Real estate practitioners should take note of a recent Ontario Superior Court decision that underscores the stringent disclosure obligations required when obtaining a certificate of pending litigation (CPL) without notice. In 4291425 Canada Inc. v. Scot-Smith et al, Justice Kaufman discharged a CPL that had been registered against a residential property for nearly eight years, finding that the plaintiff failed to provide full and frank disclosure when initially obtaining the order.
Background
The case arose from a business dispute involving a private medical clinic, which was owned and operated by the plaintiff, an investment holding company, and its business partner, Michael Scot-Smith. The plaintiff alleged that Mr. Scot-Smith orchestrated various fraudulent schemes including a concealed leasing arrangement and misappropriation of clinic funds. The plaintiff claimed that Scot-Smith used misappropriated funds to purchase a condominium at 55 Avenue Road in Toronto, which was later transferred to his wife, Rhonda Niles, in 2007.
In December 2017, the plaintiff obtained a CPL without notice against the Avenue Road property. Ms. Niles moved to discharge the CPL more than seven years later, arguing that the plaintiff had failed to make full and frank disclosure of material facts when obtaining the original order.
The Legal Framework
Justice Kaufman’s decision provides a helpful review of the principles governing CPL discharge motions. Parties seeking orders without notice must adhere to a heightened standard of candour under Rule 39.01(6) of the Rules of Civil Procedure. Material facts include any facts that could have influenced the motion’s outcome, determined objectively.
Importantly, the duty of full and frank disclosure does not require moving parties to argue against their own case. However, they must fairly present all material facts that may support the opposing party’s position. The test focuses on whether omitted information “might” have impacted the original granting of the order. Courts have emphasized that parties cannot decide for themselves which facts are relevant. All facts pertinent to the court’s assessment must be disclosed, and they must be highlighted in the body of the affidavit rather than buried in exhibits.
Critical Failures in Disclosure
Justice Kaufman identified three significant failures in the plaintiff’s disclosure:
First, the affiant, July Bergeron, claimed to have personal knowledge of the facts when her evidence was actually based on information and belief. Ms. Bergeron was the plaintiff corporation’s sole director but had no direct involvement in the business dealings. All her information came from her husband, who had been the primary business contact with Ms. Niles. Rule 39.01(4) requires affidavits based on information and belief to explicitly state this limitation and identify the source. By claiming personal knowledge, Ms. Bergeron created a misleading impression that her evidence warranted greater weight than it actually deserved.
Second, the affidavit characterized Ms. Niles as operating a “modest interior design business” and relying on her husband for funds, without disclosing that the affiant had no knowledge of Ms. Niles’ other sources of income or the financial details of her design business. This created an unfair impression that Ms. Niles lacked the financial means to legitimately acquire the million-dollar property. While Ms. Bergeron did include a section titled “What the Defendants Niles and Scot-Smith Might Say in Response” noting that Ms. Niles might claim to be gainfully employed, this fell short of the duty to present information in a fair and balanced manner in the body of the affidavit.
Third, the affidavit failed to disclose key details about the property’s acquisition that undermined the misappropriation claim. Title transfer records showed that Ms. Niles paid $325,000 in cash and assumed a $725,000 mortgage—information that should have been highlighted in the affidavit body, not merely attached as an exhibit. More significantly, the affidavit did not mention that Mr. Scot-Smith’s offshore holding company had acquired an interest in the Avenue Road property in 1998, well before any business dealings with the plaintiff began in 2004. This timing cast doubt on the allegation that the property was purchased with misappropriated funds.
Delay and Discretion
The plaintiff argued that the motion should be dismissed because Ms. Niles waited over seven years to bring it, contrary to Rule 37.14(1) which requires such motions to be brought promptly. While Justice Kaufman acknowledged that such delay could in some cases justify denying relief, he exercised his discretion differently here based on several factors.
The court considered that the plaintiff had chosen to proceed without notice and thereby assumed heightened disclosure obligations, that the action had proceeded at a “glacial pace” with minimal advancement in nearly eight years, and that the evidence connecting Ms. Niles’ property to misappropriated funds remained “tenuous at best.” The plaintiff’s explanations for delay, such as assembling records, conducting investigations, and COVID-19, did not justify the duration of inaction in this straightforward commercial dispute.
Key Takeaways for Real Estate Lawyers
This decision serves as an important reminder that:
- CPLs obtained without notice require scrupulous disclosure of all material facts, presented fairly in the body of the affidavit
- Affidavits based on information and belief must be explicitly identified as such
- Material facts must be highlighted in the affidavit text as relying on exhibits alone may be insufficient
- Even significant delay in bringing a discharge motion may not prevent relief where disclosure failures are serious
- Courts will scrutinize the strength of the evidentiary connection between the property and the alleged wrongdoing
Real estate lawyers advising clients about potential CPLs should ensure that litigation counsel retains all relevant documentation about property acquisition and ownership history, as seemingly minor details may become material to disclosure obligations.
