



COURT OF APPEAL FOR ONTARIO

CITATION:
Steinberg v. Ellis
    Entertainment Corp., 2012 ONCA 362

DATE: 20120531

DOCKET: C54767

MacPherson, Gillese and MacFarland JJ.A.

BETWEEN

Michael Steinberg

Plaintiff (Respondent)

and

Ellis Entertainment Corp. and
Stephen Ellis

Defendants (Appellant)

AND BETWEEN

Stephen Ellis

Plaintiff by Counterclaim (Appellant)

and

Michael Steinberg

Defendant by Counterclaim (Respondent)

Paul D. Guy and Faren H. Bogach, for the appellant
    Stephen Ellis

Kevin D. Sherkin and Robert A. Gold, for the respondent

Heard: May 10, 2012

On appeal from the order of Justice Glenn A. Hainey of
    the Superior Court of Justice dated November 24, 2011.

Gillese
    J.A.:

[1]

This appeal raises a significant
    pleadings issue.  A corporation and an individual jointly defended an action. 
    The corporation also counterclaimed.  It became insolvent and its assets were
    acquired by its first-ranking secured creditor.  The creditor assigned the
    counterclaim to the individual.  The individual obtained an order to continue
    the counterclaim.  The corporations defence was then struck out.  Is the
    individual permitted to amend his pleadings to make them consistent with the
    counterclaim?  In the circumstances of this case, it is my view that he
    cannot.

THE FACTS IN BRIEF

[2]

Michael Steinberg (Steinberg) was the former Chief Operating Officer
    and General Counsel of Ellis Entertainment Corp. (the Corporation).  He began
    a wrongful dismissal lawsuit against the Corporation and Stephen Ellis
    (Ellis) personally.  At the time, Ellis controlled the Corporation.  He was
    its President and Chief Executive Officer, as well as a director and officer.

[3]

In the action, Steinberg sought damages of $250,000 for wrongful
    dismissal, back wages, vacation pay, and oppression.  He sought relief against
    Ellis personally for vacation pay and back wages, pursuant to the provisions of
    the
Employment Standards Act, 2000
, S.O. 2000, c. 41.

[4]

The Corporation and Ellis defended the claim in a joint pleading,
    consisting of a statement of defence (the joint statement of defence) and a
    counterclaim (the Counterclaim).  In the joint statement of defence, the
    Corporation and Ellis alleged that Steinberg voluntarily resigned from his
    employment with the Corporation or, alternatively, that Steinberg had engaged
    in serious misconduct that justified termination of his employment for cause. 
    Paragraph 20 of the joint statement of defence set out Steinbergs alleged
    misconduct, the essence of which is that he secretly attempted to compete
    against the Corporation while employed by it.  In the joint statement of
    defence, the Corporation and Ellis also alleged that Steinberg had received all
    vacation pay and compensation to which he was entitled.

[5]

The Counterclaim was brought only by the Corporation.  In it, the
    Corporation sought damages of approximately $1 million for the wrongdoing
    alleged in the joint statement of defence.  The Counterclaim itself contained
    no additional allegations against Steinberg.  Ellis personally did not claim
    anything by means of counterclaim.

[6]

The Corporation became insolvent.

[7]

On January 13, 2011, all of the Corporations assets, including the
    Counterclaim, were acquired by the first-ranking secured creditor, Knightscove
    Media Corp. (Knightscove).

[8]

On March 18, 2011, Knightscove assigned the Counterclaim to Ellis.

[9]

On March 31, 2011, based on the Corporations failure to attend
    discovery, Steinberg successfully moved to strike out the Corporations
    statement of defence.  The Counterclaim was not struck out.  Ellis, through his
    counsel, participated in the motion.

[10]

In
    accordance with rule 19.02 of the
Rules of Civil Procedure
, R.R.O.
    1990, Reg. 194 (the Rules), as a consequence of the Corporations defence
    being struck out and it being noted in default, the Corporation was deemed to
    admit the truth of the allegations of fact contained in the statement of
    claim.

[11]

On
    May 20, 2011, Ellis obtained an order that allowed him to continue the
    Counterclaim in his name (the order to continue).

[12]

Steinberg
    did not challenge the assignment of the Counterclaim to Ellis nor did he appeal
    the order to continue.

[13]

Ellis
    moved for leave to amend his statement of defence and counterclaim to make it
    consistent with the order to continue.  The amendments would permit him to make
    the same allegations of fact as those that had been advanced in the joint statement
    of defence and which had been struck out as against the Corporation.

[14]

Steinberg
    resisted the motion.

The First Order

[15]

By
    order dated September 15, 2011, Master Sproat granted the motion and allowed
    the amendments to be made (the first order).

[16]

In
    brief reasons, the Master explained as follows.  The Corporations defence was
    struck as a result of its failure to attend discovery.  The merits of its
    defence and proof of the underlying facts were not adjudicated.  Ellis has a
    continued right to defend.  Elliss continued denial of the claim is unaffected
    by the striking of the Corporations defence or deemed admissions of the facts
    upon the noting in default.

[17]

As
    there was no order striking the Counterclaim, it was properly before the court. 
    Ellis has obtained an order to continue and no issue has been taken with that
    order.  The Rules are clear that amendments shall be granted unless there is
    prejudice that cannot be compensated for by costs and Steinberg had not
    advanced prejudice.  Therefore, Ellis should be permitted to make the
    amendments.

[18]

Steinberg
    appealed.

The Order Under Appeal

[19]

By
    order dated November 24, 2011 (the order under appeal), Hainey J. allowed Steinbergs
    appeal and dismissed Elliss motion to amend.  He reasoned as follows.

[20]

Because
    the Corporations statement of defence was struck out, it is deemed to have
    admitted the allegations in the statement of claim, including that Steinbergs
    employment was wrongfully terminated.  The Counterclaim contained no allegations
    specific to it but, rather, adopted paragraph 20 of the joint statement of
    defence which recites a number of allegations of misconduct by Steinberg during
    his employment with the Corporation.  The serious allegations are inconsistent
    with, and contrary to, the Corporations deemed admissions.

[21]

Against
    this background, it would be an abuse of process to allow Ellis to continue to
    assert the serious allegations in the Counterclaim.

[22]

The
    court should review a proposed pleading to determine whether it is legally
    tenable and should refuse an amendment as legally untenable if it is clearly
    impossible of success.

[23]

Given
    the deemed admissions by the Corporation, the allegations in the Counterclaim
    are not legally tenable and are impossible of success.  Hence, it was an error
    for the Master to have permitted Ellis to amend his pleadings.

THE ISSUES

[24]

On
    appeal to this court, Ellis asks that the order under appeal be set aside and
    the first order be restored.  He submits that Hainey J. erred by:

1.

failing to take into
    account that he (Ellis) acquired the Counterclaim before the deemed admissions
    were made by the Corporation; and

2.

allowing a
    collateral attack to be made against the order to continue.

ACQUISITION OF
    THE COUNTERCLAIM BEFORE THE DEEMED ADMISSIONS

[25]

For
    the purposes of this submission, Ellis asks that three dates be kept in mind:

-

January
    13, 2011:       Knightscove acquired the Counterclaim

-

March
    18, 2011:         Knightsbridge assigned the Counterclaim to Ellis

-

March
    31, 2011:         The Corporations statement of defence is struck                                     out.

[26]

On
    this issue, Ellis argues as follows.  The Corporation lost all of its rights
    and interests in the Counterclaim on January 13, 2011, when Knightscove
    acquired the Corporations assets.  Ellis acquired the right to pursue the
    Counterclaim on March 18, 2011, when it was assigned to him.  By the time the
    Corporations statement of defence was ordered struck out on March 31, 2011, and
    the deemed admissions were made by the Corporation, the Corporation no longer
    had the right to advance the Counterclaim: he had that right.  Accordingly, Ellis
    contends, the deemed admissions of the Corporation had no impact on the legal viability
    of the Counterclaim and Hainey J. erred in failing to recognize the
    significance of the timing of the relevant events.

[27]

I
    do not accept this submission.  In my view, although Hainey J. did not
    expressly advert to the timing of events, there is no error in his reasoning.

[28]

The
    effect of the assignment was to give Ellis the right to pursue the Counterclaim
    on behalf of the Corporation.  He stood in the Corporations shoes for the
    purpose of pursuing the Counterclaim.  He could not have a better claim than
    the Corporation.  Therefore, as I will explain, when the Corporations
    statement of defence was struck out, there was an effect on Elliss ability to
    continue the Counterclaim.

[29]

The
    Counterclaim seeks relief for allegations set out in the joint statement of
    defence and is supported by no other allegations.  As a consequence of the
    Corporations defence being struck out and it being noted in default, the
    Corporation was deemed to admit the truth of the allegations of fact contained
    in the statement of claim: see rule 19.02 of the Rules.  Accordingly, the
    Corporation was deemed to admit that it had wrongfully terminated Steinbergs
    employment.  It could no longer assert that Steinberg had wrongfully attempted
    to compete against it during his employment with the Corporation because those
    allegations are inconsistent with, and contrary to, the Corporations deemed
    admission that it had wrongfully terminated Steinbergs employment.

[30]

Thus,
    given the deemed admissions by the Corporation, it was not possible for the
    Corporation to factually establish the allegations of wrongdoing that
    underpinned its claims in the Counterclaim.  As it couldnt factually establish
    the allegations, it would be impossible for the Corporation to legally make out
    the claims in the Counterclaim.  In short, the claims in the Counterclaim are
    clearly impossible of success on the part of the Corporation.  As Hainey J.
    observed, the court should refuse an amendment if it is not tenable at law: see
Old Willoughby Realty Ltd. v. Mathews Southwest Developments Ltd.
, 2009
    CanLII 55352 (Ont. S.C.), at para. 19; and
Essa v. Panontin,
2010 ONSC
    691.

[31]

As
    I have already noted, Ellis stands in the shoes of the Corporation and cannot
    have a better claim than it does.  Because the Corporation could not factually
    or legally establish the claims in the Counterclaim, it would be an abuse of
    process to allow Ellis to amend his pleadings so that he could assert the claims
    in the Counterclaim.

THE COLLATERAL ATTACK ARGUMENT

[32]

A
    collateral attack is an attack made against a court order or judgment in
    proceedings other than ones whose specific object is the reversal, variation or
    nullification of the order or judgment: see
R. v. Wilson
, [1983] 2 S.C.R.
    594, at p. 599.

[33]

Ellis
    submits that the order under appeal is a collateral attack on the order to continue. 
    This submission runs as follows.

[34]

Through
    the assignment, Ellis acquired the Counterclaim.  The order to continue gave
    Ellis the right to continue the Counterclaim against Steinberg in his own
    name.  The order under appeal effectively invalidates the order to continue because
    it prevents Ellis from continuing the Counterclaim.  Had Steinberg wished to
    prevent the Counterclaim from being continued, Steinberg had to appeal the
    order to continue. He did not.  The order to continue was not in issue before
    Hainey J.  Therefore, it was not open to Hainey J. to make the order under
    appeal because it amounted to a collateral attack on the order to continue.

[35]

Again,
    I reject this submission.

[36]

As
    I have already explained, the effect of the striking out of the Corporations
    statement of defence and the deemed admissions means it would be impossible for
    the Corporation to succeed in establishing the claims in the Counterclaim.  In those
    circumstances, the amendments that Ellis sought to make were not tenable at
    law.  It was for that reason that Hainey J. concluded that it would be an abuse
    of process to permit the amendments to be made.  Accordingly, the order under
    appeal does not amount to a collateral attack on the order to continue.

DISPOSITION

[37]

Accordingly,
    I would dismiss the appeal with costs to the respondent fixed, on consent, at
    $2,500, inclusive of disbursements and all applicable taxes.

Released: May 31, 2012 (J.M.)

E.E. Gillese
    J.A.

I agree. J.C. MacPherson
    J.A.

I agree. J. MacFarland J.A.


