Appealing Briefs – Episode 28: Patrick Street Holdings: No do-overs!

Adam Goldenberg

Welcome to Appealing Briefs, a podcast with brief updates on cases from Canada's Courts of Appeal. I'm Adam Goldenberg. This episode briefs you on the Supreme Court of Canada's May 2026 judgment in Patrick Street Holdings Limited against 11368 NL incorporated. We'll talk about what the court's decision means for the law of res judicata, and why it matters for anyone who starts a civil lawsuit in a Canadian court.

Before we begin a brief disclaimer, this podcast contains legal information, not legal advice. Now let's start with a brief summary.

In Patrick Street Holdings, the Supreme Court of Canada affirmed an ancient principle of litigation. A party is not entitled to pursue the same claim twice. The story of the case begins with a property in Newfoundland and Labrador.

That property, which was owned by a numbered company, was subject to several mortgages, including some held by Patrick Street Holdings Limited. After the numbered company defaulted on one of the mortgages, it granted Patrick Street a new mortgage worth approximately four million dollars. Patrick Street then exercised its rights under the mortgage and arranged for the property to be sold. After the sale, Patrick Street prepared a type of report, known as an accounting to show how the sale proceeds should be divided among the various creditors.

That accounting included a claim for repayment of the four million dollar mortgage, but two other creditors objected. They challenged the accounting and argued that Patrick Street was not entitled to recover the four million dollars from the sale proceeds. The application judge agreed and excluded the mortgage from the distribution.

That wasn't the end of the story, though. A few years later, in a separate proceeding about the money that remained from the sale, Patrick Street tried again. It argued that it was still entitled to the four million dollars despite the earlier ruling.

Both the application judge and the Newfoundland and Labrador Court of Appeal rejected that argument. Patrick Street then appealed to the Supreme Court of Canada, where it lost again. In rejecting Patrick Street's claim, the courts applied a doctrine called res judicata, which is Latin, so you know, it's important.

Res judicata literally means the thing decided. It prevents parties from bringing a dispute back before the courts, after the dispute has been adjudicated. Once the courts have spoken, that's it. No do overs. One way in which res judicata operates in practice is through something called cause of action estoppel.

Cause of action estoppel generally prevents a party from bringing a claim that was, or that could have been resolved in an earlier case. And that's what, according to the Supreme Court of Canada, happened here. In the Patrick Street Holdings case, the Supreme Court determined that Patrick Street was attempting to re-argue an issue that had effectively been determined in the earlier proceeding concerning the distribution of the sale proceeds. Patrick Street was, in the court's view, advancing a new legal theory based on the same facts. It wasn't entitled to return to court years later and try again. In reaching this decision, the court clarified three important points about res judicata and about cause of action estoppel.

First, a party relying on res judicata must raise it at the earliest reasonable opportunity. But substance matters more than form. A party doesn't necessarily have to use magic words, doesn't have to say ‘res judicata’ in its pleading, but it must clearly put the relevant alleged facts before the court.

Second, when deciding whether two proceedings advance the same cause of action such that cause of action estoppel should apply, courts should focus on the underlying allegations, not the legal labels attached to the claim. A party cannot avoid cause of action estoppel, in other words, by dressing up the same alleged facts differently the second time around.

Third, cause of action estoppel may apply not only to arguments that were actually raised in an earlier proceeding, but also to arguments that could have been raised through the exercise of reasonable diligence.

This protects parties when something genuinely new comes to light, such as new evidence. So what lessons does the Patrick Street decision hold for litigants and their lawyers when we plead and argue cases the first time around? I asked my McCarthy Tetrault partner Kosta Kalogiros. Like me, Kosta is a partner in our National Litigation and Dispute Resolution Group based in Toronto.

Kosta, thanks so much for joining me.

Kosta Kalogiros 4:49

Thanks so much for having me, Adam.

Adam Goldenberg 4:51

So none of what's in the Patrick Street Holdings decision from the Supreme Court is new or, on its face, all that exciting to those of us who do civil litigation. It's a well-known principle that if you've got an argument, you've got to make it. You can't keep it in your back pocket in case you need it later, and you don't get a second bite at the cherry. You can't relitigate issues that have previously been decided. All of this is Civil Litigation 101. What's different about this case?

Kosta Kalogiros 5:20

I actually think this case really turns on the specifics. The numbered company, as we refer to it, had a primary mortgage on a subject property, and that mortgage defaulted and Patrick Street enforced on that mortgage and initiated power of sale proceedings.

Patrick Street also had a second mortgage on a separate property. The numbered company agreed to guarantee that separate mortgage. I'm going to call that the collateral mortgage. To resolve the first power of sale proceedings, Patrick Street and Numbered Co agreed to secure that collateral mortgage against the subject property. Inevitably Numbered Co defaulted on primary property again. Patrick Street reinitiated power of sale proceedings and that set in motion the series of proceedings that had this question about accounting: does Patrick Street get to deduct its four million dollars collateral mortgage?

Here's the important thing that was missing. The court said Patrick Street hadn’t proved that it was actually owed the four million yet. A) it hadn't set out that that was the correct amount outstanding under the other collateral, the guarantee contract, and B) it doesn't look like there was any evidence establishing a default.

When the proceedings came back and they ended up in the Court of Appeal in 2024, they raised a new argument and they said, no, no, look, in our collateral mortgage, there's this provision that says the power of sale proceedings in respect of that primary property, they constitute a default under this collateral mortgage or this guarantee obligation, because the legal proceeding jeopardizes the underlying asset and therefore we're able to call the whole mortgage. Okay. But it's not clear that they ever did call the mortgage.

So I actually think that matters because the court's looking at a situation, where am I going to, you know, say, yeah, you get a third kick at the can Patrick Street. You didn't get your ducks in order the first time around. We'll let you claw back this four million. And that's what the court came down with. You had the chance to make this argument like you're very clearly looking for new arguments that you missed out on the first go around in 2016, and I think that influenced the decision.

Adam Goldenberg 7:33

Yeah. I almost wonder, reading the decisions, whether the majority was thinking about the way that those litigating cases outside of this particular set of circumstances might read the court's decision and not wanting to give any indication that there was more flexibility than there would ordinarily be to add to a claim to advance new arguments later in the day. Because outside of the particular circumstances of a case like this, it's usually fairly straightforward when an argument could have been made the first time and someone has sat on it until the second time around, and I wonder whether the majority was concerned about not giving lawyers in particular openings to aim for, to try to escape the conventional and historically sound strictures of the doctrines of res judicata and cause of action estoppel.

Kosta Kalogiros 8:26

Yeah. I mean, we can't be any more in the court's head than what they've invited us into in their reasons. But I think certainly that definitely is something that might inform this decision. Like you're better off, I think, as a court sending a signal to the business world that there are bright lines and if you want to enforce certain rights, you better do so in accordance with the terms of those contracts, and you better leave the evidence that gets you the result you want. And we don't want to see you try to bootstrap it or jam it in in some other context because you, you know, or have sour grapes about losing the first time.

Like the fact of the matter is the first one went to the appeal to the Court of Appeal, and they lost there as well. And so I think the court looked at this as a just own your situation, own your situation. Like the asset sold, the proceeds have to be distributed. Uh, you didn't do what you had to do. Too bad. So sad. And yeah, clients and lawyers, you're not going to get a freebie. So like, and there's a lot of areas in law that are like this, right? It's not just in the context of res judicata, but there's a lot of highly technical areas of law, like construction liens, etc., where if you, you can lose out if you don't act properly. I think in most instances when we're talking about people initiating new causes of action against opponents, absolutely, they should still be having discussions with their lawyers and lawyers should be having discussions with their clients about ‘here's what I think are the winning arguments, and here is what the losing argument is, and we're going to make that call and we can kiss those other arguments goodbye.’

I don't think this is this should be read as an invitation to the bar to throw spaghetti at the wall. I would not read this decision to stand for that.

Adam Goldenberg 10:14
Good. I agree, and I hope that others do too. Kosta, thanks so much for your time today.

Kosta Kalogiros 10:19

My pleasure, and thanks again for having me on, Adam.

Adam Goldenberg 10:22

Kosta Kalogiros is a partner in McCarthy Tetrault’s Litigation Group based in Toronto. Thanks to Emily Strike, a summer student in our Toronto office, for her work on this episode. We hope you found this brief appealing. Thanks for listening.