Court of Appeal for Ontario

Date: April 4, 2017 Docket: C61750

Judges: Rouleau, van Rensburg and Miller JJ.A.

Between

Trade Capital Finance Corp. Plaintiff (Respondent)

and

Peter Cook also known as Peter William Cook, Marc D'Aoust also known as Jean Marc D'Aoust, Thomas Barker also known as Thomas Richard Barker (personally and carrying on business as LC Exchange, Global Medical and GreenLink Canada Group), Rocky Racca, Bruno Didiomede also known as Bruno Diaiomede, Alan Keery also known as Alan John Keery, Chris Bennett Jr. also known as Chris Bennett also known as Christopher Bennett (personally and carrying on business as CJR Consulting), Todd Cadenhead, Dayawansa Wickramasinghe, Bonny Lokuge also known as Don Bonny Lokuge, Virtucall Inc., Virtucall International LLC, Debt Resolve-Mortgage Funding Solutions Inc. carrying on business as Debtresolve Inc., The Cash House Inc., 1160376 Ontario Limited operating as The Cash House, 2242116 Ontario Inc. carrying on business as Superior Medical Services Inc. and Superior Medical Services, Carlo De Maria also known as Carlo Vince De Maria also known as Carlo Vincent De Maria also known as Carlo Vincenzo De Maria, Matteo Pennacchio, Frank Zito also known as Francesco Zito, Simone Sladkowski, Jobec Trade Finance Inc., 1461350 Ontario Inc., 2299430 Ontario Inc., WF Canada Ltd., Jobec Investments RT LTD., Green Link Canada Inc., 2339989 Ontario Inc., 2252364 Ontario Inc., 2224754 Ontario Ltd., 6980023 Canada Inc. operating as Living Benefits and Millwalk Enterprises Inc.

Defendant (Appellant)

Counsel

Andrew Parley and Eli Lederman, for the appellant, The Cash House Inc., and the non-parties, Osman Khan and 2454904 Ontario Inc.

Peter W.G. Carey and Christopher R. Lee, for the respondent

Heard

October 26, 2016

On Appeal

On appeal from the orders of Justice Mackenzie of the Superior Court of Justice, dated January 21, 2016, and May 24, 2016.

B.W. Miller J.A.

Overview

[1] The respondent, Trade Capital Finance Corp., is in the business of purchasing accounts receivable. It alleges that it was defrauded of approximately $6,500,000 in a sophisticated scheme in which it unknowingly purchased fictitious accounts receivable. It alleges that the majority of its lost funds were eventually deposited in bank accounts owned by the appellant, The Cash House Inc., a financial services company in the business of making payday loans, cashing third party cheques, and providing foreign exchange services. Cash House is owned by 2454904 Ontario Inc. ("245"), which in turn is owned by Osman Khan.

[2] On May 6, 2015, the respondent obtained a Mareva Order freezing the assets of named defendants, including Cash House, and ordering financial disclosure. Cash House, 245, and Khan (collectively "the appellants"), were later found to be in contempt of the Mareva Order. Khan was eventually sentenced to 90 days incarceration, and the statement of defence and crossclaim of Cash House was struck.

[3] The appellants now appeal the finding of contempt, the sanction of incarceration, and the striking of the statement of defence and crossclaim of Cash House.

[4] For the reasons given below, I would dismiss the appeal.

Facts and Decisions Below

[5] Trade Capital obtained an ex parte Mareva Order on May 6, 2015, freezing the assets of Cash House and other defendants, ordering financial disclosure, and providing other relief.

[6] The Mareva Order provides that all persons with notice are "restrained from directly or indirectly … (a) selling, removing, dissipating, alienating, transferring, assigning, encumbering, or similarly dealing with any assets of any of the Mareva Defendants". The Mareva Order further specifies that "a Defendant's assets include any asset which such Defendant has the power, directly or indirectly, to dispose of or deal with as if it were the Defendant's own."

[7] Cash House moved to set aside or vary the Mareva Order, and in support filed two affidavits from Khan. In his first affidavit, sworn May 15, 2015, Khan provided a list of the assets of Cash House. In his cross-examination on May 27, 2015, he revealed the existence of a bank account held by 245 that he had used for the operations of Cash House, both before and after the Mareva Order had been issued.

[8] The motion to set aside or vary the Mareva Order was dismissed by Ricchetti J. on June 10, 2015. In his endorsement, Ricchetti J. found that the respondent had made out a strong prima facie case of fraud against Cash House, and found that Khan had intentionally used 245's bank account in a manner that contravened the Mareva Order. The decision of Ricchetti J. was not appealed.

[9] Through September and October 2015, the respondent sought to schedule an examination of Khan as representative of Cash House, as authorized by the Mareva Order. After the respondent was unsuccessful in doing so, it unilaterally set a date on 7 days' notice. Counsel for the appellants advised that neither he nor Khan were available on that date. Accordingly, Khan did not attend.

[10] The respondent then brought a motion, seeking: (i) to have the appellants found in contempt of the Mareva Order under rule 60.11 of the Rules of Civil Procedure, and (ii) to strike Cash House's statement of defence and crossclaim under rule 60.12 for failure to comply with the Mareva Order.

[11] On December 4, 2015, McKenzie J. granted an adjournment of the contempt motion on terms, which included the requirement that Khan deliver an updated list of assets of Cash House, with supporting documents, by December 7, 2015, and that Khan attend for examination on December 11, 2015.

[12] The hearing of the contempt motion continued on January 8, 2016, with reasons given on January 21, 2016. Reviewing the steps taken by the appellants to comply with their obligations under the Mareva Order and the December 4, 2015 order, the motion judge noted that they "only delivered non-current documents relating to the bank accounts of Cash House and no documents for the accounts of 245". Although Khan had attended the examination scheduled for December 11, 2015, he "did not produce the documents that were subject to the Mareva Order and further stipulated in the December 4, 2015 order."

[13] The motion judge found that "Cash House and Mr. Khan … intentionally operated the business of Cash House on an ongoing basis since the inception of the Mareva Order on May 5, 2015 utilizing the bank account(s) of 245." He found the appellants to be in contempt (the "Contempt Order"), and adjourned the motion to strike the defence and crossclaim until the sanction hearing. The appellants were given two months to purge their contempt before the sanction hearing.

[14] During that interval, the appellants delivered a sworn statement from Khan listing accounts into which any money in which Cash House had a legal or beneficial interest had been deposited or withdrawn since May 6, 2015. The appellants produced some financial statements, tax returns, and bank statements. They also collected approximately 1,000 boxes of documents in a storage location, and invited the participation of the respondent to develop a plan for the review and inspection of these documents.

[15] On March 14, 2016, the matter was back before the motion judge for the sanction phase hearing, and the hearing of the motion to strike. He released his decisions on May 24, 2016. He found the appellants' documentary production since the Contempt Order to have fallen short of what was ordered, and ordered the appellants to "forthwith supply the Plaintiff, through counsel, with a comprehensive and detailed written inventory of the documents contained in each of the approximately 1,000 bankers boxes" that the appellants had collected.

[16] The motion judge found that the appellants had intentionally and continually disobeyed orders of the court, and he sentenced Khan to 90 days of imprisonment to be served on weekends (the "Penalty Order"). He further ordered that the statement of defence and crossclaim of Cash House be struck, with leave to amend should Cash House comply with the ordered disclosure.

[17] The appellants appeal the Contempt Order, the Penalty Order, and the order to strike the statement of defence and crossclaim.

Issues

[18] The appellants argue that the motion judge erred by:

1. Finding the Mareva Order to be clear and unambiguous;
2. Failing to correctly apply the test for striking a pleading;
3. Providing insufficient reasons;
4. Ordering a custodial sentence for the contempt;
5. Failing to allow the appellants an opportunity to make submissions before awarding costs on a substantial indemnity basis.

Analysis

A. Is the Mareva Order Clear and Unambiguous?

[19] The elements of civil contempt have been recently summarized by this court in 2363523 Ontario Inc. v. Nowack, 2016 ONCA 951, leave to appeal to SCC requested, at para. 20:

A party seeking to establish civil contempt must prove that: (a) the order alleged to have been breached states clearly and unequivocally what should and should not have been done; (b) the party alleged to have breached the order had actual knowledge of it; and (c) the party allegedly in breach intentionally did the act the order prohibits or intentionally failed to do the act the order compels. A judge retains an overriding discretion to decline to make a contempt finding where the foregoing factors are met where it would be unjust to do so, such as where the alleged contemnor has acted in good faith to take reasonable steps to comply with the relevant court order. The burden on a party seeking a contempt order is to establish the above elements by proof beyond a reasonable doubt [citations omitted.]

[20] The appellants argue that the motion judge erred by failing to conduct a correct analysis to determine whether the Mareva Order was sufficiently clear and unambiguous in the circumstances to ground a finding of contempt.

[21] The appellants' position, both before the motion judge and this court, is that the Mareva Order is unclear and suffers from multiple ambiguities that must be resolved in favour of the appellants. An ambiguity in an order is to be resolved in favour of the person said to have breached the order: G.(N.) c. Services aux enfants & adultes de Prescott-Russell, 82 O.R. (3d) 686, at para. 39. The resolution of these ambiguities, the appellants argue, ought to have resulted in the dismissal of the contempt motion. The ambiguities identified by the appellants can be summarized as follows:

1. It is unclear whether the prohibition of "dealing with the assets" of Cash House prohibits the operation of the Cash House's business;
2. It is unclear whether the Mareva Order obligated Cash House to include the bank account of 245 in a sworn statement describing its worldwide assets; and
3. It is unclear whether Khan, as representative of Cash House, was obligated to attend a unilaterally scheduled examination.

[22] Although this ground of appeal is expressly formulated in terms of ambiguity, the argument, in reality, is that the Mareva Order is not sufficiently clear or precise for the appellants to understand their obligations under that order. Ambiguity, in the sense employed in G.(N.), indicates uncertainty as to which of two (or perhaps more) discrete meanings was intended by the order. To resolve an ambiguity in favour of the contemnor is to choose the meaning that is most favourable to the contemnor. The appellants have not identified any ambiguity in this sense, but argue instead that the relevant terms of the Mareva Order do not set out the appellants' obligations with sufficient precision for them to know whether or not they have complied.

[23] As I explain below, however, the motion judge made no error in finding the Mareva Order to be sufficiently clear.

(i) "Dealing with the assets"

[24] The appellants argue that, if the prohibition against "dealing with the assets" of Cash House was intended to prohibit the continued operations of Cash House, the Mareva Order needed to say so expressly. It did not, the appellants say, and to interpret it in this way would be inconsistent with the purpose of a Mareva Order, which is to prevent a party from depleting its assets, and not to prevent it from carrying on business in the ordinary course: Farah v. Sauvageau Holdings Inc., 2011 ONSC 1819, 11 C.P.C. (7th) 363, at para. 111.

[25] I am not persuaded by this argument. The salient question for the purpose of this appeal is not whether the appellants were operating the business of Cash House, but whether they dealt with the assets of Cash House. It is not necessary to consider the question of whether the Mareva Order permitted the business of Cash House to be operated in some form. The motion judge found that the appellants, in the mode in which they continued to carry on the business of Cash House, dealt with assets of Cash House – specifically, they dealt with funds deposited into the account of 245 – and that this was expressly prohibited by the Mareva Order. That finding was supported by the evidence before the motion judge, particularly the evidence of Khan on cross-examination.

[26] Khan, on cross-examination, admitted that he opened 245's account contemporaneous with his purchase of 245 and Cash House, and began using the 245 account for the operations of Cash House shortly thereafter. After the Mareva Order was issued and the accounts of Cash House were frozen, Khan continued operation of Cash House through the 245 account, which was used to accept deposits belonging to Cash House.

[27] A review of the 245 account statements provided revealed there were significant sums deposited and paid out of that account commencing in March 2015 and continuing well after the Mareva Order was issued. It appears that any business that Cash House was conducting, including the collection of its receivables, was occurring from 245's account. The motion judge made no error in finding that the 245 account was "directly or indirectly" an asset of Cash House. The use of this asset constituted a breach of the Mareva Order, and the motion judge made no error in so concluding.

(ii) Disclosure

[28] On the second issue, paragraph 4 of the Mareva Order required Cash House to prepare a sworn statement providing particulars of its worldwide assets "whether owned directly or indirectly and including any assets held in trust for [Cash House]".

[29] The appellants argue that there was no direct evidence in the contempt proceedings to establish that Cash House had the power to dispose of or deal with 245's account, and that the motion judge erred by not engaging in any reasoning to establish that 245's account came within the scope of the Mareva Order.

[30] There is no merit to this submission and it cannot be maintained in light of Khan's evidence on cross-examination. The evidence is clear that the 245 account received funds from Cash House's operations. Its existence therefore had to be disclosed. It was not disclosed and the motion judge made no error in finding Cash House and Khan thereby breached the Mareva Order.

(iii) Examination under oath

[31] On the third issue, Cash House and Khan have attempted to manufacture confusion where the Mareva Order is abundantly clear: Cash House "must submit to examinations under oath within thirty (30) days of the delivery by [Cash House] of the aforementioned sworn statements or by such later date as may be confirmed by the Plaintiff's counsel of record." The appellants argue that this provision is unclear because, effectively, it authorizes the respondent to demand the impossible: to schedule an examination unilaterally for a date when a party could not appear.

[32] Again, the motion judge made no error. A Mareva Order does not want for clarity simply because it does not concretize every particular of a party's obligations. It need not do so. The order was made in the context of a self-governing legal profession with settled norms of practice. There can be no suggestion here that the appellants, represented by counsel, did not understand their obligations. Neither did the respondent depart from settled norms of practice and demand the impossible of the appellants. The respondent made reasonable attempts to enlist the assistance of the appellants in coming to a mutually convenient schedule for an examination. That assistance was not forthcoming. The appellants' failure to participate is not the product of any defect in the Mareva Order or, for that matter, any unreasonable demands made by the respondent. The motion judge made no error in refusing to give effect to this argument.

B. Striking the Defence and Crossclaim

[33] The appellants argue that the motion judge erred by failing to apply correct legal principles on the motion to strike the statement of defence and crossclaim pursuant to rule 60.12. They advance six arguments, all of which I would reject.

[34] First, the appellants argue that the motion judge erred by striking the defence and crossclaim at the first instance, and thus using it as a remedy of first resort. They rely on this court's decision in Bell ExpressVu Limited Partnership v. Corkery, 2009 ONCA 85, 94 O.R. (3d) 614, at para. 35, that striking out a defence for failure to comply with a court's order is a severe remedy that should not generally be imposed as a remedy of first resort. This argument is contradicted by the procedural history of the motion: the motion judge adjourned the hearing of the motion to strike for two months to provide the appellants with time to comply with court orders. He found that they did not do so.

[35] Second, the appellants argue that the motion judge erred by failing to consider whether a less extreme remedy would suffice. In fact, after the motion judge chronicled the history of the appellants' contempt, he specifically addressed the need to provide a remedy that is proportionate to the misconduct, expressing concern about turning the action into a default proceeding. Consequently, he made the order without prejudice to Cash House moving for leave to amend after satisfying the court that the contempt has been purged.

[36] Third, the appellants argue that the motion judge erred in stating that the appellants were in contempt of two court orders, the Mareva Order and the December 4, 2015 order in aid of the Mareva Order. In fact, the appellants argue, they were only in contempt of the first of these orders.

[37] It is difficult to see how this submission assists the appellants.

[38] Fourth, the appellants argue that the motion judge misapprehended the requirement that he assess the merits of the defence in order to consider whether the interests of justice warranted another method of sanction, and improperly imposed an evidentiary burden on the appellants to establish the legitimacy of the defence.

[39] The statement of defence and crossclaim, however, amounts to little more than a bare denial. In the context of an action where there has been a determination that the respondent has adduced a strong prima facie case, the motion judge was justified in concluding that the merits of the defence were weak and that, in the absence of a full evidentiary record, "bald assertions" would not suffice. There was no misapprehension of the test here, and the motion judge placed no burden on the appellants to establish their defence. Indeed, as he observed, it was not the court's role to determine the viability of either the claims or any defence, but to assess whether striking the pleading was an appropriate sanction (para. 22).

[40] Fifth, the appellants argue that the motion judge considered only the goal of sanctioning the appellants, and failed to consider the overarching objective that the Rules of Civil Procedure be interpreted so as to secure the just determination of each civil proceeding on its merits.

[41] Again, there is no merit to this submission. Cash House is one among many defendants in the same action. Where one defendant among many does not comply with its procedural obligations, it hinders and delays the expeditious determination of the overall proceeding.

[42] Finally, the appellants argue that the motion judge failed to give Cash House one last chance. Again, I would not give effect to this submission. The motion judge found that Cash House has a lengthy history of non-compliance with the Mareva Order. It received numerous warnings. The hearing of the motion to strike was adjourned for two months after the Contempt Order to allow for further time to comply. It did not do so. Even in striking the defence and crossclaim, Cash House has been permitted to move for leave to amend after it has complied. The motion judge did not err by not providing for further indulgence.

C. Sufficiency of Reasons

[43] The appellants also appeal on the grounds that the reasons of the motion judge on both the Contempt Order and the motion to strike are inadequate, in that they do not explain why the motion judge decided the way that he did.

[44] I would not give effect to this ground of appeal. With respect to the Contempt Order, the reasons, when read in conjunction with the written record that was before the court (including the endorsement of Ricchetti J., dated June 10, 2015), disclose all that is needed to be known for the purposes of appellate review, and for the purposes of enabling the appellants to understand their obligations. Reasons are given in context and must be understood in that context: R. v. R.E.M., 2008 SCC 51, [2008] 3 S.C.R. 3. The motion judge set out in detail the submissions of the appellants and the respondent. He accepted the arguments of the respondent as rationally superior to the arguments of the appellants and defeating those arguments. It was not necessary, in this context, that he do anything more than this.

[45] Similarly, with respect to the motion to strike the appellants' statement of defence and crossclaim, I do not accept the appellants' argument that the reasons given by the motion judge are inadequate. None of the five defects that the appellants allege have any merit, and I do not propose to address each individually. One example is sufficient to illustrate their tenor: the appellants ask how the motions judge could have concluded that the merits of the defence are weak. No one who has read the record, including the statement of defence and crossclaim and the endorsement of Ricchetti J., could be left with any doubt about the basis of the motion judge's conclusion.

D. Contempt Sanction – Error in Ordering a Custodial Sentence

[46] The appellants argue that ordering a 90 day custodial sentence is grossly disproportionate for what it describes as a first instance of non-compliance. They further argue that they made massive efforts to comply with the extensive production obligations imposed.

[47] The motion judge did not view the appellants' conduct as either a first instance of non-compliance or as an imperfect but well-intentioned attempt to comply with an onerous production obligation. He found that the appellants breached the Mareva Order continuously, even after the endorsement of Ricchetti J., service with the contempt motion, and after being found in contempt.

[48] The motion judge was not impressed with the production efforts of the appellants. The appellants' production obligations under the Mareva Order were not satisfied, in the view of the motion judge, by simply dumping 1,000 boxes of documents on the respondent. These are not the records of an unsophisticated enterprise, but of a financial services corporation. The motion judge made no error, in my view, in requiring the appellants to provide a "comprehensive and detailed written inventory" of the documents contained in the 1,000 boxes.

[49] It is important to note that the appellants made no proposal whatsoever as to how they would proceed to satisfy their obligations, and merely invited the respondent to consult with them. The motion judge found this to be insufficient. What the appellants describe as a mammoth task is hardly novel or unprecedented. At a minimum, the appellants ought to have put before the motion judge a plan from which it could have argued for an extension of time before the penalty hearing. It did little more than argue that the task was a large one, and that the respondent had not provided any assistance. The motion judge was accordingly unimpressed.

[50] The motion judge made no error in principle: he did not, as the appellants argue, overemphasize punishment, or lose sight of the purpose of contempt sanctions, namely to secure compliance. To the contrary, the intermittent nature of the custodial sentence was expressly intended to facilitate compliance with disclosure obligations.

Costs Appeal

[51] The motion judge imposed an award of costs against the appellants on a full indemnity basis. The appellants appeal on the basis that they did not have an opportunity to make submissions on costs, and that this constituted a breach of natural justice. They ask this court to set aside the costs order.

[52] As the respondents note, however, the costs award was imposed as a sanction for contempt, pursuant to rule 60.11(e). The quantum of the costs remains to be assessed. This penalty was available to the motion judge under rule 60.11(e). The requirement that costs be assessed provides the appellants with an opportunity to make submissions on quantum. I would not give effect to this ground of appeal.

Disposition

[53] I would dismiss the appeal. I would award the respondent costs in the amount of $15,000 inclusive of disbursements and HST.

Released: April 4, 2017

"B.W. Miller J.A."

"I agree. Paul Rouleau J.A."

"I agree. K. van Rensburg J.A."