Executive Summary: Key Legal and Evidentiary Issues

• The chambers judge erroneously conflated the tests for setting aside a noting in default, setting aside a default judgment, and granting summary judgment—three distinct legal standards that must not be intermixed.

• Appellants were denied fair process by being held to the stricter default judgment test rather than the more flexible "fair and just" standard applicable to setting aside a noting in default.

• A noting in default is merely a procedural notation, while a default judgment constitutes a final legal ruling—this fundamental distinction was overlooked in the lower court's analysis.

• Multiple defences were raised, including an alleged unwritten joint venture agreement, statutory non-compliance of the guarantee, and lack of understanding when signing the guarantee.

• Proper procedure requires the set aside application to be determined before the summary judgment application to allow adequate canvassing of defences and evidence.

• The matter was returned to the Court of King's Bench for redetermination using the correct legal tests and proper procedural order.

Background and facts of the case

Owen and Natasha Shaw owned and operated several companies, including River Valley Development Corp, Shaw Capital Group Ltd, and Shaw Properties Group Inc. On October 17, 2011, River Valley Development Corp mortgaged 21 condominium units and an 8.5-acre bare lot in Peace River to Liberty Mortgage Services to secure a $1.25 million loan with interest at 11% per annum. On November 29, 2012, Natasha Shaw became the director and sole owner of the corporate appellants after Owen Shaw filed for bankruptcy. In January 2014, she signed a commitment letter, and on March 6, 2014, personally guaranteed the loan to obtain an extension on the mortgage.

Between October 2012 and January 2015, several extension agreements were entered into between the parties, increasing the mortgage amount to $1,545,000. On February 16, 2016, Liberty Mortgage Services filed a Statement of Claim on the mortgage indebtedness and personal guarantees. The appellants did not file a Statement of Defence or Demand for Notice. On March 2, 2017, the parties entered into a Forbearance Agreement. The mortgage was never repaid, and on February 14, 2019, the appellants were noted in default.

Procedural history and the parties' positions

On October 10, 2019, Natasha Shaw filed an application to set aside the noting in default, claiming she did not intend to sign the guarantee in her personal capacity, she had not received proper counsel before signing it, and her and Owen Shaw's signatures on the 2017 forbearance agreement were not properly witnessed. Questioning on that application was completed on January 15, 2020. On October 21, 2021, Liberty Mortgage Services brought an application for summary judgment on the personal guarantee of Natasha Shaw. The appellants took no further action until December 16, 2021, when they filed the second set aside application at issue on this appeal.

The second set aside application and the application for summary judgment were heard together on August 30, 2023. Reasons for judgment were delivered on February 15, 2024. On the application to set aside the noting in default, the appellants raised the defence that the mortgage could not be enforced due to the terms of an unwritten joint venture agreement between the Shaws and Clinton Evangelista, a shareholder and partner at Liberty Mortgage Services. On the summary judgment application, the appellants raised two additional defences: the guarantee is unenforceable because it does not comply with the statutory requirements for guarantees, and Natasha Shaw signed the guarantee without understanding it.

The distinction between noting in default and default judgment

The Court of Appeal provided detailed clarification on the legal distinction between a noting in default and a default judgment. A noting in default is a purely procedural step of officially documenting a defendant's failure to respond to an originating document, usually a statement of claim. It merely prevents the party so noted from participating further, including by filing a statement of defence, without court permission. A default judgment, on the other hand, is a final legal ruling granting the plaintiff a remedy without a trial due to the defendant's delinquency. This distinction is set out clearly in the Alberta Rules of Court, AR 124/2010, rr 3.36 to 3.42.

The test for setting aside a noting in default, as set out in Al-Ghamdi v Alberta, 2017 ABCA 208, allows the court to consider whether "it is fair and just to allow that defendant an opportunity to defend the claim on the merits." The decision to set aside a noting in default is a discretionary matter, and the test is flexible, allowing a court to consider a variety of factors such as the behaviour of the parties, length of the defendant's delay, reason for delay, complexity and value of the claim, and prejudice to the parties. The test for setting aside a default judgment is prescriptive, applied more strictly, and recognizes the presumptive finality of a judgment. It requires showing: (a) an arguable defence; (b) that the applicant did not deliberately let the judgment go by default and has some excuse for the default; and (c) that after learning of the default judgment, the applicant moved promptly to open it up.

The chambers judge's errors

The chambers judge quoted the tri-partite test to set aside a default judgment but applied it to an application to set aside a noting in default. In doing so, he cited Kraushar v Kraushar, 2019 ABCA 186. However, Kraushar was a case where the defendant had been noted in default before the plaintiff proceeded to a default judgment. The test therefore reflected the test for setting aside a default judgment, not the test for setting aside only a noting in default that had not yet progressed to default judgment.

The chambers judge conflated the tests for setting aside a noting in default and setting aside a default judgment, applying the stricter test for setting aside a default judgment, when the matter before him was to be determined on the less onerous "fair and just" standard. Compounding matters, the chambers judge then substituted the summary judgment standard of "no genuine issue requiring a trial" in applying the test for setting aside a default judgment. The Court of Appeal found that the effect was to confuse three separate and distinct tests and to improperly constrain the chambers judge's exercise of discretion in determining whether to set aside the noting in default. This constituted an error of law.

The Court of Appeal noted that the proper procedure when applications for setting aside a noting in default and for summary judgment are both pending requires the court to first determine whether the noting in default should be set aside and, if so, whether a statement of defence should be entered and any other steps in the litigation completed before the summary judgment application proceeds. Applying the incorrect test prejudiced the appellants because they were denied fair process. They lost the opportunity to file a Statement of Defence, putting a defence formally into issue, and in this matter a proposed Counterclaim for equitable set-off, file an updated affidavit to provide evidence for that defence and counterclaim, advance that defence and counterclaim in submissions, and "put their best foot forward."

Outcome and disposition

The Court of Appeal of Alberta, comprising Justices Kevin Feehan, Kevin Feth, and Karan Shaner, allowed the appeal. The matter was returned to the Court of King's Bench to proceed on the setting aside of the noting in default application and then the summary judgment application based upon the proper legal tests for those applications, and in the proper order. The question of new evidence proposed by the appellants was left to the Court of King's Bench to address. At the lower court level, the chambers judge had granted summary judgment in the amount of $2,588,577.26 adjusted for disbursements and receipts occurring after August 21, 2021 in favour of Liberty Mortgage Services. No final monetary determination was made at the appellate level, as the ultimate outcome remains contingent on the redetermination by the Court of King's Bench under the proper legal standards.