Court File and Parties

COURT FILE NO.: CV-14-61854 DATE: 11/01/2021

ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN: 6071376 CANADA INC. Plaintiff/Moving party – and – 3966305 CANADA INC. and MAHMOOD KHEDMATGOZAR Defendants/Respondents

Counsel: G. James Thorlakson for the Plaintiff Charles Gibson & Ian Houle for the Respondents

HEARD: December 1st, 2020

Endorsement on Motion to Compel Disclosure

Justice Sally Gomery:

[1] 6071376 Canada Inc. (“607”) seeks an order to compel Mahmood Khedmatgozar (“Khedmatgozar”) and his company 3966305 Canada Inc. (“396”) to disclose records. It contends that 607 needs the records to assist in obtaining execution of a $1,196,682 judgment against the defendants.

Background

[2] The facts giving rise to the motion are not in dispute, as they are the subject of the trial decision in the action; 6071376 Canada Inc. v. 3966305 Canada Inc., 2019 ONSC 3947.

[3] In 2003, 607 invested $233,600 towards the purchase of a property in Hull, Quebec (the “Hull Property”) by Khedmatgozar’s wholly-owned company 396. The total purchase price for Property was just over $2.6 million. Pursuant to the parties’ agreement, 607 was to recover 40% of the net income during 396’s ownership of the Hull Property and 40% of the net proceeds on its eventual sale.

[4] In June 2006, unbeknownst to 607, the Hull Property was sold. After paying other investors (but not 607), Khedmatgozar used the balance of the sale proceeds to fund the purchase of another property by his company 396 (the “Wellington Property”) for $3,200,000. 396 collected commercial and resident rent from this Property and, in 2012, sold it for $4,670,000. All of this occurred without the knowledge or consent of 607. In fact, at trial, Khedmatgozar admitted that he actively concealed the sale of the Hull Property from 607’s principals and lied to them repeatedly when they asked about the status of their investment.

[5] After finally discovering that the Hull Property had been sold, in the plaintiff sued the defendants in 2014 for breach of their agreement. On June 25, 2019, 607 obtained judgment for $1,196,682, including general damages of $653,978, punitive damages of $200,000, and pre-judgment interest. The trial judge found that Khedmatgozar had breached his fiduciary duty to 607 by misappropriating the investment funds its principals had provided. He described Khedmatgozar as “an admitted liar” who used 396 as his alter ego. As a result, he found him personally liable for the damages and interest owed to 607. The judge also awarded 607 its substantial indemnity costs to the end of trial.

[6] The defendants’ appeal of the trial decision was dismissed by the Court of Appeal on June 30, 2020. The Court awarded 607 a further $20,000 in costs on the appeal.

[7] To date, the defendants have not paid any of the damages, interest or costs they owe to 607. Khedmatgozar has taken the position that the defendants’ only asset is his dental practice.

[8] On August 21, 2020, the plaintiff examined Khedmatgozar pursuant to r. 60.18 of the Rules of Civil Procedure. The purpose of the examination was to determine the whereabouts and extent of money and property held by the defendants, for the purpose of satisfying the June 2019 judgment. At the examination, Khedmatgozar provided nine undertakings, including undertakings to provide personal tax returns and notices of assessment, as well as personal credit card statements, for the preceding two years. He took under advisement questions relating to the ownership of his past and present dental practices and a request for further tax documents. The ownership of the dental practices is relevant because Khedmatgozar admitted, during the examination, that he used a single bank account for his professional income and revenues flowing to 396. He refused thirteen questions, including questions about financial dealings at non-arms’ length with individuals such as his spouse, and what happened to the proceeds of the sale of the Wellington Property.

[9] A month after the examination, the defendants had not provided answers to undertakings or advisements, prompting 607 to bring this motion. In its notice of motion, it sought an order compelling Khedmatgozar to answer all questions, undertaken, refused, or taken under advisement.

Submissions on this motion

[10] At the hearing of the motion on December 1st, 2020, the plaintiff’s counsel advised that the defendants had provided some answers the day before. He reported, however, that they contained no meaningful details and that no supporting records had been delivered. The November 30 communication from defence counsel was not filed on the court record by either party, but defence counsel did not dispute the plaintiff’s characterization of its contents.

[11] In the answers delivered, for example, the defendants conceded the general relevance of questions about the sale of the Wellington Property. They did not however provide any information about what happened to the proceeds of sale except to say that they were no longer available to pay the judgment as they had been used to pay off a debt Khedmatgozar allegedly owed in Florida.

[12] The defendants also conceded, in the November 30 correspondence, that the plaintiff is entitled to a copy of the agreement whereby Khedmatgozar recently sold his dental practice. They did not, however provide the contract, saying that they have not yet obtained it from the defendants’ solicitor and want to redact it before delivering it to the plaintiff. As a result, defence counsel was unwilling or unable to commit to a delivery date.

[13] 607 argues that these answers show that Khedmatgozar has no intention of respecting his obligation, as a judgment debtor, to make full and frank disclosure of his assets. In light of this, 607 is no longer only seeking answers to questions asked at the judgment debtor examination. It also seeks broad disclosure orders effectively requiring the defendants to provide a complete account of all of their financial dealings from the date of the sale of the Wellington property forward.

[14] The defendants argued that they had no notice of the additional orders that 607 was seeking prior to the hearing of the motion. They objected in particular to requests that went beyond questions asked at the debtor examination. The defendants contend that the proper procedure would be for 607 to obtain a ruling on undertakings, refusals and advisements and, if necessary, seek to continue its examination on the information provided in response. The defendants say that 607 will have to wait until after the one year anniversary of the first examination to ask any new questions since, pursuant to r. 60.18(4), only one examination in aid of execution may be held in a twelve month period in respect of a debtor in the same proceeding, unless the court orders otherwise.

Analysis

[15] R. 60.18(2) explicitly gives a creditor the right to examine a debtor on a wide array of topics relevant to their ability to satisfy the judgment. Permitted lines of questioning include:

a) the reason for nonpayment or non-performance of the order; b) the debtor’s income and property; c) the debts owed to and by the debtor; d) the disposal the debtor has made of any property either before or after the making of the order; e) the debtor’s present, past and future means to satisfy the order; f) whether the debtor intends to obey the order or has any reason for not doing so; and g) any other matter pertinent to the enforcement of the order.

[16] Subparagraphs (e) and (g), in particular, allow a very broad scope of inquiry.

[17] R. 60.18(2) codifies longstanding principle. The Court of Appeal recognized 140 years ago that a debtor examination could touch not only on the property that the debtor currently has, but also the property he had when the debt or liability giving rise to the action was incurred, and how he has disposed of that property since that time; The Ontario Bank v. Mitchell (1881), 32 U.C.C.P. 73 (ONCA), cited in EnerWorks Inc. v. Glenbarra Energy Solutions Inc., 2012 ONSC 748, at para. 23. In its 1881 decision, the Court of Appeal noted that:

[I]t is material in making or in the attempt to make out present property, to shew that at some anterior time, no matter how far back, the debtor had property, and to get an account from the debtor where that property is, or what has been done with it.

[18] In JG Young & Son Ltd v Gelleny, [2002] OJ No 4203, 29 CPC (5th) 109, 118 ACWS (3d) 35, 2002 CarswellOnt 3597, at paras. 13 to 16, Master Dash reviewed the caselaw establishing that a debtor “must properly account for his business affairs”. As he noted, a judgment debtor examination "should not be hampered by undue technicality”: Beau Monde Ladies' Tailoring Co. v. Garrett (1925), 57 O.L.R. 256. A debtor is not only required to answer questions put to him, but to actively assist the creditor in understanding what he has at his disposal to satisfy the judgment: "It is the duty of the defendant to furnish such explanation as will place his dealings in an intelligible shape. It is not to be left to the creditors to find out as best they may, what it is the business of the defendant to make plain."; Foster v. Van Wormer, (1888), 12 O.P.R. 597 at page 598.

[19] In Lauzier v. Ranger, [1995] O.J. No. 1943; 41 C.P.C. (3d) 64, Charron J. held that the scope of examination may extend even to questions about owned property on which the creditor had no right of execution, for instance jointly owned property, if the creditor can establish a connection between the property and the debtor. Information about such property may allow the creditor to discover other assets belonging to the debtor or to establish that assets previously owned by the debtor have been conveyed to another person at less than their actual value.

[20] In short, a judgment debtor examination is not a cat and mouse game or any kind of game at all. The plaintiff’s claim has been adjudicated and the defendant is liable to pay any damages assessed to the best of his ability. The examining creditor has the right to obtain a full account of the debtor’s property, as well as how he has disposed of property he held, all the way back to the time that the debt came into existence. The debtor is obliged to cooperate and even assist in this exercise. If it appears, from the examination, that the debtor “has concealed or made away with property to defeat or defraud creditors”, he may be found in contempt; r. 60.18(5).

Answers asked at the examination

[21] I have reviewed the table of undertakings, questions taken under advisement, and refusals filed by the plaintiff. I find that all of the questions asked sought relevant information and records.

[22] The plaintiff asked whether Khedmatgozar’s spouse was a shareholder in any of his dental practices and, if so, what she paid for them and how she got financing to do so. On the facts here and given the applicable principles on a judgment debtor examination canvassed above, I conclude that this is a relevant line of inquiry.

[23] I consider the following facts to be relevant. $4.67 million from the sale of a property, purchased using funds advanced by the plaintiff, has apparently vanished into thin air. Defence counsel has provided no meaningful information about what happened to this money. According to the defence, Khedmatgozar’s only remaining asset, as of a few months ago, was his dental practice. He coincidentally sold this practice only a few months after the Court of Appeal upheld the judgment against him, and a few weeks after his judgment debtor examination, for a relatively modest amount of money. Beyond these circumstances, which in of themselves raise suspicion, Khedmatgozaar has been found by the court to have been dishonest about his financial dealings with the plaintiff.

[24] In this situation, any interest that Khedmatgozar’s spouse (or any other person with whom he is not dealing at arm’s length) may have in the practice is highly relevant. His refusal to answer questions on this topic suggest that his spouse was or is a shareholder; if not, Khedmatgozar could have shut down this line of inquiry by answering “no” to the first question on the subject. If his spouse is or was a shareholder, it is legitimate for the plaintiff to satisfy itself that the shares — the only asset, apparently, remaining to satisfy any part of the debt owed to 607 — were not put it in her name to evade execution of the judgment.

[25] The defendants have had ample time to provide meaningful responses since the August 2020 examination. I therefore order them to answer the questions sought in the notice of motion, including those refused and taken under advisement, in the next seven days.

Additional information and records requested

[26] In addition to the information and records requested at the examination, the plaintiff asks that the defendants be ordered to provide the following:

(1) An unredacted copy of the share purchase agreement and shareholder registry for the new corporation that recently purchased Khedmatgozar’s dental practice; (2) Shareholder agreements, including share purchase agreements, for dental practices in which Khedmatgozar or his spouse is a shareholder; (3) Personal and corporate tax returns since 2012; (4) Loan applications and any supporting documents used to acquire the dental practices; (5) Personal and corporate credit card statements from 2012 to present; (6) Statement of adjustments from sale of Wellington property; (7) Proof of repayment of Florida investments; and (8) Particulars of any investments and payments made using proceeds from sale of Wellington property.

[27] I reject the defendants’ submission that the plaintiff must wait until August 2021 to ask further questions based on information received since the examination. The plaintiff is entitled to broad disclosure of the defendants’ current and past financial situation, so that it may execute the judgment it has obtained. It is accordingly legitimate for the plaintiff to ask follow-up questions notwithstanding the limit of one examination annually at r. 60.18(4).

[28] Defence counsel also objected to the orders sought on the basis that they were not set out in the notice of motion. None of the requests, with perhaps the exception of expanded requests for banking and tax records, could reasonably surprise defence counsel. They all flow either from lines of inquiry at the examination or arise as a result of information provided by the defendants after the examination.

[29] I would also observe that, to the extent that defence counsel had little time to prepare for the arguments raised at the hearing, this is a direct result of having waited until the day before to deliver answers to undertakings made two and a half months earlier.

[30] With respect to items (1) and (2), defence counsel acknowledged that the plaintiff could not have asked for these records at the August 2020 examination because they did not exist at that time. Khedmatgozar sold his current dental practice at the end of October 2020, and plaintiff’s counsel only learned about the sale in mid-November.

[31] Defence counsel also implicitly conceded that the share purchase agreement was relevant, because he undertook prior to the hearing of the motion to provide plaintiff’s counsel with a redacted copy. He has not however done so. In fact, defence counsel admitted that he had not yet taken steps to obtain the documents from the law firm acting for Khedmatgozar on the transaction. This lack of initiative is inconsistent with the defendants’ obligation to assist the plaintiff in understanding his financial dealings.

[32] Based on submissions made at the December 1st, 2020 hearing I immediately ordered that the defendants provide the following records within seven business days:

(i) all requested records with respect to the sale of Khedmatgozar’s professional practice. This includes the share purchase agreement and the share registry for any corporation formed to purchase the practice. (ii) the statement of adjustments on sale of Wellington property.

[33] I directed that, if any of these records were redacted, 607 has the right to request that they be reviewed, and I remain seized for this purpose. To alleviate concerns about the confidentiality of third-party information, I also directed that the deemed undertaking rule applies to these productions, such that the records could only be used by 607 to execute its judgment against the defendants.

[34] Item (4) relates to the possibility that Khedmatgozar’s sale of the dental practice was not at arm’s length. For the reasons I have already set out above, I find this line of questions to be relevant. I therefore order the defendants to provide the records requested at (4) within seven days.

[35] Items (6), (7) and (8) flow from the answers provided to undertakings. At the examination, the plaintiff asked a series of questions about the proceeds of sale of the Wellington Property. These questions were all refused. Defence counsel subsequently conceded the relevance of some of these questions on November 30, by saying that the proceeds had been used to pay a debt Khedmatgozar owed in Florida. No further details or records were however provided.

[36] I have already concluded that the questions about the sale of the Wellington Property were relevant. The records requested at (6), (7) and (8) are likewise relevant. I order the defendants to produce them in the next seven days.

[37] This leaves items (3) and (5). The defendants argue that there is no reason why they should be ordered to produce tax and banking records that the plaintiff could have requested at the August examination. At the examination, 607 requested these records for the preceding three years, but now seeks an order for records since 2012.

[38] The plaintiff’s counsel explained that, when he examined Khedmatgozar in August 2020, he assumed, perhaps unwisely, that he would get a meaningful amount of information about his financial dealings in answers to undertakings. This has not transpired. He now realizes that he will have to conduct a more thorough forensic review.

[39] As observed earlier, gamesmanship has no place in the execution of a judgment. Based on the principles set out in the caselaw from Bank v. Mitchell forward, the plaintiff has the right to information about all of the defendants’ financial dealings and the disposition of their assets since they first breached their agreement to pay 607 revenues and proceeds of sale from the Hull Property. The defendants should in fact be working actively to help 607 understand the state and evolution of their finances.

[40] Since 607 could have asked for tax and banking records from 2006 on at the August examination, I see no reason why it should be foreclosed from seeking some of these records — tax and banking records from 2012 on — in the context of this motion. I further agree with the plaintiff that, given the lack of information provided to date, a review of these records is likely necessary to obtain an understanding of what the defendants have done with the proceeds from the sales of the Hull Property and the Wellington Property.

[41] I therefore order the defendants to provide the requested banking and tax records from 2012 forward. Since some of these documents may be in the hands of third parties, they will have twenty days from this endorsement to deliver them to the plaintiff.

Transfer of proceeds of sale held in trust

[42] The plaintiff requested the transfer of $81,000 that defence counsel has advised is held in trust following the sale of Khedmatgozar’s dental practice, in partial satisfaction of the outstanding judgment.

[43] There is no evidence with respect to these funds in the court record. I cannot determine whether there is a valid reason for the refusal by defence counsel to transfer these funds to the plaintiff. I therefore cannot make the order sought at this time.

Disposition

[44] The motion is granted for the relief set out in these reasons.

[45] The plaintiff is entitled to costs on the motion. Plaintiff’s counsel shall serve and file a costs outline, attaching a draft bill of costs and any other relevant documents, within ten days. The defendants shall serve and file a responding costs outline, with a draft bill of costs and any other relevant documents, within ten days of receipt of the plaintiff’s submissions. Each costs outline shall not exceed three pages in length. Materials shall be submitted to the Court in searchable pdf format by email to ottawa.scj.courts@ontario.ca.

Justice Sally Gomery Released: January 11, 2021