Law firm's "aggressive maneuvers" an abuse of process

Townsgate Homes Inc. v Owens Wright LLP, 2023 ONSC 3086
What is the test for voiding a consent to judgment obtained by a law firm as an abuse of process / fraudulent preference?

Overview: This case considers whether a law firm’s actions against its now insolvent former clients - (1) failing to serve the receiver with its statement of claim despite knowledge of the receivership appointment and (2) obtaining a consent judgment after the receiver delivered a notice of intent to defend - constituted an abuse of the Court’s process.

The Applicants sought to set aside two consent judgments obtained by Owens Wright LLP as against its now-insolvent clients (Greenvilla). RSM Canada Ltd., as receiver of Greenvilla, supported the relief sought by the Applicants. The Applicants were property developers who purchased lands from Grenvilla and creditors of Greenvilla. They contended that the consent judgments were obtained by Owens Wright through abuse of the Court’s process on the basis that (a) Owens Wright failed to serve RSM with its Statement of Claim, despite knowledge of RSM’s appointment as Receiver of Greenvilla and (b) when RSM discovered the action and delivered a Notice of Intend to Defend on behalf of Greenvilla, Owens Wright ignored that Notice and proceeded to obtain a ‘consent’ judgment in the defended action.

The consent judgments obtained by Owens Wright were registered as executions against Grenvilla. Without removing those executions, the Applicants’ plan of subdivision could not be registered as each phase of the subdivision development project was reached. To avoid costly delay, the Applicants were compelled to pay off the two judgments to Owens Wright, in trust, while the present Application was pending, without prejudice to the Applicants’ position herein. Accordingly, in addition to a Declaration that the consent judgments were null and void and an Order setting them aside, the Applicants also sought the return of the $739,649.70 that they paid to Owens Wright.

The Applicants argued that the earlier of the two consent judgments was obtained pursuant to a claim filed only days after Owens Wright acknowledged to the Applicants that they deserved “fair notice” of further claims against Greenvilla, while the second judgment was taken out purportedly on consent of Greenvilla but in the face of a Notice of Intend to Defend by Greenvilla’s receiver who stood in its shoes.

The Court agreed that both of these aggressive maneuvers were abusive of the court’s process. The doctrine of abuse of process is a flexible one that covers any number of sui generis situations, the common thread being that the circumstances undermine the interests of justice. A consent judgment “is not a judicial determination on the merits of a case but only an agreement elevated to an order on consent”. It can be more readily varied or set aside than a final judgment on the merits of a case, and a court has inherent authority to intervene where necessary in the interests of justice.

This was the case here, where at issue was a failure to give notice of the first judgment to the one interested party that Owens Wright acknowledged deserved “fair notice”, and a failure to heed the Notice of Intent to Defend served by Greenvilla’s validly appointed receiver for the second judgment. These failures effectively undermined any chance for a proper adjudication of the actions. These maneuvers were not merely technical defects; they created circumstances in which to “set aside court orders…[as] it is necessary in the interests of justice to do so”.

In addition to the abuse of process argument, Applicants’ counsel also argued that the consent judgments amounted to a fraudulent preference, contrary to section 3 of the Assignment and Preferences Act. A party’s consent to judgment is void and cannot give rise to a judgment or execution if given by a person who is insolvent or on the eve of insolvency and who has an intent to defeat or prejudice creditors. It does not matter whether the consent to judgment is given voluntarily or is entered into in collusion with a creditor. The intent to prefer a creditor is sufficient to render the transaction void.

In discerning whether there was the requisite intent, a court will look to inferences of preferential or fraudulent intent from the factual circumstances. Here, the natural consequence of the two consents to judgment was that there would be a preference shown toward Greenvilla, since the Applicants were in a position that ensured that they had to pay the judgments in full. As well, the solicitor-client relationship between Owens Wright and Greenvilla made them non-arm’s length transactors. These factors, in turn, puts an onus on Owens Wright and Geenvilla to establish that the consent judgments were non-collusive. Given the circumstances—a law firm continuing to do a high volume of work for a client that it knows cannot pay, and a history of judicial findings about Owens Wright and Greenvilla attempting to “hoodwink the court” and conducting a “charade”—the relationship between Owens Wright and Grenvilla gave rise to a suspicion of collusion. That suspicion was not rebutted or addressed by Owens Wright. Greenvilla’s claim of satisfaction with the firm’s services likewise did nothing to counter the sense of collusion between a law firm continuing to serve its non-paying commercial client, and then the two of them entering successive consent judgments.

Accordingly, the Court granted a declaration that the consents to judgment given by Greenvilla were null and void as an abuse of process and as violating section 3 of the Assignment and Preferences Act, and ordered that they be set aside. The Court also ordered Owens Wright to return the amounts paid by the Applicants.

Judge: Justice E.M. Morgan

Counsel: Jonathan Roth of Roth Advocacy for the Applicants

Robert Choi and Paul Jacoby of Owens Wright for the Respondents, Owens Wright LLP, 2088556 Ontario Inc., and Greenvilla (Sutton) Investments Limited

Anisha Samat of Robbins Appleby for RSM Canada Limited as Receiver