Court of Appeal for Ontario

Date: 20200214 Docket: C66155

Before: Pepall, Pardu and Paciocco JJ.A.

Between:

Caja Paraguaya de Jubilaciones y Pensiones del Personal de Itaipu Binacional Plaintiff (Respondent)

And:

Eduardo Garcia Obregon a.k.a. Eduardo Garcia a.k.a. Eddie Obregon, Claudia Patricia Garcia a.k.a. Patricia Garcia a.k.a. Claudia Patricia De Garcia a.k.a. Claudia Santisteban, Ligia Ponciano, Managed (Portfolio), Corp., Genesis (LA), Corp. (Ontario Corporation Number 1653094), Genesis (LA), Corp. (Alberta Corporate Access Number 2013145921), FC Int, Corp., First Canadian Int, Corp., Union Securities Limited, Scott Colwell, Marty Hibbs, Hibbs Enterprises Ltd., Columbus Capital Corporation, Antonio Duscio, Leanne Duscio, Leanne Duscio carrying on business as The Queen St. Conservatory, Catan Canada Inc., Vijay Paul, Greg Baker, Bradley F. Breen, Lou Maraj, 2138003 Ontario Inc., Mackie Research Capital Corporation, First Canadian Capital Markets Ltd., First Canadian Capital Corp., FC Financial Private Wealth Group Inc., Jason C. Monaco, Daniel Boase, Paolo Abate, Nikolaos Stylianos Tsimidis, Genesis Land Development Corporation, Limited Partnership Land Pool (2007) and GP LPLP 2007 Inc. Defendants (Appellants)

Counsel: David Milosevic, for the appellants Jacqueline L. King and Christopher Gaytan, for the respondent

Heard: January 29, 2020

On appeal from the order of Justice Sean F. Dunphy of the Superior Court of Justice, dated October 12, 2018, with reasons reported at 2018 ONSC 5379.

Reasons for Decision

[1] This appeal involves a massive fraud against the respondent, Caja Paraguaya de Jubilaciones y Pensiones del Personal de Itaipu Binacional (“Cajubi”), a Paraguayan pension fund, perpetrated by the individual Garcia and corporate appellants.

[2] Cajubi invested over $34 million in three Canadian investments with the assistance of three insiders: its president, vice president, and treasurer. The appellants proposed three investment products to Cajubi’s Board of Directors with the guidance of the insiders. Each proposal purported to be advanced by one of three legitimate regulated Canadian institutions but in fact was made on behalf of an unregulated and unlicensed shell company designed to mimic the relevant legitimate Canadian institution. Those three shell companies are the corporate appellants in this matter. Each shell company was controlled by the individual Garcia appellants. In each case, the proposals deliberately and fraudulently misrepresented the attributes of the proposed investments.

[3] Once a proposal was approved by Cajubi’s Board, about 90 percent of the payment would be paid to the legitimate Canadian company and 10 percent would be retained by the appellants as an “up-front fee”. This fee was not disclosed nor was it the subject of any invoice. A portion of the 10 percent was retained by the appellants but the bulk went to fund a kickback directed to the Swiss bank account of a Panamanian nominee company at the direction of the insiders. One or more of the appellants, through their shell companies, also received sales commissions from the legitimate Canadian institution which were not disclosed to Cajubi. In fact, the investments were freely available without the payment of any commission. False statements issued by the shell companies showed the entire amounts, including the money that was paid as kick-backs, as having been invested with the corresponding legitimate Canadian company and also reflected non-existent monthly investment returns.

[4] The appellants’ involvement was shielded from all at Cajubi with the exception of the insiders.

[5] The appellants controlled all communications with the legitimate Canadian institutions to ensure that the scheme remained undetected. Any audit inquiries were intercepted. The appellants also caused the addresses of the legitimate Canadian institutions within Cajubi’s records to be altered to addresses controlled by the appellants.

[6] When the financial crisis intervened, one of the investments was liquidated and Mr. Garcia caused the funds of approximately $7 million to be reinvested in Columbus Notes, a sham investment which was diverted to a bankrupt and fraudulent colleague and the proceeds were quickly dissipated.

[7] The insiders were removed from office when the losses from the schemes became apparent, and at the time of trial were in jail in Paraguay. New management of Cajubi then brought an action in an attempt to recover the millions of dollars lost.

[8] The trial judge concluded that the appellants were variously responsible for all of Cajubi’s losses as the investments would not have been made but for their fraudulent misrepresentations.

[9] He granted judgment in favour of Cajubi against the appellants for fraudulent misrepresentation and breach of fiduciary duty in the total amount of $20,843,888 and ordered an accounting. He also ordered punitive damages of $250,000 against Mr. Garcia due to the brazen fraud and Mr. Garcia’s “vicious scorched earth campaign” to damage or seek revenge from witnesses or professionals he deemed to be his enemies. Mrs. Garcia was ordered to pay $100,000 in punitive damages.

[10] The appellants raise numerous grounds of appeal, many of them factual in nature. An appeal is not an opportunity to reargue the entire trial before new adjudicators. Here, having reviewed “thousands of documents” and the evidence from witnesses, the trial judge made numerous factual findings. He gave extensive reasons for decision consisting of 519 paragraphs detailing all of the transactions, investments, reporting, payments, and losses.

[11] Cajubi called eight witnesses including representatives from Cajubi, and from the legitimate Canadian companies, and an expert witness on fraud. The appellants only called Mr. and Mrs. Garcia as witnesses. The trial judge conducted an extensive analysis of their credibility concluding at para. 430:

I found both witnesses prepared to be dishonest whenever they thought a dishonest answer might advance their cause. Both of these witnesses have demonstrated a willingness to part with the truth only when all other options have been exhausted. I attach no credibility to the testimony of either Mr. or Mrs. Garcia except in matters without controversy, where contrary to their interests or where satisfactorily corroborated by other sources.

[12] Turning to the grounds of appeal, first the appellants submit that the trial judge failed to consider their defence based on the corporate identification doctrine.

[13] The corporate identification doctrine is not a free-standing rule; rather it is used for the purposes of applying the ex turpi causa doctrine which is also relied on by the appellants. The overriding concern is whether recovery by the respondent would damage the integrity of the legal system. See: Deloitte & Touche v. Livent Inc. (Receiver of), 2017 SCC 63, [2017] 2 S.C.R. 855, at para. 98.

[14] Further, in Christine DeJong Medicine Professional Corp. v. DBDC Spadina Ltd., 2019 SCC 30, 435 D.L.R. (4th) 379, Brown J. indicated, at para. 2:

What the Court directed in Livent, at para. 104, was that even where those criteria are satisfied, “courts retain the discretion to refrain from applying [corporate attribution] where, in the circumstances of the case, it would not be in the public interest to do so”. [Emphasis in original.]

[15] While it is the case that the trial judge did not refer to the corporate identification doctrine or attribution by name, he unquestionably considered and rejected its application and that of ex turpi causa.

[16] Amongst other things, he noted that the lawsuit raised the question of whether fraud committed with the knowledge of one or more insiders to whom kickbacks are paid, loses its character of fraud. He found that the appellants knew full well that the insiders were acting corruptly, and they worked actively with the insiders to prevent Cajubi from discovering that fact. He reasoned that fraud by the perpetrator cannot be excused on this basis.

[17] He was also clearly of the view that recovery by Cajubi would not damage the integrity of the legal system. Based on the record, that conclusion is undeniable. Application of the corporate attribution rule here would not be in the public interest. Perversely, its application would deprive a company, vulnerable to fraud because of the neglect and corruption of board members and officers, of any civil remedy, to the detriment of its shareholders and legitimate creditors. Meanwhile, it would permit fraudsters to pocket their gains with civil impunity.

[18] In a similar vein, the appellants submit that the trial judge neglected to address the appellants’ stand-alone limitation defence (as distinct from the limitation submission made at trial that was dependent on the success of the corporate identification ground of appeal).

[19] We agree that the trial judge did not address this argument. This may be because it was not raised in closing submissions. Or it may be because the appellants’ statement of defence pleaded no material facts in support of the defence. In any event, the limited evidence relied upon by the appellants would not ground a successful claim in this regard. Cajubi’s new Board of Directors took over in July 2010, and the statement of claim was issued on May 10, 2011. The trial judge found that the appellants had worked to conceal their identities from Cajubi. The earliest that any limitation period could begin to run would have been August of 2009, well within the applicable limitation period.

[20] We also do not find any merit in the appellants’ written submission that the trial judge erred by finding them liable for conspiracy when it was not pleaded against them. The judgment against the appellants is not for conspiracy but for fraudulent misrepresentation, a conclusion amply supported by the record. The role of the insiders was an important part of the narrative of the appellants’ own fraudulent conduct. Moreover, the substance of the claim against the appellants was pleaded and it certainly cannot be said that the appellants were taken by surprise.

[21] The appellants also argue that the trial judge erred in finding that there was reliance by Cajubi on the appellants’ representations. The trial judge found that the appellants were variously responsible for all of Cajubi’s net losses arising from the transactions in issue, none of which would have been entered into but for their fraudulent misrepresentations. Both the evidence and the trial judge’s many findings make it abundantly clear that the appellants’ conduct caused Cajubi to act. There was no other reasonable inference available. The Cajubi representative testified on reliance and the appellants were the source of the investment proposals.

[22] Lastly, the appellants submit that the trial judge frequently misapprehended the evidence and invite us to conclude that the conduct of the trial judge raised a reasonable apprehension of bias. In particular, their counsel urged us to review his closing submissions at trial.

[23] The appellants have painstakingly cherry-picked the evidence in their attempt to reveal factual inaccuracies. They must establish both palpable and overriding error in their factual challenges. They have not done so either individually or collectively.

[24] We also do not accept the appellants’ submissions on bias. Amongst other things, a review of the closing submissions of the appellants shows that the trial judge was engaged in attempting to find answers to the shortcomings in the appellants’ case and was challenging counsel, albeit in a somewhat aggressive fashion, to provide guidance on the merits of his clients’ case. Unfortunately, there was no merit to their case. Their exchanges do not give rise to a reasonable apprehension of bias as alleged by the appellants.

[25] For these reasons, we dismiss the appeal with costs to be paid by the appellants to the respondent fixed in the amount of $125,000 inclusive of disbursements and applicable tax.

“S.E. Pepall J.A.”

“G. Pardu J.A.”

“David M. Paciocco J.A.”