Townsgate Homes Inc. v Owens Wright LLP - Case Summary

The Ontario Superior Court of Justice recently released a notable decision that explores the common law doctrine of abuse of process and shines light on section 3 of the Assignments and Preferences Act (the “Act”), which holds that a party cannot consent to judgment or give rise to judgment or execution if they are insolvent (or near insolvency) and attempting to defeat or prejudice creditors.

In Townsgate Homes Inc. v Owens Wright LLP (“Townsgate”), Justice Morgan found that two consent judgments obtained by Owens Wright LLP against its insolvent clients constituted an abuse of process and a fraudulent preference, which violated section 3 of the Act. The consent judgments were declared to be null and void.

Robins Appleby LLP represented RSM Canada Ltd. (“RSM”) in the proceedings. RSM supported the Applicants’ position.

The Facts

The Parties

The respondents, 2088556 Ontario Inc. and Greenvilla (Sutton) Investments Ltd.,(together, “Greenvilla”) are insolvent corporations. Owens Wright LLP represents these insolvent corporations, while RSM acts as the privately appointed receiver for them.

The Applicants, Townsgate Homes Inc. and Delpark Homes (Sutton 25) Inc. (“Delpark”) are property developers and purchasers of building lots from Greenvilla for a new subdivision located in Sutton, Ontario. Delpark is also a creditor of Greenvilla, and had entered into purchase agreements with Greenvilla beginning in 2012.

Delpark brought an Application to set aside two consent judgments obtained by Owens Wright against Greenvilla, as it could not proceed with the development and sale of the subdivision while the consent judgments (and associated writs of execution) were in place.

The Consent Judgments and Writs of Execution

Owens Wright had acted as counsel for Greenvilla since 2019. When Greenvilla failed to pay Owens Wright fees allegedly incurred by them, Owens Wright sued Greenvilla, yet continued to act for them and incur fees.

In September 2021, Greenvilla went into insolvency as a result of mortgage defaults, and RSM was privately appointed as a Receiver over Greenvilla. RSM wrote to Greenvilla notifying them of their appointment. However, the day after Greenvilla had received RSM’s letter, Owens Wright registered a writ of execution against Greenvilla, based on a consent judgment they had previously obtained in August 2021.

In October 2021, Owens Wright issued another Statement of Claim against Greenvilla but did not serve it on RSM. At this time, Owens Wright had also initiated a motion for another judgment on consent. When RSM discovered the Statement of Claim, it delivered a Notice of Intent to Defend and wrote to Owens Wright objecting to the lack of service. RSM also asked Owens Wright to withdraw the motion for judgment on consent given that the action was defended, however, Owens Wright did not comply. In November 2021, Owens Wright obtained another “consent” judgment and registered another writ of execution against Greenvilla.

At no time did Owens Wright advise the Court that it was aware of RSM’s appointment, or had been served with a Notice of Intent to Defend.

Issue

The singular issue on this Application was whether the consent judgments obtained by Owens Wright LLP should be set aside.

The Applicants’ two key arguments were that:

1. Owens Wright neglected to serve RSM with the required Statement of Claim, despite being aware of RSM's appointment as the Receiver of Greenvilla. When RSM eventually discovered the case and delivered a Notice of Intent to Defend on behalf of Greenvilla, Owens Wright disregarded it and proceeded to secure a 'consent' judgment for an execution on Greenvilla’s property. This constituted an abuse of process; and

    

2. the consent judgments blatantly favoured Owens Wright as a preferred creditor, disregarding the rights of all other creditors or parties involved. There were multiple indicators of preferential intent. Consequently, according to the Act, consent to judgment made in such circumstances is void.

One of Owens Wright’s arguments was that RSM did not have authority to defend the actions that Owens Wright had commenced against Greenvilla.

The Court’s Findings

Justice Morgan rejected Owens Wright’s argument regarding RSM’s authority to defend, stating that it was a “deflection of the point”, and focused on the abuse of process and fraudulent preference issues.

Abuse of Process

The Court held that Owens Wright’s actions were “aggressive maneuvers” and abusive of the court’s process. The Court found that although the principle of finality “points toward deference to consent orders, a court has inherent authority to intervene where necessary in the interests of justice”. Here, intervention was necessary given Owens Wrights’ failure to give notice to RSM of the August 2021 consent judgment, or heed the Notice of Intent to Defend served by RSM in November 2021. Justice Morgan stated that this “effectively undermined any chance for a proper adjudication of those two actions to take place”. It undermined the court’s ability to determine a fair and just result and thus constituted an abuse of process.

Fraudulent Preference

The Court further held that the consent judgments were entered into contrary to Section 3 of the Act, and thus null and void. In doing so, the Court reiterated the key criterion to determine contravention of this section as set out in Stevens v. Hutchens, namely, that the intent to prefer a creditor is sufficient to render a transaction void. The Court also considered an important factor in determining improper preferences, i.e. the relationship between the parties entering into a transaction.

Given the solicitor-client relationship between Owens Wright and the corporations, they were non-arm's length parties, and the onus was on them to prove the absence of collusion. However, looking at the history of the proceedings and prior judicial findings of attempts to “hoodwink” the Court, the Court found strong reasons to suspect collusion. The consent judgments appeared to be designed to protect the corporations' remaining funds while knowing about their insolvency. Owens Wright was also clearly preferred over all other creditors as they had been paid while other creditors had not. Considering these facts, Justice Morgan stated at paragraph 41 of the decision:

The circumstances of the two consent judgments challenged by the Applicants are replete with the badges of a fraudulent preference. These indicia of fraud have not been overcome or countered by Owens Wright.

Conclusion

Townsgate is an immensely important decision in the field of bankruptcy and insolvency law, highlighting the interplay between the doctrine of abuse of process and Section 3 of the Act. It fundamentally upholds the purpose of Section 3 of the Act, which is that it acts to safeguard against abusive practices and thus maintains the integrity of the insolvency and debt recovery processes.

Moreover, the decision is also important in that it demonstrates the Court’s broad authority to intervene in cases where there is a clear abuse of process. It reinforces that the doctrine of abuse is a flexible one, covering any sui generis situation, and is designed to ensure that the judicial process remains untainted by improper conduct.