Case among the few recent applications of s. 3 of Assignments and Preferences Act, says lawyer
An Ontario Superior Court has ordered the law firm Owens Wright LLP to pay $739,649 to a creditor of an insolvent client, finding that the firm and client colluded to fraudulently prefer one creditor – Owens Wright – over the others.
Justice Edward Morgan found that two consent judgments that the firm obtained against its financially distressed client were an abuse of process and amounted to a fraudulent preference, contrary to s. 3 of the Assignments and Preferences Act. He ruled the judgments null and void.
The decision is one of the few – possibly the only – recent applications of s. 3 of the Assignments and Preferences Act, says Jonathan Roth, who acted for the applicants.
“It also re-affirms the principle that the court has inherent jurisdiction to control its own process to prevent abuse, especially where the conduct of solicitors is at issue,” he says.
The applicants in the case are two property developers – Townsgate Homes Inc. and Delpark Homes (Sutton 25) Inc. – who had done business with Owen Wright’s now insolvent client, Greenvilla (Sutton) Investments Ltd.
In August and November of 2021, the law firm got two consent judgements of $265,550 and $442,989 registered as executions against Greenvilla.
The applicants had purchased land from Greenvilla and, until these executions were removed, were unable to register their plan of subdivision as they reached each phase of their subdivision development project. The applicants paid the amounts, plus interest and costs, totalling $739,649.
Justice Morgan notes that Owens Wright was aware of Greenvilla’s “financial decline.”
The law firm has represented Greenvilla since 2019, when it acted for the company in a trial over its alleged failure to service lands it had sold, in which “specific performance was awarded against Greenvilla, based in part on the perceived inability of Greenvilla to satisfy a damages award,” said Morgan. As the firm continued representing the company through 2021, it had to “successively sue its client for unpaid fees.”
By May 2021, Greenvilla had defaulted on at least three mortgages, the repayment of an advance from the applicants, its municipal taxes were in arrears, and the company had defaulted on several contractors and consultants.
The firm also knew of the applicants’ “significant investment in the development project on the lands purchased from Greenvilla” and the “extent of the Applicants’ efforts to salvage that project,” said Morgan. In 2019, when Greenvilla transferred mortgages on which it had defaulted to the applicants, Owens Wright did the legal work.
In January 2021, right before the completion of the first phase of the applicants’ development project, Owens Wright registered an execution against Greenvilla. The applicants paid the judgment to the firm to have the execution deleted and register their project’s first phase.
The applicants argued that the law firm must have realized that it could continue to accumulate legal fees with Greenvilla, a non-paying client, and rely on the applicants to pay off any execution because they needed to have lands transferred from Greenvilla as they registered each phase of their subdivision project.
In May of 2021, amid all Greenvilla’s financial difficulty, Owens Wright emailed the applicants’ – who were among Greenvilla’s creditors – to provide “fair notice” that there would be more claims against Greenvilla and, therefore, more executions. A week later, the firm issued a statement of claim for $265,550 plus interest and costs against Greenvilla but did not serve it to the applicants. Morgan said this made the firm’s previous fair notice “distinctly less fair” because the applicants had no opportunity to apply to the court to intervene or raise any objection.
Greenvilla became formally insolvent on Sept. 23, 2021, and one of its creditors, the Canadian Mortgage Servicing Corporation, appointed RSM Canada Inc. as a receiver.
In Owens Wright’s second claim against Greenvilla, of $442,989, the firm did not serve RSM, and Greenvilla did not forward the claim to its receiver. Morgan said Owens Wright “moved immediately and without notice” for judgment with Greenvilla’s consent.
Once RSM learned of the claim, it sent Owens Wright a notice of intent to defend and a letter stating that the firm should withdraw the motion for judgment since the action would be defended. Without responding to RSM or informing the court that it had been served with a notice of intent to defend, the firm took out the consent judgment. RSM was a respondent in the action and supported Townsgate’s and Delpark’s application.
“The court was obviously led to believe that the action was entirely undefended. As it had done previously, the law firm then registered this judgment as an execution against Greenvilla,” said Morgan. “Predictably, the applicants were again forced to pay it, along with the August 9, 2021 execution, in order to register the next phase of their subdivision project.”
The applicants argued that both consent judgments were an abuse of process. The first was pursuant to a claim filed after Owens Wright acknowledged to the applicants that they deserved fair notice of further claims targeting Greenvilla. The second was taken out on Greenvilla’s consent but ignored Greenvilla’s receiver “who stood in its shoes,” said Morgan. The judge agreed that both “aggressive manoeuvres” were an abuse of the court’s process.
Under s. 3 of the Assignments and Preferences Act, a party cannot consent to judgment and cannot give rise to judgment or execution if they are insolvent, close to insolvent, and are attempting to defeat or prejudice creditors.
Morgan said the two consent judgments “are replete with the badges of a fraudulent preference” and that Owens Wright had not overcome these indicia of fraud. He concluded that the agreements leading to the consent judgments were entered into contrary to s. 3 of the Act.
Robert Choi, head of Owens Wright’s litigation group and counsel on the case, did not respond to Law Times’ request for comment.
