and (

b) they did not deliberately let judgment go by default and have some excuse for the default, such as illness or a solicitor’s inadvertence;and (

c) after learning of the default judgment, they moved promptly to open it up. [17] The Court relied on Alberta v Fjeld, 2008 ABQB 558, 459 A.R. 272, at para. 16 for this description of the test. [18] In Bank of Nova Scotia v Torringa, (A.B.Q.B., M.C.) the aspect of the test as described in Palin in (b),above, was set out in different words. The Court said the defendant must show “why a statement of defence was not delivered”.However, the analysis shows that the same approach was used.

The evidence showed there that the defendants had made a deliberatedecision not to defend but then much later after having “negotiations of some sort” they changed their mind. [19] Master Funduk reviewed many authorities and concluded that even though there appeared to be an arguable defence (see para.

5), and even though their “explanation” was that they had misapprehended their legal position (para. 13), leave to defend should not begiven. He relied, in particular, on Banks v Sopko, , [1940 1 W.W.R. 45) (SK.C.A.). In that case, Mackenzie, J.A. reliedon Haigh v Haigh, 31 Ch.D. 478, 55 L.J.

Ch. 190 (1885) where Pearson, J. had said, “there is no case which has gone to show that thisrule can be acted upon where the party who seeks to put it into force has, with full knowledge and wilfully, allowed the judgment to goby default.” Gordon, J.A. in Banks said, “There is no doubt as to the practice, as it has been authoritatively laid down in a number ofdecisions, that a defendant cannot succeed if he has deliberately lain by and allowed judgment to go by default.” [20] Defence counsel points out that in Don Reid Upholstery Ltd v Patrie, (AB KB), 173 AR 233, 32 Alta.L.R. (3d) 281, Mme.

Justice Veit pointed out that, “the only real rule on these motions is that the court’s discretion must be appliedjudicially.” At para. 4, she addressed these tests and the submission that they are “rules”: There are no such rules; there is only one rule – the court must do what is fair.

The case law merely provides guidance for the exercise ofjudicial discretion in setting aside judgments. [21] She said (at para. 25) that our own Court of Appeal had, “emphasized that the objective of the Rules is to achieve fairness, notblind adherence to mere formalism.” [22] In Don Reid Upholstery, the defendant said he was unaware of the action until he had been served with an application by acreditor to set aside a property transfer. Mr. Patrie’s argument focussed on the fact that he had not had an opportunity to defend.

Serviceon him had been pursuant to an order for substitutional service allowing service on his father. That is a fundamentally different situationthan here. Not knowing of the claim is the strongest argument possible to explain why a defence was not filed in time. [23] As all the cases say, the third requirement is that the application to set aside the default be brought promptly.

The Application to Set Aside [24] On December 20, 2016 defence counsel brought this application to set aside the noting in default, which is based on theargument that the plaintiffs have latterly learned that they have a limitations defence. They say that the mortgage was clearly in default in2011, and in any event although the evidence currently before the Court suggests that there was a payment made in January 2012, thatwas the last payment.

Since the proceedings were not started until well over two years after that occurrence, they say they are not liableon the mortgage. [25] The affidavit in support of the application is sparse. It does not assert what the defence is, it does not say that they did notknow they had a limitations defence when it was time to defend, and effectively does not satisfy any of the usual tests for applying to setaside a noting in default.

The argument that there is a limitations defence is limited to an assertion that the last payment made was onJune 8, 2011, which may not be true according to the evidence from the plaintiff. The plaintiff’s evidence includes a letter, discussedbelow, setting out all missed payments and there appears to have been a payment made in January, 2012.

The defendants otherwise relyheavily on the plaintiff’s evidence as to the history of payments, but this discrepancy is not addressed in the defendants’ evidence. [26] In any event, the evidence adduced on behalf of the defendants shows that they believe they had not made a payment sincemore than two years prior to the commencement of the action. [27] Not only did the defendants not defend this action, the defendants did not defend the other foreclosure actions either, nor didthey appear in court when applications for redemption orders were heard in other proceedings. [28] Counsel for the plaintiff says that the affidavit evidence filed on behalf of the defendants does not satisfy the requirements ofan application to set aside, regardless of how finely the requirements might be described.

Is There an Arguable Defence? [29] The defendants argue that the best evidence is that the last payment was made, perhaps, as late as January, 2012. The claimwas not filed until July 2014. Therefore, it is out of time. The result is that the mortgage is void pursuant to the Limitations Act, RSA2000 chap. L-12. [30] The plaintiff responds that it was a demand mortgage, and that no limitation has run. The only payments required in theinterim were for interest.

Although the mortgage had matured, the mortgage contains a clause that states that the debt is only due whenthe plaintiff exercises its option to require payment. That did not occur until, at the earliest, December 13, 2013 when the plaintiff sent aletter to the defendants setting out a “discharge statement” indicating that the balance payable at that time was $218,479.73. The plaintiffrefers to this letter as a “demand” although it is not styled that way. [31] The particular

section of the mortgage that the plaintiff refers to is

section 7 which says, at sub-paragraph (e), this: 7. THE MORTGAGOR further covenants with the Mortgagee that in the event of default being made in any of the covenants,agreements, provisos, or stipulations expressed or implied herein; (

e) The whole of the monies secured hereunder shall, at the option of the Mortgagee, become due and payable, and in the event of theMortgagee exercising such option, an amount equal to Three (3) months interest shall thereupon be added to the principal balance of themortgage, which shall be a charge upon the mortgaged property and which shall bear interest at the mortgage rate until paid. [32] The reference to an extra three months’ interest is consistent with

section 14, which adds three months’ interest if the principalis not paid at maturity. [33] However, the covenant to pay the debt was set out in

section 1, which says

THAT THE Mortgagor will pay to the Mortgagee at Calgary [the principal] with interest thereon ... as follows: (

a) Interest at the said rate ... shall become due [on the date for adjustment of interest]; (b) [the principal] with interest thereon ...by monthly installments of TWENTY SIX HUNDRED AND NINETY-FIVE ($2,695.00)DOLLARS (which shall be applied on the interest only) on the TWENTY-EIGHTH day of each and every month ...;.... (

c) The principal balance of the monies due hereunder to become due and payable in any event on the TWENTY EIGHTH day ofJANUARY, 2009. [34] The ultimate deadline for payment was extended by renewals of the mortgage and (according to the evidence of thedefendants) the maturity date was changed to June 8, 2011. [35] The assertion that this was a “demand” debt and that no limitation begins to run until demand appears to be debatable.

Theargument somewhat parallels Community Futures Lesser Slave Lake Region v Alberta Indian Investment Corporation, 2014 ABCA232 at para. 27 where the Court of Appeal held that the acceleration clause did not compel the lender to call the loan, and until a demandwas made the limitation did not begin to run, but the terms of the loan were different in that case. It expressly provided that in the eventof default, apparently including default of payment at maturity, the loan became due at the option of the mortgagee. Here, the provisionin

section 7 seems to apply only in the event of a default before maturity. At maturity, the debt is already due. The agreement seems toprovide that if there was a default, then the lender was entitled to accelerate the loan, but in any event the loan was actually due atmaturity. [36] Accordingly, on this point there may be an arguable defence limited to the terms of the contract. [37] However, the facts here are not clear to me.

The evidence of the defendants that the debt was due July 8, 2011 seems toconflict with the “demand” letter of December 13, 2013 which indicates that post-dated cheques were received for monthly payments atleast until May 8, 2012, that they were deposited and did not clear the bank. As mentioned, that letter suggests that the January, 2012cheque cleared the bank. If the debt was due July 8, 2011, why would the defendants have provided post-dated cheques for the periodalmost a year after that date? [38] These facts suggest that there is more to the story here: (

a) the letter was sent December 13, 2013, (

b) it was apparently not responded to by the defendants, and (

c) it sets out scheduled payments due up to December 8, 2013. [39] Defence counsel describes this December 2013 letter as being “opaque” because it is not clear when defaults were made. It isclear in saying that cheques up to and including May 8, 2012 (excepting the January 2012 cheque) were returned and an NSF fee of $250was claimed.

But the next batch of postdated cheques listed are simply described as “mortgage payment dated _________”, without anexpress indication that those payments had not been paid. [40] Defence counsel says that upon reading this letter it was not clear to him that the mortgage interest payments had been indefault since at least January 2012.

Of course, it would have been clear to the defendants that they did not pay any of those 19 paymentslisted. [41] Defence counsel argues that there is a reasonably arguable defence to the claim, and he submits that that is the single mostimportant factor in an application to set aside a noting in default. He submitted that if there is an arguable defence, the other aspects ofthe test should not be determinative.

Is There an Explanation for the Delay? [42] It is clear is that there was no intention to defend within the time for doing so, that the failure to defend was not unintentional,and clearly there was no intention to defend at all until December 2016, almost 2 ½ years after the claim was advanced and served uponthe defendants, and almost a year after they were noted in default and served with the application for a redemption order. [43] Plaintiff’s counsel argues that one of the requirements of an on an application to set aside is to show that there was anintention to defend at the relevant time: Reynolds Plumbing

(80) Ltd v Barlow, (AB KB), [1995] A.J. No. 281 atpara. 5. There was no such intention here. [44] The facts here clearly disclose that the defendants consciously decided not to deliver a defence when it was time to do so.They contacted a lawyer in September 2014 but gave him no instructions for over two years, not until February 2016, and thoseinstructions were to have settlement discussions.

Was the Application Brought Promptly? [45] In this case, counsel was instructed to act for the defendants by February 29, 2016, but the defendants did not bring thisapplication until December 2016, about 10 months later, almost 2 ½ years after they were sued, and almost a year after the applicationfor the redemption order was served. Counsel for the plaintiff argues that that is not prompt. The Applicability of Gottlieb v Nahal [46] Counsel for the defendants argues that Gottlieb is on all fours with the facts of this case, except that the facts in Gottlieb weremore egregious.

He submits that the Court is bound to follow the Chambers Judge’s ruling in that case.

[47] However, the facts in Gottlieb were different. As mentioned by the Court of Appeal, the facts were “extraordinary” and thesetting aside to allow a defence did not allow a complete defence of the claim. By the time the application to set aside was brought, theaction had proceeded a long ways towards conclusion as to in rem remedies. When the matter came back before Master Prowse by wayof opposing

summary judgment applications (reported at 2014 ABQB 271), before he could rule on competing

summary judgmentapplications he had to determine the consequence of the setting aside. He concluded (para.14, last bullet point) that, “The context ofsetting aside the noting in default was not so that [the defendant] could defend the in personam claim against him. That claim was notbeing advanced.

The context was so that [the defendant] could claim the judicial sale proceeds.” The defendant argued that themortgage was void because the limitation had run, but Master Prowse discussed the fact that even if that were true (and he found that thelimitations defence might not succeed: para. 23) the mortgage might still properly remain on title, and still represent a claim to mortgageproceeds. The setting aside order allowed Mr. Nahal to advance that claim, but when he moved for

summary judgment before MasterProwse, he dismissed the application. [48] That is, the defendant was not initially asking to file a defence to the complete claim. The Chambers Judge had found that thedefendant had, in the unusual circumstances, applied promptly to set aside: see para. 62.

But in doing so he re-affirmed prior case law assaying that “failure to take steps promptly may be fatal to any application to set aside a default”: para. 63. [49] In my view, the Gottlieb case is not to be taken as establishing any change in the applicable factors on a set aside application.The facts were unique, and the Court of Appeal expressly chose not to give direction on the applicable factors. [50] In my view, the comments by Veit, J. in Don Reid Upholstery set out the guiding principles: the factors to be looked at arenot “rules”, and the main objective is to do what is fair. [51] But what is fair requires looking at the case from more than one perspective, and the other factors to be considered are not tobe ignored simply because there is an arguable defence.

None of the cases say that if there is an arguable defence the other factors nolonger matter, although it is correct to say that if the defendants cannot show an arguable defence there is no purpose in setting asidedefault proceedings; the “arguable defence” test is more important than the other factors because it is a sine qua non factor. Furthermore,in Palin v Duxbury, the Court held that to succeed an applicant must satisfy all three elements of the test: para. 48. [52] On these facts, I am not prepared to ignore Bank of Nova Scotia v Torringa and the cases cited therein.

A noting in defaultmeans the defendant has admitted the claim by default of defence: Syncrude Canada Ltd v Tibo Steel Products Ltd, 2001 ABQB 478,292 A.R. 368, relying on Sulef v Parkin, (AB CA), [1966] 57 W.W.R. 236 at 239 (A.D.). An application to set aside anoting in default is a complete reversal of that result. The case law is to the effect that if the defendant can explain the delaysatisfactorily, applies promptly and has an arguable defence, then the scales of fairness tip in the defendant’s favour and he is given a“Mulligan”.

There are potentially many things that might explain the delay, and in order to exercise discretion a court must weigh allthree aspects of the test. For example, where a defence appears strong and the application is brought promptly after learning of thedefault proceedings, the weakness of the explanation for not defending in time might be overcome by the promptness of the applicationand the strength of the defence. [53] The Rules of Court have deadlines for a reason.

If a party decides consciously not to defend, or only raise specific issues butthen much later changes his or her mind, starting over should not be automatic with no consequences, just as a plaintiff may be denied are-do when it sues and is unsuccessful or settles the claim, then tries to sue again with a slightly revised claim.

The factor of “fairness”mentioned in Don Reid Upholstery must take into account all three parts of the test as well as the defendants’ decision to change theirposition. [54] Here, the defendants consciously chose not to defend and did not instruct their lawyer at all until long after it was too late todo so. Even long after it was clear that the case was proceeding, even long after they had taken

part in settlement discussions based onthe apparent equity available to fight over, they did not look into or apply to set aside until even more time had passed. Their applicationwas not brought promptly. Conclusion [55] Accordingly, the defendants have failed to satisfy - in fact, their supporting affidavit does not even address - two of the threerequirements for their application.

The defence proposed is arguable, although it would not necessarily be successful. [56] Accordingly, the application to set aside is dismissed. [57] Defence counsel acknowledges that the Chambers Judge in Gottlieb required the defendants to pay costs on a full indemnitybasis for all thrown away steps times 1.5, but the Court set aside the noting in default at a stage much later than the circumstances here. [58] If I had concluded that despite the defendants’ delay in applying to set aside the noting in default allowing a defence would beappropriate, I would have echoed the distaste enunciated by Jeffery, J. in Gottlieb at para. 78 over allowing defendants who have missedtheir deadline to defend anyway, on the sole basis that the plaintiff has missed its deadline.

I would have required all thrown away costspast the service of the statement of claim and any report by plaintiff’s counsel to the plaintiff at that point, to be paid on a solicitor clientcosts times 1.5 (except for disbursements and GST paid by the plaintiff, both of which would be paid without a gross-up) as a pre-requisite to the defence being filed. I would have required these costs to be paid within three weeks of the release of my decision and thedefence to be filed and served within one week thereafter. Heard on the 20th day of January, 2017.

Dated at the City of Calgary, Alberta this 8th day of February, 2017.

A. R. Robertson, Q.C. M.C.C.Q.B.A. Appearances: Neil Fenna Neil Fenna Professional Corporation for the Applicants (Defendants) Mark F. Crossfield Mark Crossfield Professional Corporation for the Respondent (Plaintiff)