In Yehya v Thomas, 2019 ABCA 164, the court of appeal revisited the test for setting aside a default judgment where there is a procedural flaw.
The plaintiffs contracted with Las Palmas, a home construction company of which the defendant was sole director and shareholder. Progress on the home was halted when Las Palmas experienced financial difficulty, and accordingly a statement of claim was served on the defendant by email, who responded indicating "no objections will be filed". The defendant was noted in default 20 days later. Following the defendant making an assignment in bankruptcy, a subsequent stay of proceedings took effect authorized under s. 69.3 of the Bankruptcy and Insolvency Act two days prior to the finding of a default judgment against the plaintiff and Las Palmas.
Some months later, the stay was lifted, and the plaintiffs filed for an order stating that despite the defendant's discharge from bankruptcy, the debts not be released, as they are predicated on accusations of fraudulent misrepresentations on the part of the defendant and Las Palmas under s. 178 of the Bankruptcy and Insolvency Act. The defendant then applied to set aside the default judgment a little over a month after being discharged from bankruptcy. The issue before the court was whether or not the chambers judge erred in refusing to set aside the default judgment.
The test from Palin v Duxbury, 2010 ABQB 833 for setting aside a default judgment is that the applicant must show that they have an arguable defence, that there was no deliberate intention to allow the judgment to go by default and a corresponding valid excuse for the default, and that once notified, the applicant moved promptly to open the judgment up. Anstar Enterprises Ltd. v. Transamerica Life Canada, 2009 ABCA 196 indicates that this test is not applied when the presence of a procedural flaw is found, and as such, the defendant is entitled to open up the judgment as of right.
The chambers judge applied the Palin test and found that the defendant had failed at each stage. Most importantly, he found that the defendant's email was indicative of a deliberate intention to allow the judgment to go in default, and that the occurrence of the bankruptcy proceedings did not constitute a valid excuse for the default. In fact, it was found that the duration of the bankruptcy proceedings was included as evidence for demonstrating a temporal delay in opening the judgment up on the part of the defendant.
On appeal, the court relied upon Braun Nursery Ltd. v Edmonds Bros Landscape Service Ltd, (1978), 29 CBR (NS) 55 (Ont SC) which establishes that entering a default judgment while a stay of proceedings is in effect constitutes a flaw "in procedure and thereby entitles the defendant to open the judgment up as of right. In the finding of such a flaw, this case highlights that in any future litigation, plaintiffs must be cognizant that when seeking a default judgment, its validity is subject to bankruptcy proceedings that result in a stay under s. 69.3 of the Bankruptcy and Insolvency Act".
The test resulting from this case is that, where there is a procedural flaw, if a defendant seeks to open up a default judgement as of right once it has been found, they must demonstrate that they proceeded promptly in attempting to do so. In the case at bar, while both the default judgment and noting the defendant in default were ultimately set aside, the plaintiffs' previous argument that the debt not be discharged, as it is grounded in fraud, still remains to be deliberated upon.
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