Canada: Ontario Personal Property Security Act Registration Made In "Shake-Down" Attempt Results In Award Of Substantial Indemnity Costs Against Corporation And Sole Director

Last Updated: October 30 2014
Article by Alex Tarantino

Clients regularly ask us what happens if an Ontario Personal Property Security Act registration is made against them which was not authorized. Our response is that they should approach the purported secured party and ask them clearly to discharge the registration immediately (i.e., in 10 days or less) or provide evidence of the existence of the purported secured indebtedness or obligations.  Failing that, they can go to court if the registering party fails to discharge the registration. However, there is very little case law with respect to such an unauthorized registration.
 
In September 2014, the Superior Court of Justice (Ontario) (case citation: 2014 ONSC 5226) ordered the discharge of an Ontario Personal Property Security Act (the "OPPSA") registration that was made in an effort to "shake-down" and intimidate a third party law firm and one of its senior partners and awarded costs on a substantial indemnity basis jointly against a corporation and the individual behind it. The case illustrates and confirms that, in addition to ordering the statutory remedy of discharging an unlawful registration, a court can award substantial costs where punitive damages may not be appropriate and that in certain instances an individual cannot use a corporation to shield him or her from misconduct.
 
The facts from this case went something like this.  An Ontario law firm and one of its senior partners was retained by a Canadian bank to recover the unpaid balance of a line of credit provided by the bank to its individual borrowers, GB and LB.
 
In response to the law firm's demand letter asserting repayment of the unpaid balance of the line of credit with interest, GB responded with a letter asserting that if the law firm did not verify the claim and its standing within five business days then the claim would be deemed to be fraudulent, the law firm would be responsible for all damages suffered, the account with the bank would be deemed to be settled and the law firm would pay for GB's time and efforts. The law firm commenced a small claims action against GB and LB, the action was not defended and the law firm obtained a default judgment. The law firm then received letters from a corporation, with the letters referring to GB and enclosing an invoice for $15,000,000 and a separate invoice for $2,755,000 for "threats and intimidation," "unsolicited correspondence" and "unauthorized use of name" and a copy of an OPPSA registration which was made by the corporation against the law firm and the senior partner personally. A corporate search revealed that GB was the sole director of the corporation and that it was incorporated after the demand letter and initial response from GB and around the time that the law firm commenced the small claims action against GB and LB. GB also tried to commence a private criminal action in Oshawa against the senior partner with respect to the demand letter and default judgment but the action was declined by a Justice of the Peace in Oshawa on the basis that it should be dealt with in Toronto (it does not appear that GB tried to then commence a criminal action in Toronto). Pursuant to subsection 56(2) of the OPPSA, the law firm wrote to GB, LB and the corporation requesting that the OPPSA registration be discharged within 10 days as prescribed.  The corporation wrote back that the OPPSA registration would only be discharged upon payment of $10,255,000 (which, as described below, was an amount arbitrarily chosen by GB and the corporation in an attempt to "shake-down" the law firm and the senior partner).
 
The law firm and the senior partner applied to the Superior Court of Justice (Ontario) against GB, LB and the corporation. The Court:

  • Held that the OPPSA registration was to be discharged. There was no signed security agreement underlying the OPPSA registration and no other legitimate basis to make the OPPSA registration.
  • Ordered GB, LB and the corporation to pay $500 to the law firm and the senior partner. Pursuant to subsection 56(4) of the OPPSA, unless there was a reasonable excuse, where a OPPSA registration is not discharged as required under certain other sections of the OPPSA within 10 days of receiving a demand, the person in whose favour the OPPSA registration was made is to pay $500 to the person whom the OPPSA registration was made against.
  • Did not award punitive damages. Citing the 2002 Supreme Court of Canada case Whiten v. Pilot Insurance Co., the Court confirmed that punitive damages are the exception and not the rule and are to be awarded not only where the misconduct departed in a marked degree from ordinary standards of decent behaviour but also where, absent the award of punitive damages, the misconduct would go unpunished or other penalties would be inadequate to achieve the objectives of retribution, deterrence and denunciation.  The Court declined to award punitive damages because it awarded substantial costs against GB and the corporation.  The Court believed such substantial costs could otherwise achieve the objectives of, for example, deterrence, notwithstanding the primary objective of a costs award is compensatory and not punitive.
  • Did not award damages for injurious falsehood. The Court held that there was no evidence of actual injury, notwithstanding the Court found that the OPPSA registration was made with malice.
  • Ordered the corporation and GB to pay costs to the law firm and the senior partner on a substantial indemnity basis in the amount of $22,500, being substantially the amount of their bill of costs with respect to the action. The Court held that the conduct of GB and the corporation – the letters, the filing of the OPPSA registration and then demanding $10,255,000 in return for discharging the OPPSA registration (there was no evidence the law firm and the senior partner was somehow indebted to GB and/or the corporation in this amount but instead the amount was arbitrarily chosen by GB and the corporation) - was a reprehensible attempt to "shake-down" the law firm and the senior partner. Also, the Court referred to the 2001 Ontario case of 642947 Ontario Ltd. v. Fleischer and confirmed that where a corporation is used as a shield for fraudulent or improper conduct, it is appropriate to hold the responsible individuals personally responsible. The Court held that the corporation was incorporated to shield GB and the Court ordered GB jointly and severally liable to pay the substantial indemnity costs. No order was made against LB as there was no evidence of misconduct by LB.

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