Court File and Parties

COURT FILE NO.: CV-23-00697221-00C DATE: 20230612 SUPERIOR COURT OF JUSTICE – ONTARIO – COMMERCIAL LIST

RE: WAYNE SAFETY INC., Plaintiff AND: DIANA GENDELMAN, NATAN GENDELMAN, 12069253 CANADA INC., BEST SHOWA INC., HEALTH IN MOTION REHABILITATION INC., HEALTH IN MOTION MEDIA INC., ENABLED KIDS INC., 13829103 CANADA INC., 2663788 ONTARIO LTD., 14807031 CANADA INC., ALEXANDER DOBRINSKI, DDNG CORPORATION, JOHN DOE, JANE DOE, and other persons unknown who have conspired with the named Defendants

BEFORE: Peter J. Osborne J.

COUNSEL: Mark Ross, Sara Romeih & Eric Brousseau, for the Plaintiff Kim Ferreira, for the Defendants Diana Gendelman, Natan Gendelman & Related Entities Michael Simaan, for the Defendant Alexander Dobrinski Jeffrey Haylock and Sandy Lockhart, for the Independent Supervising Solicitor

HEARD: April 13 and 14, 2023

Endorsement

[1] This matter returns as directed by me in my previous Endorsement providing reasons for the Mareva, Norwich, Anton Piller and Certificate of Pending Litigation (“CPL”) relief granted in companion orders.

[2] Defined terms in this Endorsement have the meaning given to them in my earlier Endorsements and/or the motion materials, unless otherwise indicated.

[3] All named Defendants are now represented, and counsel for all named Defendants was present, together with counsel for the Independent Supervising Solicitor (“ISS”) and the Plaintiff.

[4] Motion materials by the Gendelman Defendants were served very late the night before the hearing and early the morning of the hearing itself.

[5] There were six issues to be addressed today:

a. a request to vary the existing orders to provide funding for living expenses for the Gendelmans; b. a request to vary the existing orders to provide funding for legal expenses for the Gendelmans; c. a request to vary the existing orders to provide funding for certain real estate projects under development to continue, and for the servicing of mortgage financing for those projects; d. a request to lift the CPL over the Calderon Property (11 Calderon Crescent, North York, Ontario) which is the subject of a pending sale; e. a request for directions with respect to access to evidence seized; and f. a request for the return of the Gendelmans’ passports, currently deposited for safekeeping with counsel for the ISS.

[6] In the course of hearing submissions from counsel, it became apparent that some of the above issues ought not to be determined today, but rather should be addressed on the basis of a full record once all affected parties have had an opportunity to file materials as appropriate.

[7] One such issue is the Calderon Property. It is the subject of a pending Agreement of Purchase and Sale (“APS”) previously entered into by the owner, 2663788 Ontario Ltd. (“266 Ontario”), scheduled to close next Monday, April 17. All parties are in agreement that the sale should be allowed to proceed, as there is no evidence that the purchaser is anything other than a bona fide arm’s-length purchaser and that the sale price represents fair market value.

[8] All parties are also in agreement that, with one notable exception discussed below, the proceeds of sale, net of transaction costs such as adjustments and real estate commissions, are to be held in trust by the real estate solicitor acting for the vendors and not released from that solicitor’s trust account pending further order of the Court.

[9] The one exception to that, albeit a significant one, is whether the mortgagees who hold mortgages against title to that Calderon Property should be paid out on closing. This needs to be dealt with prior to April 17, since the sale presumably will not close unless those issues are addressed. A further complicating factor is that this property is owned, as noted above, by 266 Ontario. That entity is owned and controlled by the Defendants. Diana Gendelman is the Secretary Treasurer and one of two directors. The Defendant Alexander Dobrinski is the President and one of two directors. He also personally guaranteed one of the mortgages registered against title to the Calderon Property.

[10] Mr. Dobrinski’s counsel has just been retained and is in the process of reviewing the materials. He wants an opportunity to respond with respect to that pending sale.

[11] In all the circumstances, it is appropriate to adjourn that issue in order to allow the parties an opportunity to work out a consensual resolution of the issue of whether and the extent to which the mortgages registered on title to the Calderon Property should be paid out to permit the sale of the Calderon Property to proceed. The parties are also going to attempt to work out a consensual resolution of the issue as to whether certain of the sale proceeds that would otherwise be applied to discharge the mortgages (i.e., such as the mortgage that Mr. Dobrinski guaranteed) should be retained in the trust account of the solicitor to the vendor pending further order of the Court, but the mortgage discharged in order that the sale can proceed.

[12] Accordingly, I will hear the parties with respect to that issue on Friday, April 14, 2023, at 9:00 A.M. via Zoom before the beginning of the regular court day, since, as noted above, closing of the APS is scheduled for April 17.

[13] Mr. Ross will ensure that all affected parties have all necessary materials if they have not done so already. The Plaintiff’s Notice of Action has been issued, and a Statement of Claim will be provided shortly.

[14] As to the evidence obtained upon the execution of the Anton Piller order, counsel for the ISS provided a summary of the status, amplifying the ISS Report filed with the Court. While generally, execution of the order proceeded without incident, the ISS noted, and was concerned (as was the Plaintiff) by a delay of approximately two hours in the ISS being granted access to the subject premises, having been advised that there were no additional computers or electronic devices, and then discovering, after Mr. Gendelman had asked to be left alone in the basement, an additional laptop stuffed in a duffel bag in a room under the stairs with the light on. This led the ISS to believe that it had been in use immediately prior to it being located.

[15] In any event, counsel for the Gendelman Defendants was concerned that the Plaintiff would have access to electronic and physical document evidence seized without any ability for claims of privilege to be maintained, resolved or determined. First, all evidence remains in the possession or control of the ISS. None of it has been provided to the Plaintiff. Second, all parties are in agreement (and I would have so ordered had they not been) that a protocol should be established for the preservation of the documents, analysis as to relevance, and any claims of privilege to be asserted by the Gendelman Defendants.

[16] Under the auspices of the ISS, counsel will work cooperatively with a view to sorting out that protocol, failing which it will be set by the Court. It is the expectation of the Court that the parties, particularly with the involvement of the ISS, ought to be able to work out a protocol that balances the appropriate steps to be taken with the need for preservation of relevant evidence and efficiency and alacrity.

[17] With respect to access to funds for living expenses and legal expenses, the Gendelmans request that they each receive $10,000 per month to fund living expenses, for a total of $20,000 per month for living expenses, and an additional $55,000 to pay their lawyers for fees and disbursements through to at least the close of pleadings.

[18] The Gendelman Defendants state that they have established on the evidence that they have no other assets available to pay for their expenses other than those frozen, that they require these amounts for living expenses and legal costs and that they meet the test for an order to vary a Mareva injunction: Canadian Imperial Bank of Commerce v. Credit Valley Institute of Business & Technology, [2003] O.J. No. 40 (S.C.), at para. 18. They also rely heavily on the decision in Bot Construction (Ontario) Ltd. v. Dumoulin (2008), 90 O.R. (3d) 680 (S.C.), at paras. 14-15.

[19] The Gendelman Defendants submit in their factum and their counsel repeated in court, that they have no other assets.

[20] The Gendelman Defendants also request a variation to the previous orders to continue funding construction costs and mortgage financing costs for all of their other properties currently under development. Today, their counsel was unable to quantify with precision what that amount would be, but submitted that it was in the interest of all parties to preserve and maximize the value of the assets, with the result that, so long as the funds were used to continue construction, pay trades and service mortgage financing, the amount should be paid whatever the quantum may be.

[21] The Plaintiff objects to these requests and submits that, at least for today, no funds whatsoever should be made available to the Gendelman Defendants for living expenses, for legal expenses or to fund financing and construction costs for the properties under development.

[22] The Plaintiff submits that neither Mr. nor Mrs. Gendelman has delivered a sworn version of their statement of assets. I pause to observe that their counsel undertook to have them do so immediately. He also confirmed that the unsworn statements delivered were accurate.

[23] The Plaintiff also submits that there is no affidavit evidence whatsoever from the principal Defendant, Diana Gendelman. The affidavit of her husband, Natan Gendelman, should be accorded little if any weight, the Plaintiff submits, since he boldly states that he has no knowledge of his wife’s activities or bookkeeping.

[24] The Plaintiff further submits that a significant portion of the funds those Defendants are requesting are for Diana Gendelman and also various companies of which he is not even a director. In short, the Plaintiff submits that there is still no evidence of the legitimacy of their funds.

[25] Applying the Credit Valley factors, pursuant to paras. 25-26 of that decision, I am concerned about the fact that the evidence appears to disclose over $100,000 per month in expenses being funded, without any evidence of combined income for the Gendelmans together of even one fifth of that amount. They submit that the real estate portfolio funded the balance, but many of the properties remain under development and indeed require additional cash infusions (as noted above, this is part of their request for the release of funds), and they are a long way from being cash flow positive so as to generate the approximate amount of $80,000 per month, every month, to fund the additional expenses on those other properties, at least on the evidence in the Record to date.

[26] It also appears to be the case on the Record before me that the total value of all of the properties identified to date is approximately $10 million, while the total value of mortgage financing registered against those same properties is approximately $15 million, which are material sums that remain unaccounted for.

[27] As noted, Diana Gendelman has not put forward any evidence. Natan Gendelman has filed an affidavit, but it is silent with respect to those issues, or with respect to the concerning events referred to above and detailed in the Report of the ISS.

[28] On the other hand, I accept that the Gendelmans do need funds for basic living expenses.

[29] Having considered all of the factors, and balancing the appropriate interests, I direct that the Gendelmans may access up to a maximum of $3500 per month in the aggregate for the two of them together, for living expenses, and may access up to a further $25,000, in the aggregate, for legal expenses. Both of those orders (i.e., for living expenses, and for legal expenses) are subject to review and variation at the request of any party at any time. They are not permanent or even interlocutory orders, but are interim orders in effect only until further order of this Court.

[30] Finally, the Gendelmans seek the return of their passports that are in the custody of the ISS. Their counsel confirms that they have no travel planned so that there is no issue of an imminent trip, for example. They do submit, vigourously however, that they regularly visit friends and family abroad and in particular in Russia and Israel, and there is no basis for an order restricting their ability to do so.

[31] The Plaintiff opposes this relief also. It submits that, given that the Gendelmans have family and friends abroad, that the identified properties in this jurisdiction appear to be “under water” in the sense that the mortgage financing exceeds the total property value, there is good reason to believe that a significant portion of the funds that the Plaintiff alleges were stolen from it have been transferred abroad. For these reasons, the Plaintiff submits, those Defendants pose a flight risk and their passports should remain in the custody of the ISS.

[32] I recognize that this Court has ordered on numerous occasions the surrender of passports of the Defendants in civil proceedings and in particular in the context of Mareva injunctions. However, it would appear that the jurisprudence analyzing when and on what terms such an order is appropriate, is relatively limited.

[33] It seems to me that the jurisdiction to grant such an order in a civil proceeding must flow from s. 101 of the Courts of Justice Act, R.S.O. 1990, c. C.43, which gives this Court the power to grant an interlocutory injunction or mandatory order where it appears to a judge of the court to be just or convenient to do so. I reach this conclusion since the practical effect of granting an order directing the surrender of passport is akin to granting an injunction prohibiting the holder of that passport from travelling outside Canada.

[34] The issue, then, is whether it is just or convenient to make such an order.

[35] There is some guidance from the England and Wales Court of Appeal on this issue. In Bayer A.G. v. Winter, [1986] 1 All E.R. 733, the Court considered an appeal by the plaintiffs from a decision granting Mareva and Anton Piller relief against the defendant but refusing to order that the defendant surrender his passport.

[36] The Court of Appeal reversed the lower court decision and directed that the term requiring the defendant to surrender his passport be included in the order, describing it as: “an injunction restraining the first defendant from leaving the jurisdiction, and secondly, that he deliver up his passports.”

[37] In coming to this conclusion, the Court of Appeal relied on the wide discretion afforded by s. 37(1) of The Supreme Court Act 1981 (now the Senior Courts Act 1981 c. 54) which provides that “the High Court may by order (whether interlocutory or final) grant an injunction or appoint a receiver in all cases in which it appears to the court to be just and convenient to do so.” The Court further explained that “the Court has a wide discretion to do what appears to be just and reasonable in the circumstances of the case.”

[38] Accordingly, while that case supports my conclusion that the similar discretionary jurisdiction given to this Court under s. 101 of the Courts of Justice Act could be interpreted sufficiently broadly to include the power to order the surrender of a passport, I must still consider whether it is just or convenient to do so in this case.

[39] At the outset, I would observe that such a term ought to be granted with caution. The nature of the right being infringed by such a term is qualitatively different than the rights being affected by virtually every other term of the orders sought here. Mareva, Anton Piller and Norwich relief, and CPLs, all of which I have granted here, focus on the preservation and production of assets and/or evidence that are the subject of or relevant to the current proceeding.

[40] An order requiring the surrender of a passport, on the other hand, infringes the liberty and freedom of movement of the holder of that passport. Accordingly, it seems to me that the threshold for obtaining such an order should be high. As a starting point, it seems to me that in most if not all cases, the moving party must have already satisfied the Court that a Mareva injunction freezing the subject assets should be granted.

[41] I also accept that in many cases, and particularly cases of alleged fraud, the risk of asset flight or dissipation can be reasonably inferred from the material facts supporting a strong prima facie case of fraud: Wallace v. Pristine Developments, 2021 ONSC 2794, at para. 26. There may not be direct evidence of all of the above factors, and there may very well be cases in which the factors can be satisfied by indirect or inferential evidence.

[42] I further recognize that some courts have framed the issue by posing the rhetorical question of whether a defendant “poses a flight risk”. While this issue is clearly part of the analysis, it cannot be the entire analysis, since even if the answer to that hypothetical question is “yes”, there must still be a basis to order the surrender of the passport.

[43] In other words, if the defendant remained in the jurisdiction, would the plaintiff/moving party be entitled at the end of the day upon proving its case on the merits to an order restricting the movement of the defendant out of the jurisdiction unless and until such time as a judgment were satisfied?

[44] The answer may be very different in a criminal proceeding, or even in a civil proceeding where the relief being sought was, for example, a finding that the individual was in contempt of court.

[45] I do not purport here to set out any definitive test or list of factors to be applied to the analysis of whether such an order is “just or convenient”. Clearly, the analysis will be very fact specific in each individual case. It may be, however, that factors such as those set out below, to be applied once entitlement to Mareva relief had been established, could be useful in determining whether an order compelling the surrender of passports should be made:

a. are there assets, and particularly assets (including but not limited to funds), located outside the jurisdiction, which are the subject of the Mareva relief? b. were those assets transferred out of this jurisdiction in an attempt to place them beyond the reach of this Court? c. were there attempts on the part of the defendant to hide, to not disclose, or transfer contrary to any court order, any assets, documents, or other evidence out of the jurisdiction?” d. were there attempts on the part of the defendant to hide, to not disclose, or transfer contrary to a court order, any assets? e. was there a breach by the defendant of a prior order of the court?

[46] In my view, this issue requires further judicial consideration. It may be that other factors, in addition to the non-exhaustive list above, may be relevant.

[47] In the particular circumstances of this case, I decline to order the continued retention of the passports by the ISS at this time and direct that they be returned.

[48] Except to the extent they are varied by this Endorsement, all previous orders remain in full force and effect. As stated above, I will hear the parties with respect to the Calderon Property on Friday, April 14 at 9:00 A.M. via Zoom. The parties can also address further scheduling issues at that time if and as necessary.

Osborne J. Date: June 12, 2023