CITATION: 2092280 Ontario Inc. v. Voralto Group Inc., 2018 ONSC 2305

DIVISIONAL COURT FILE NO.: 753/17 DATE: 20180417

ONTARIO SUPERIOR COURT OF JUSTICE DIVISIONAL COURT

THORBURN, MCKELVEY and MYERS JJ.

BETWEEN:

2092280 ONTARIO INC., and SRIMOORTHY PATHMANATHAN c.o.b. as SHARON MAINTENANCE SERVICES Plaintiffs

– and –

VORALTO GROUP INC., ANSELMO ANGLEO PATRUNO a.k.a. ANDY PATRUNO, CATHERINE PATRUNO a.k.a. CATHY PATRUNO, STEVEN SARDINHA a.k.a. STEVE SILVA, JOHN DOE, JANE DOE AND DOE CORPORATION Defendants

COUNSEL: P. James Zibarras, for the Plaintiffs No one appearing for the Defendants

HEARD at Toronto: April 4, 2018

THE COURT

Background

[1] The Plaintiffs sought a Mareva injunction before the motion judge to restrain the Defendants from disposing of or dissipating any assets including monies held in any bank accounts and a residential property located in Burlington.

[2] The motion was brought on an "ex parte" basis or without notice to the Defendants. The motion judge was not persuaded that relief without notice was warranted. He ordered that the motion be brought on notice to the Defendants.

[3] The motion judge also found that the evidence relating to the residential property which is registered in the name of the Defendant Catherine Patruno did not go further than establishing that Catherine Patruno was the spouse of Andy Patruno and that she and Andy Patruno formerly co-owned the house in which they currently reside. The evidence of her involvement in the alleged fraudulent activity did not disclose a prima facie case against her.

[4] With respect to the remaining Defendants (the "Remaining Defendants"), the motion judge stated,

In light of the delay in pursuing a remedy, the delay in advancing this claim for injunctive relief, the fact that the Defendants have not been served, and the lack of evidence that these Defendants are dissipating assets, I am not prepared to grant relief without giving them an opportunity to respond.

[5] On that basis, the motion judge declined to grant an order on a without notice basis and ordered that the Defendants be served with the motion for a Mareva injunction.

[6] The Plaintiffs have brought a motion for leave to appeal the decision of the motion judge without notice to the Defendants. If leave to appeal is granted, they ask this court to grant a Mareva injunction without notice.

[7] During the course of argument, the Plaintiffs' counsel agreed that the reasons for dismissing the Mareva injunction as against Catherine Patruno were reasonable. The Plaintiffs are not seeking to appeal the portion of the order which dismisses the request for a Mareva injunction as against her and her house. They are seeking leave to appeal the order to the extent that it dismisses the relief sought against the Remaining Defendants with respect to any property they might own including monies held in various bank accounts which include a bank account at a credit union in Stoney Creek.

[8] For reasons which follow, the Plaintiffs' motion for leave to appeal the order of the motion judge regarding the Remaining Defendants is granted and the order of the motion judge is set aside in relation to the Remaining Defendants. A Mareva order in the usual form shall issue as against the Remaining Defendants.

Test For Granting Leave to Appeal

[9] The test for granting leave to appeal an interlocutory order of a judge is set out in Rule 62.02(4) of the Rules of Civil Procedure. This Rule provides that leave to appeal shall not be granted unless,

(a) There is a conflicting decision by another judge or court in Ontario or elsewhere on the matter involved in the proposed appeal and it is, in the opinion of the panel hearing the motion, desirable that leave to appeal be granted; or

(b) There appears to the panel hearing the motion good reason to doubt the correctness of the order in question and the proposed appeal involves matters of such importance that, in the panel's opinion, leave to appeal should be granted.

Background Information

[10] In support of their request for a Mareva injunction, the Plaintiffs introduced evidence before the motion judge of activity of the Remaining Defendants which is alleged to be fraudulent. Some of the particulars of the alleged fraudulent activity include the following assertions which were contained in the affidavits filed with the court:

(1) The Defendant, Steven Sardinha has a history of engaging in and being convicted for illegal dumping and other fraudulent or illegal activity.

(2) The Defendant, Voralto Group Inc. ("Voralto") is jointly owned and controlled by the Defendants Andy Patruno ("Patruno") and Steven Sardinha ("Sardinha").

(3) In or around January 2016, the Defendants, Patruno and Sardinha approached Ahmad Kheir who is a co-director and co-shareholder of 2092280 Ontario Inc. ("209").

(4) During the course of those discussions, Patruno and Sardinha represented that Voralto was a landscaping company and wanted to lease a portion of 209's property in Grimsby to park its landscaping trucks and temporarily store clean landscaping topsoil for use in landscaping projects.

(5) Sardinha executed the lease on behalf of Voralto using a false name "Steve Silva" so that the Plaintiffs would not become aware of his past fraud convictions.

(6) Following signing of the lease, the Defendants illegally dumped 1,500 truckloads of industrial waste on the property in Grimsby.

(7) Although the lease of the Grimsby property required Voralto to insure the property against environmental contamination, one day after delivering the certificate of insurance to the Plaintiffs, Voralto cancelled the policy without telling the Plaintiffs.

(8) Voralto never paid rent to the Plaintiffs.

(9) Voralto's actions were the subject of a criminal investigation. The police have charged both Patruno and Sardinha with numerous counts of criminal fraud arising out of their activities in this matter.

The Plaintiffs' Position

[11] The Plaintiffs argue that a motion for a Mareva injunction ought to proceed without notice and that unless assets are frozen before a Statement of Claim is served, there is very little point in proceeding with an action against alleged fraudsters as there cannot reasonably be expected to be any assets remaining if the perpetrators are given notice of such a motion.

[12] The purpose of proceeding without notice is to obtain an order before those responsible for a fraud become aware of the action so that if the assets are then dissipated, the dissipation can be remedied through the contempt powers available to a court.

[13] Because of the recognized need to grant Mareva orders on a without notice basis, Mareva orders have their own internal protections including a requirement that if granted, the motion must be returnable within 10 days on notice to the defendants affected so that any objections can be considered by the court. In addition, Plaintiffs are required to give an undertaking relating to any damages suffered by any defendant affected in circumstances where an improper freezing order has been issued. The Plaintiffs must also meet the very high burden of proof in the test for a Mareva injunction. The Plaintiffs also bear the extraordinary burden of full and frank disclosure of its own and the other sides' likely case as required on motions made without notice.

[14] The Plaintiffs argue that the motion judge erred in law by failing to consider the likelihood of serious consequences to the Plaintiffs if they are required to serve their motion material before a Mareva injunction is granted.

Analysis

[15] The decision of Strathy J. (as he then was) in Sibley & Associates LP v. Ross, 2011 ONSC 2951 provides a helpful summary of the requirements for a successful Mareva injunction application.

[16] The five requirements for a Mareva injunction are:

(1) The plaintiff must make full and frank disclosure of all material matters within his or her knowledge.

(2) The plaintiff must give particulars of the claim against the defendant, stating the grounds of the claim thereof, and the points that could fairly be made against it by the defendant.

(3) The plaintiff must give grounds for believing that the defendant has assets in the jurisdiction.

(4) The plaintiff must give grounds for believing that there is real risk of the assets being removed out of the jurisdiction or disposed of within the jurisdiction or otherwise dealt with so that the plaintiff would be unable to satisfy a judgment awarded to him or her.

(5) The plaintiff must give an undertaking as to damages.

[17] In the present case, the motion judge declined to grant a Mareva injunction without notice to the Remaining Defendants. However, where the requirements for a Mareva injunction have been met, the case law supports a conclusion that notice to the parties affected is not required initially. This is reflected in the Sibley decision where it is noted that the plaintiff was seeking a Mareva injunction without notice.

[18] The motion judge in this case declined to give the order on an without notice basis citing delay by the Plaintiffs in advancing their claim for injunctive relief and the lack of evidence that the Remaining Defendants were dissipating assets which is the fourth requirement established under the case law.

[19] With respect to the first issue, the Plaintiffs did not issue their notice of action until August 2, 2017. A Statement of Claim was filed on September 1, 2017. The motion without notice for the Mareva injunction was not brought before the motion judge until November 6, 2017.

[20] In the present case, the Plaintiffs argue that a Mareva injunction can be brought at any time. They refer to the fact that timeliness is not one of the five requirements for a Mareva injunction as set out in the case law. However, this is not an issue we are required to address in this case. From a practical perspective, the rules relating to service of a Statement of Claim mean that there is a limit to the delay which can be incurred before the Defendants become aware of the litigation. While delay may be a relevant factor in some cases, particularly where urgency is alleged as a basis of moving without notice under Rule 37.07 (3), it is not a relevant factor where a risk of dissipation of assets is the basis for moving without notice under Rule 37.07 (2). The prejudice suffered by any delay would only appear to affect the Plaintiffs' chances of a successful recovery of damages. It is hard to identify any prejudice to the Defendants by delay in a case involving fraud and the risk of dissipation of assets.

[21] In our view, there is reason to doubt the correctness of the motion judge's conclusion that there is a lack of evidence that the Remaining Defendants "are dissipating assets" and that the lack of direct evidence of actual dissipation of assets is fatal to the granting of a Mareva injunction.

[22] This is reflected in the comments of Strathy J. in the Sibley decision where he states, at para. 63:

Rather than carve out an "exception" for fraud, however, it seems to me that in cases of fraud, as in any case, the Mareva requirement that there be risk of removal or dissipation can be established by inference, as opposed to direct evidence, and that inference can arise from the circumstances of the fraud itself, taken in the context of all the surrounding circumstances. It is not necessary to show that the defendant has bought an air ticket to Switzerland, has sold his house and has cleared out his bank accounts. It should be sufficient to show that all the circumstances, including the circumstances of the fraud itself, demonstrate a serious risk that the defendant will attempt to dissipate assets or put them beyond the reach of the plaintiff. [Emphasis added.]

[23] Thus, the Plaintiffs are not required to adduce direct evidence showing that the Remaining Defendants are actively dissipating their assets. A serious risk of dissipation is sufficient and the risk may be inferred in appropriate cases by the surrounding circumstances of the fraud. Unfortunately, the motion judge did not address that issue in the broader context as required.

[24] In the present case, the circumstances of the alleged fraud would suggest, based on the evidence before the court, that the Remaining Defendants are very likely to attempt to dissipate or hide their assets or remove them from the jurisdiction. The alleged circumstances which would justify this conclusion include:

(1) Sardinha executed the lease using a false name.

(2) Voralto was never in the landscaping business.

(3) The lease required Voralto to insure the Grimsby property against environmental contamination. However, one day after delivering the certificate of insurance, Voralto cancelled the policy.

(4) Within days of the lease being executed, hundreds of industrial size trucks began arriving at the Grimsby and dumped truckloads of industrial waste. This evidence is supported by photos of the alleged dumping.

(5) Voralto never paid rent to the Plaintiffs and there is evidence that a cheque it issued to 209 was returned NSF.

(6) It is reasonable to infer that the Defendants were paid for removing and disposing of industrial waste. The monies earned would be liquid, easily transferable and difficult to trace once transferred.

(7) The evidence supports a strong prima facie case of fraud.

[25] The plaintiffs claim the Remaining Defendants obtained contracts to haul industrial waste by undercutting legitimate competitors and then dumped the waste on an unsuspecting landlord never intending to dispose of the waste lawfully themselves. It is a reasonable infer from these circumstances that there is a real risk that a defendant who has a history of fraudulently dumping waste who establishes a prima facie case that the Remaining Defendants have done it again would attempt to dissipate or hide their assets or remove them from the jurisdiction if given notice of the motion for a Mareva injunction.

[26] As to the proof that the Remaining Defendants have assets, there is evidence in the record that until recently the corporate Defendant was purporting to continue to carry on business. To that end, it was paid sums by one or more of the Plaintiffs and those funds are either still with the corporate Defendant or were removed by its owners the Remaining Defendants.

[27] As all of the requirements for a Mareva injunction appear to be satisfied, there is reason to doubt the correctness of the order in question.

[28] The proposed appeal involves matters that in the panel's opinion require that leave to appeal should be granted. Fraud is a serious crime which threatens unwitting victims with substantial and often devastating financial losses. The Mareva injunction is an important tool for Plaintiffs to try and recover their losses due to fraud or theft. A requirement to notify the perpetrators of a fraud in advance of an impending Mareva injunction would significantly water-down an important remedy for protecting innocent victims. Judgments for damages cannot reasonably be expected to be affordable or collectable against fraudsters. If funds cannot be frozen in advance, a vital arrow in the civil law's quiver to address serious fraud will be lost. This is a narrow exception to the general rule against prejudgment execution. It is therefore a remedy that is not readily available. However, where evidence discloses a strong prima facie case that Defendants perpetrated a premeditated, substantial fraudulent scheme against innocent victims, the law's reluctance to allow prejudgment execution must yield to the more important goal of ensuring that the civil justice system provides a just and enforceable remedy against such serious misconduct.

[29] There are adequate safeguards associated with the Mareva order which provide for the protection of defendants who are the subject of a Mareva order. The Defendants may be able to use frozen funds to defend themselves and for living expenses provided they satisfy the applicable legal tests and accept the usual safeguards. In addition, as discussed above, the Plaintiffs are required to give an undertaking with respect to damages. Further, the Plaintiffs are required to promptly serve a copy of the order on the Defendants affected. The matter will be scheduled to come back before a single judge hearing motions in the Superior Court within 10 days of the court order to hear the Remaining Defendants' submissions and ensure that there is a prompt opportunity by the court to reconsider the appropriateness of the order.

Order

[30] For the above reasons, there is no basis to grant leave or set aside the dismissal of the claim for Mareva relief as against the Defendant, Catherine Patruno. Leave is granted, however, to appeal the decision of the motion judge to require service of the motion record for Mareva relief against the Remaining Defendants. For the same reasons, the appeal on this aspect of the decision is granted.

[31] The Plaintiffs shall be entitled to a Mareva order in accordance with the standard terms against all Defendants except for Catherine Patruno. Costs in the cause.

___________________________ THORBURN J

MCKELVEY J.

MYERS J.

Date of Release: April 17, 2018