COURT FILE NO.: CV-14-511290 DATE: 20230705
ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
LIQUID CAPITAL EXCHANGE CORP. Plaintiff
– and –
MARC DAOUST, A.KA. JEAN-MARC DAOUST, PETER COOK, FRANK ZITO, ENBRIDGE GAS DISTRIBUTION INC., JOBEC INVESTMENTS RRT LTD., ENBRIDGE SALES INC. and 2292430 ONTARIO INC. Defendants
Counsel: Jeffrey Radnoff & Charles Haworth, for the Plaintiff Chris Argiropoulos, for the Defendant Frank Zito John Longo & Pamela Miehls, for the Defendant Enbridge Gas Distribution Inc.
HEARD: January 16-26, 2023
Justice Pollak
Reasons for Decision
[1] The Plaintiff, Liquid Capital Exchange Corp. (“Liquid Capital”), is incorporated in Ontario and is in the business of financing. It provides short-term financing for start-up companies that cannot obtain conventional financing. It secures financing on the strength of the companies’ third-party invoices, advancing a discounted invoice to a debtor and receiving payment in full of the invoice from the person who owes the money to the debtor.
[2] Liquid Capital was defrauded by two of the defendants, Mr. Cook and Mr. Daoust, who created false invoices that showed their company was owed money from “Enbridge”. Liquid Capital relied on these invoices and advanced $757,525.50 to Mr. Cook and Mr. Daoust’s company.
[3] Mr. Sol Roter (“Mr. Roter”) is the principal of Liquid Capital.
[4] In 2006, Mr. Roter and the defendant, Mr. Peter Cook (“Mr. Cook”), operated a company that Liquid Capital had purchased. The business was sold around 2006 and Mr. Cook was employed by the plaintiff to help develop its business. In April of 2008, he started his own factoring business.
[5] The defendant, Mr. Jean-Marc Daoust (“Mr. Daoust”), owned and operated Virtucall, two large call centres. Several years before this action was commenced, the Plaintiff provided financing to Virtucall through an introduction by Mr. Cook.
[6] The defendant, Enbridge Gas Distribution Inc. (“Enbridge”), is a gas distribution company.
[7] The defendant, Mr. Frank Zito (“Mr. Zito”), was employed by Enbridge as a collections manager. Mr. Zito’s employment was terminated after the events that led to this proceeding.
[8] Mr. Zito was a friend of Mr. Rocky Racca (“Mr. Racca”) before this litigation. This court has held that Mr. Racca received $389,000.00 from the funds defrauded from Liquid Capital. It was alleged by the Plaintiff that Mr. Zito was paid $15,875.00 by Mr. Racca when the fraud was taking place.
[9] The defendants Jobec Investments RT Ltd, Enbridge Sales Inc. and 2299430 Ontario Inc. are corporations alleged to be used by Mssrs. Daoust and Cook to assist in the fraud. How? There is no evidence before the court in this regard.
[10] Mr. Daoust, Enbridge Sales Inc. (another entity that does not exist) and 2299430 Ontario Inc. have been noted in default.
[11] Mr. Cook’s defence was struck by the Court for failing to comply with his disclosure obligations.
[12] Messrs. Cook and Daoust were convicted of fraud on the plaintiff.
[13] The plaintiff claims that the defendants, Messrs. Zito, Daoust, Cook and Enbridge are liable to pay damages to it in the amount of $398,433.50 (not including interest) as follows:
a. Amounts advanced pursuant to the invoices: $757,525.50 b. Less Payment from Enbridge Sales: $76,840.00 c. less amounts collected in bankruptcy/proceedings involving WF Canada Ltd.: $282,252.00
[14] Liquid Capital relied on the evidence of Mr. Roter (its principal), Mr. Vlad Rojko and Mr. Barnett Gordon, who testified on the Plaintiff’s process of advancing funds to its clients. Messrs. Cook and Daoust also testified.
[15] The Plaintiff’s theory is that:
a. By 2012, Mr. Cook and Mr. Daoust borrowed over $1,000,000 from Mr. Racca at an interest rate of 39.99% (evidence of Messrs. Cook and Daoust). Messrs. Cook and Daoust with the alleged assistance of the defendant Mr. Zito, committed a fraud against the plaintiff in an attempt to repay Mr. Racca. (This allegation was denied by all witnesses.) b. Mr. Zito was the collections manager of Enbridge at the relevant time. He managed third-party collection agencies. He had been involved in the selection of third-party collection companies in the past. c. Mr. Zito was a friend and business associate of Mr. Racca. He had allegedly invested in businesses involving Mr. Racca. Mr. Zito invested in a call centre, Virtucall, partly owned by Mr. Daoust, in the approximate amount of $50,000.00. Mr. Zito disputes this characterization of the evidence and testified that he had loaned Mr. Racca the money. d. In May/June of 2013, in an attempt to repay Mr. Racca, Messrs. Cook and Daoust participated in a false invoice scheme to defraud the plaintiff to repay Mr. Racca (evidence of Messrs. Cook and Daoust). e. To assist with the scheme, Messrs. Cook and Daoust had to get the assistance of an insider at Enbridge, Mr. Zito. He was a willing accomplice because he stood to benefit from the fraud, to get repayment of amounts he had invested into Virtucall through the funds defrauded from Liquid Capital. This allegation is denied by all witnesses. As set out below, I do not accept that this allegation has been proven. f. The plaintiff’s theory is that Enbridge is, therefore, liable for the fraud of its employee Mr. Zito. The evidence is that it prepared a report on the fraud and fired Mr. Zito. The plaintiff emphasizes that Enbridge did not take any steps to provide evidence to the court that it must have had concerning the fraud, actively seeking to supress evidence concerning the fraud that may be against its own financial interests. The plaintiff did not take any steps to move for production of these documents. As set out below, I do not accept this allegation.
[16] The defendants Messrs. Cook and Daoust were known to Liquid Capital. It had factored Mr. Daoust’s business Virtucall and had also invested in Mr. Cook’s previous business. Mr. Cook worked for Liquid Capital until around 2011.
[17] Mr. Roter was an investor in Mr. Cook’s company, a video rental company for hotels in the Caribbean. After selling his video rental company, Mr. Cook started working for Liquid Capital and was mentored by Mr. Roter in the factoring business.
[18] In the spring of 2013, Messrs Cook and Daoust met with Mr. Roter to discuss financing by the plaintiff for a new call centre operated by Messrs. Daoust and Cook, called WF Canada Ltd. (“WF”).
[19] Mr. Roter was shown a Services Agreement dated March 28, 2013, between WF and Enbridge Gas Distribution Inc. (which does not exist) (the “Agreement”). The Agreement outlined the services that WF would be providing to Enbridge Gas Distribution, which allegedly involved call centre collection services. The Agreement listed Mr. Zito’s email address at Enbridge as the “debtor contact”. In addition, three original invoices also included Mr. Zito’s email address.
[20] The fraudulent Service Agreement did not contain the proper legal name of Enbridge Gas Distribution Inc. It was admitted by the President of Liquid Capital, Mr. Roter, that this is something that should have been flagged by the plaintiff during the due diligence process, but was missed. The proper name of Enbridge was never verified. At trial, Mr. Cook admitted that he forged Mr. Zito’s signature on this document.
[21] Mr. Roter testified that the keys to successful factoring are “character and collateral”. Messrs. Cook and Daoust were well known in the factoring industry and the invoices were from “a Canadian blue-chip company”, Enbridge. Therefore, the transaction involving WF provided both character and collateral as assurance to Liquid Capital.
[22] The theory of Enbridge’s defence is that the plaintiff was not properly diligent. It should have conducted searches, which would have revealed the fraud. I agree. The plaintiff did not follow its own procedure.
[23] Mr. Cook submitted WF’s completed Client Application to the plaintiff on May 29, 2013.
[24] Liquid Capital’s standard procedure was to perform due diligence in regard to a Client Application. Mr. Roter was in charge of the due diligence. It was his evidence that, typically, a whole team at Liquid Capital was involved in conducting due diligence. This process included retaining lawyers to assist with the due diligence and conducting certain credit and corporate searches.
[25] It was the plaintiff’s evidence that they produced their complete due diligence file in this action. However, no documentation with respect to a due diligence file concerning WF is in the plaintiff’s productions. This was admitted by Mr. Roter during his cross-examination.
[26] A Liquid Capital Financial Application Checklist relating to WF, which was supposed to be in Liquid Capital’s due diligence file, was not produced. This Checklist lists several documents Liquid Capital was supposed to obtain in connection with its due diligence of its “deal” with WF, which were not obtained.
[27] It is Enbridge’s position that there were no credit or corporate searches conducted on WF or its principals, Mr. Cook and Mr. Daoust. Mr. Roter testified that such searches should be in the due diligence file, but they were not in the plaintiff’s productions or in the evidence before this court.
[28] Further, there were no social media account searches conducted on WF or its principals. However, there were social media account searches conducted on WF after the fraud was discovered.
[29] Despite Mr. Roter’s evidence that it was standard procedure for Liquid Capital, no site visit of WF’s premises was conducted. Had the plaintiff visited the site, it would have seen that WF had no employees despite allegedly being a call centre collecting payments for Enbridge Gas and other companies.
[30] Mr. Roter testified that the plaintiff did not follow up with WF’s bank regarding WF’s bank account records and statements. WF’s Application Form indicated that its bank account was opened on May 9, 2013, and bank account statements showed very little activity for a company that was alleged to be generating hundreds of thousands in revenue. These Financial Statements were not obtained by the plaintiff until after the fraud was discovered.
[31] It is Enbridge’s position that the plaintiff did not do any due diligence because this deal was brought to the plaintiff by a “trusted friend”, Mr. Cook. He had been a partner with the three principals of Liquid Capital in a video business. Mr. Cook was also Liquid Capital’s former VP Sales and had brought Liquid Capital a lot of business in the past.
[32] It was also Mr. Cook’s evidence that he probably “got cut slack” because of his relationship with Liquid Capital.
[33] Liquid Capital’s principals never thought that Mr. Cook would commit a fraud against them. Mr. Roter testified that he felt “profoundly betrayed” when he discovered that Mr. Cook was involved in the fraud. Mr. Gordon agreed.
[34] I find that the plaintiff trusted Mr. Cook, and that it was because of this trust that it did not follow its normal due diligence practices.
[35] All other emails exchanged with Mr. Zito before the fraud is discovered were sent or received from Frank Zito’s alleged Telus Blackberry email account.
[36] Both Mr. Cook and Mr. Daoust admitted during their testimony that they were criminally convicted as a result of the fraud in issue and that Mr. Zito was not involved in the fraud.
[37] Mr. Rojko is the vice-president of operations at Liquid Capital and a Chartered Professional Accountant and Certified General Accountant. In 2013, he was Liquid Capital’s manager of operations, assisting in underwriting factoring transactions.
[38] Mr. Roter instructed Mr. Rojko to send a notification letter (the “Notification Letter”) to Enbridge to advise Enbridge of the factoring agreement it had entered with WF, instructing Enbridge to pay WF invoices to Liquid Capital. Mr. Roter also told Mr. Rojko to verify that the Enbridge invoices were valid. Liquid Capital normally requires the debtor to confirm each invoice to ensure that they are valid and will be paid. The plaintiff also required Enbridge to sign the Notification Letter acknowledging the services being provided to it by the client, WF, and requiring Enbridge to pay the WF invoices directly to Liquid Capital.
[39] Mr. Rojko testified that he “confirmed the validity of the first three invoices independently” by determining who the correct contact was at Enbridge as follows:
a. He conducted a Google search and reviewed Mr. Zito’s social media, such as LinkedIn. b. Through his searches, Mr. Rojko discovered that Mr. Zito was a speaker at a credit conference and was identified as an employee of Enbridge. c. Mr. Rojko called Enbridge’s 1-800 number, asked to speak to Mr. Zito “in collections”. He was given another 1-800 number to call, which he called and asked to speak with Mr. Zito. He was forwarded to Mr. Zito’s voicemail, and he left a voicemail introducing himself. He received no reply to his voicemail and never spoke to Mr. Zito. Mr. Rojko did not check that the right corporate name was in the Agreement. d. On June 7, 2013, Mr. Rojko emailed Mr. Zito at his Enbridge email directly and asked for confirmation that the invoices were valid and correct.
[40] The emails he sent are set out below.
June 7, 2013 at 9:14am, Mr. Rojko sent an email to Mr. Zito’s Enbridge email account, Frank.Zito@enbridge.com (“Enbridge account”), to confirm the validity of three fraudulent WF invoices as follows:
Dear Zito,
Our new client WF Canada Ltd. had instructed us to contact you for directions and confirmation of the billing and payment process for the services provided to Enbridge Gas Distribution.
According to our arrangement with WF Canada Ltd. we will be processing company’s invoices, including submission for payments and collections.
Please let us know who and how we will be submitting new invoices for provided services starting from first week of June 2013. Who should be contacted to confirm that services billed have been performed, correct and accepted according to service agreements between Enbridge and WF Canada?
Please let us know what process should be followed to record Liquid Capital as third party payee in Enbridge’s account payable system. If our standard assignment notification letter is acceptable please help us to have it signed by an authorized Enbridge representative.
Please let me know if the attached invoices are correct according to your records and will be paid according to the established Enbridge’s payment schedule
Invoices attached B102, B103 and B104
[Emphasis Added]
At 9:17 am, Mr. Rojko emailed Mr. Zito’s Enbridge email account because he had forgotten to attach the documents he referred to in the previous email. He attached the following documents:
i. Invoices B102, B103, B104; and ii. Notification Letter re WF Canada Ltd., unsigned by Enbridge and Mr. Zito.
By return email from frankzito@telus.blackberry.net (the “Blackberry account”) dated June 7, 2013 at 11:52:00am, Mr. Zito is alleged to have confirmed the validity of the 3 fraudulent invoices. Mr. Zito testified that he has no Blackberry Address. The blackberry email copied Mr. Zito’s Enbridge account. Attached to the Blackberry email was the signed Notification letter by Enbridge, allegedly signed by Mr. Zito, which provided in part as follows:
The undersigned [Enbridge] acquiesces in and accepts the assignment to Liquid all further invoices and other receivables which are purchased from time to time by Liquid and undertakes to make payment thereof to Liquid on the due date referred to above at the address indicated above or as otherwise instructed by Liquid.
On the same day, at 12:41 pm, Mr. Rojko sent a further email to Mr. Zito at his Enbridge account and the Blackberry account thanking Mr. Zito for his quick response.
[41] There are only two emails sent to Mr. Zito’s valid Enbridge account by Liquid Capital (Exhibits 35 and 36), both dated June 7, 2013. The second email included the unsigned Notification Letter and WF Invoice nos. B102, B103 and B104. The responses to these two emails are from Mr. Zito’s Blackberry account. The Blackberry emails are copied to the Enbridge account (Exhibits 37 and 38). There are therefore 4 emails in total sent to Mr. Zito’s Enbridge email, two of which were copies of the Blackberry emails.
[42] It was Mr. Zito’s evidence that he did not open the attachments to the emails he received from Liquid Capital on his Enbridge email account and that he deleted the emails because he thought that they were spam.
[43] At trial, Mr. Cook and Mr. D’Aoust each testified that the other sent the emails from the Blackberry account. The plaintiff emphasizes that there is no logical explanation as to how Messrs. Cook or Daoust came into possession of the emails that were sent only to Mr. Zito’s Enbridge account.
[44] The evidence is that the “Zito” Blackberry account was created by Marc D’Aoust and that it was Marc D’Aoust or Peter Cook who was responding to Liquid Capital. Mr. D’Aoust stated during his testimony that he and Mr. Cook knew when Liquid Capital was reaching out to Mr. Zito on June 7, 2013 to verify the first three invoices because they were following up with Liquid Capital in this regard. Once they received confirmation from Liquid Capital that the first three invoices were sent to Mr. Zito for verification on June 7, 2013, they responded quickly from the “Zito” Blackberry account. This evidence is consistent with the emails produced. When the first fake “Zito” Blackberry email is sent to Liquid Capital on July 7, 2013 attaching the signed Notification Letter and approving Invoice Nos. B102, B103 and B104, the original email from Liquid Capital to Frank Zito’s Enbridge account is not attached.
[45] It was Mr. Cook’s testimony that the fraudulent Service Agreement allegedly entered into between WF and Enbridge Gas was not signed by Mr. Zito, it was signed by Mr. Cook. It was also Mr. Zito’s evidence that he did not sign the Service Agreement.
[46] Liquid Capital was able to mitigate some of its losses through the bankruptcy proceedings of WF. At the bankruptcy hearing, in which Messrs. Cook and Daoust gave evidence, the court made the following findings, which the plaintiff submits are binding on this Court:
a. WF was incorporated on March 26, 2013. Both Messrs. Daoust and Cook were 50% shareholders of WF and the directing minds of WF. b. WF had no employees, no payroll, no HST number and made no remittances to the CRA. There was no evidence that it carried on business. c. At some point in 2012 or 2013, when Messrs. Daoust and Cook’s business began to have financial trouble, they embarked on a course of conduct to obtain money by fraudulent means. d. Between October 2012 and April 2013, Mr. Racca lent money to various companies controlled by Mr. Daoust, Mr. Cook, or both. Mr. Racca loaned $1,051,500 to Messrs. Daoust and Cook’s companies at interest rates of 39.99%. e. WF used the money it received by defrauding Liquid Capital to pay Mr. Racca in the amount of $389,000.00. f. WF was incorporated for the specific purpose of defrauding Liquid Capital, and it did defraud Liquid Capital.
[47] After verification was complete and before funding was provided, around the same time as final review, Mr. Rojko told Mr. Roter that the signed notification letter was received from a Blackberry account. Mr. Roter was not concerned that the confirmation email came back from a Blackberry account because he thought that it showed that Mr. Zito was just working from his Blackberry and more importantly the email copied Mr. Zito’s Enbridge account. The evidence is that no one from the plaintiff ever spoke to Mr. Zito or verified what Mr. Zito’s responsibilities were. They relied only on his title as “collections manager”.
[48] Mr. Gordon and Ms. Sharon Boot of Liquid Capital confirmed the remaining invoices. Mr. Gordon was not concerned that the emails indicated a Blackberry account for Mr. Zito. The evidence is further, that it was Mr. Cook who approved one of the invoices. Mr. Gordon testified that he had completed his own independent investigation to confirm that Mr. Zito was a collection manager at Enbridge, and he had previously reviewed the emails to Mr. Zito’s Enbridge account. The plaintiff also relies on Mr. Cook’s evidence, who has significant experience in the factoring industry, and who stated on cross-examination that it is not common practice for a factoring company to confirm each and every invoice.
[49] In total, eight “Enbridge invoices” were factored by the plaintiff, which advanced $757,525.50 to WF between June 13, 2013 and July 12, 2013.
[50] WF’s Invoice No. B106 was never sent to Mr. Zito at Enbridge for approval. This invoice was approved directly by Mr. Cook via email dated June 24, 2013. It was Mr. Gordon’s evidence in chief that the Plaintiff did not follow its normal procedure to approve this invoice because, at that time (June 24, 2013), the plaintiff still trusted Mr. Cook because he was a former employee. As a result, Mr. Gordon proceeded to process Invoice No. B106 based on Mr. Cook’s statement that he had “already reviewed the invoice with Mr. Zito” which led to a further advance of $132,000 to WF.
[51] The first advance by Liquid Capital to WF on the first three false Enbridge invoices was on June 10, 2013, with the last advance being made on July 12, 2013. Within one month, a total of $758,000 was advanced to WF.
[52] It is Liquid Capital’s position that Mr. Zito was involved in the fraud. Mr. Zito denies these allegations. All of the email responses approving the false Enbridge invoices (except for the one approved by Mr. Cook) came from the fake “Zito” Blackberry account as follows:
a. the June 7, 2013 email from frankzito@telus.blackberry.net to Liquid Capital allegedly approved Invoice Nos. B102, B103 and B104; b. the June 11, 2013 email from frankzito@telus.blackberry.net to Liquid Capital allegedly approved Invoice No. B105; c. the June 28, 2013 email from frankzito@telus.blackberry.net to Liquid Capital allegedly approved Invoice No. B107; and d. the July 11, 2013 email from frankzito@telus.blackberry.net to Liquid Capital allegedly approved Invoice No. B108.
[53] Mr. Zito admits he received the two emails which were sent to his Enbridge account.
[54] The plaintiff submits that evidence from Mr. Zito and Enbridge’s witness, Ms. Ferguson, concerning the emails is internally inconsistent for the following reasons:
a. Mr. Zito initially testified that he had deleted all unknown source emails pursuant to the training he received. b. On cross-examination he admitted that he may have printed off one of the Emails and shown it to his supervisor, Ms. Tanya Ferguson. Ms. Ferguson, who testified for Enbridge first stated on cross-examination that there was no policy to delete unknown source emails, but when she was referred to evidence from another examination, she stated there was a policy. Mr. Zito initially said on his examination-in-chief that he had deleted/not read the emails. He later said that he may have read the e-mails but not the attachments. c. Mr. Zito testified that when he would receive emails from individual Enbridge customers with issues that he would have to resolve, he would need to do some type of search to determine if a person was a customer. He did no searches on Liquid Capital when he received the two emails from the plaintiff. d. Mr. Zito did not advise Enbridge of the emails from Liquid Capital. Ms. Ferguson, testified that she was not told by Mr. Zito about those emails. e. The plaintiff emphasizes that neither Enbridge nor Mr. Zito provided details of Mr. Zito’s email account at Enbridge, which may have filled in many gaps. The plaintiff did not move for production of Mr. Zito’s email account.
[55] The plaintiff submits that the evidence at trial leads to the “inescapable conclusion” that Mr. Zito must have been involved in the fraud with Messrs. Cook and Daoust for the following reasons:
a. Messrs. Daoust and Cook admitted on cross-examination that it is highly unlikely that the plaintiff would have advanced any funds if Mr. Zito had responded to the June 7, 2013 emails by denying a business relationship and/or the validity of the invoices. b. From the amounts that WF received from the fraud, Mr. Daoust forwarded approximately $400,000.00 to Mr. Racca and instructed Mr. Racca to pay Mr. Zito from the fraudulent funds. c. Mr. Zito did not tell Enbridge about the emails he had received from Liquid Capital to his Enbridge account. d. There is no explanation as to how Messrs. Cook and Daoust would have come into possession of the June 7, 2013 emails between Liquid Capital and Mr. Zito at his Enbridge account. I do not accept this submission and refer to the evidence in paragraph 34 above. e. Messrs. Daoust and Cook do not recall who signed the notification letter, which was sent to only Mr. Zito’s Enbridge account, but ended up in their possession and was sent from the Zito Blackberry account fully signed. Mr. Cook’s evidence was that Mr. Daoust was the one sending emails from Mr. Zito’s Blackberry account and Mr. Daoust’s evidence was that Mr. Cook sent that email because it included “paperwork”.
[56] The plaintiff’s main submission is, “if Mr. Zito is not involved in the fraud, how did the fraudsters, Mr. Cook and Mr. Daoust, pull this off”?
[57] The evidence is clear from Ms. Ferguson’s evidence and the relevant “Contract Selection, Review and Administration Policy” that Mr. Zito did not have the authority to sign this type of contract. It was a non-standard contract, and any such contract was required, pursuant to section 6.2 of the Contract Policy, to be sent to Enbridge Gas’s law department, which was responsible for preparing or revising the form of agreement and negotiating and finalizing the written contract. Such a contract was also required to be executed by two signatures of duly appointed officers of Enbridge Gas.
[58] The burden of proof on the Plaintiff is the civil standard. In cases where fraud is alleged, the Court will, however, examine the evidence with greater care and require a higher level of probability than in an ordinary case such as negligence.
[59] The evidence is that Mr. Daoust created Mr. Zito’s alleged Telus Blackberry account. Mr. Cook said at trial that Mr. Daoust had a number of blackberry phones. Mr. Daoust admitted at trial that he set up the blackberry phone used to send the fake “Frank Zito” Telus Blackberry emails and that he was the one who set up the fake email account. Mr. Daoust also stated that he did not notify Mr. Zito that he set up this fake email account, seek Mr. Zito’s permission to set up the account or speak to Mr. Zito about this fake email account. Finally, Mr. Daoust admitted that it was either him or Mr. Cook that sent back the allegedly signed Notification Letter by Enbridge Gas to the plaintiff and that he had a copy of the Notification Letter signed by both himself and Liquid Capital as the document was signed by the two parties at the same time.
[60] It was also Mr. Rojko’s evidence that Mr. Daoust was “hanging around” Liquid Capital’s offices a lot during the time of the fraud, and that he spoke to Mr. Daoust and Mr. Cook throughout the time period of the fraud and advised them when he sent the Notification Letter and fraudulent Invoices to Enbridge. It was Mr. Roter’s evidence that Mr. Cook would drop in and out of Liquid Capital to say hi to everyone because his greatest strength was that he was well-liked, part of the “Peter Cook Factor”.
[61] Both Mr. Rojko and Mr. Gordon at Liquid Capital testified that they had some concerns when the responses came from a Frank Zito Telus Blackberry email account. Mr. Rojko raised the concern with Mr. Roter. However, no one at Liquid Capital did anything about this. They did not attempt to call Mr. Zito again or meet with Mr. Zito in person. They also did not attempt to contact someone else at Enbridge Gas. They accepted it because the initial emails were copied to Mr. Zito’s Enbridge email account, and it is submitted that they accepted it because of the “Peter Cook Factor”. Until the fraud was discovered, Liquid Capital did not receive any emails from Mr. Zito’s Enbridge email account. All correspondence sent to and from Mr. Zito were sent to and from the “Zito” Blackberry account.
[62] Mr. Zito admitted that, within approximately 30 days of the June 7, 2013 emails, he received the following funds from Mr. Racca (the “Money”):
a. June 13, 2013 - $1,825.00 b. June 15, 2013 - $3,475.00 c. June 28, 2013 - $3,075.00 d. July 11, 2013 - $7,500.00
[63] Mr. Zito’s evidence is that he received the Money as repayment for an investment he made with Mr. Racca. However, the plaintiff submits that his evidence is inconsistent and leads to the conclusion that he was actively involved in the fraud in order to benefit from the funds defrauded from Liquid Capital as:
a. There are no documents papering this investment. In July 2012, Mr. Zito allegedly “invested” more money than he had (which is why he got his sister involved) without a single document. Mr. Zito has been in the credit and collection business for more than 20 years and has two business diplomas. b. The terms of the investment according to Mr. Zito required monthly $2,000 payments. However, there is no evidence of payments until around the time of the fraud. c. Mr. Zito never did anything to recover the balance of the investment. d. Mr. Zito’s evidence regarding the total payments from Mr. Racca is materially different and inconsistent with the evidence he gave at discovery. At trial he said that he had received $23,000.00 from Mr. Racca. At his examination for discovery he said he had received at most $12,000.00. e. Mr. Zito provided funds to both Virtucall and Silver Seven but stated that the funds were needed by Mr. Racca to purchase Silver Seven. Therefore, providing funds to Virtucall and Silver Seven directly is not logical. f. $30,000.00 of the $50,000 investment was paid to Virtucall and not to Mr. Racca or Silver Seven.
[64] The plaintiff relies on the following chart, which details the timing of the payments to Mr. Zito against the dates Liquid Capital advanced funds:
| Date of funds advanced by Liquid Capital | Date of payment to Zito | Days between advance from Liquid Capital and Zito receiving payment from Rocky Racca |
|---|---|---|
| June 10, 2013 | June 13, 2013 | 3 days |
| June 11, 2013 | June 15, 2023 | 4 days |
| June 24, 2013 | June 28, 2023 | 4 days |
| June 28, 2013 | July 11, 2023 | 13 days (1 day before next advance) |
| July 12, 2013 |
[65] On the basis of the evidence at trial, I do not find that the plaintiff has met its burden of proving Mr. Zito was a party to this fraud.
[66] The burden of proof to establish Mr. Zito’s participation in the fraud is on a balance of probabilities. The burden is on the plaintiffs and not the defendants. The plaintiff relies on inferences which it wishes the court to draw, not evidence of Mr. Zito’s participation. The evidence of the admitted fraudsters, which was not contradicted on their cross-examinations, was that Mr. Zito did not participate in the fraud. I do not find that the evidence regarding payments by Mr. Racca to Mr. Zito, and Mr. Zito’s failure to alert his superiors at Enbridge to the two emails and copies of emails, are sufficient to prove his participation in the fraud on a balance of probabilities.
Is Enbridge Vicariously Liable
[67] If the Court had found that Mr. Zito did participate in the fraud, then the issue would have been whether Enbridge Gas should be held vicariously liable. For the reasons set out below, I do not find that Enbridge would have been held vicariously liable for Mr. Zito’s fraud.
[68] The Supreme Court of Canada has held that vicarious liability may be imposed where there is a significant connection between the conduct authorized by the employer and the wrong: Bazley v. Curry, [1999] 2 S.C.R. 534. There is no connection between Mr. Zito’s conduct as authorized by Enbridge and the fraud. He had no authority from Enbridge to enter into any contracts or to approve any invoices in his capacity as an employee of Enbridge. Further, it was not reasonable for the plaintiff to rely on his title as “collections manager”, which it did.
[69] When determining whether vicarious liability should be imposed, the Court bases its decision on several factors, which include:
(1) what opportunity did the employer offer the employee to abuse his power or position? There was no typical risk present here as Mr. Zito had no authority to enter into any contracts or approve invoices on behalf of Enbridge Gas. (2) to what extent did the employee’s alleged wrongful act further the employer’s aims? It did not, as this was a financing factoring transaction for the benefit of WF and Liquid Capital. (3) to what extent was the employee’s alleged wrongful act related to friction, confrontation or intimacy inherent in the employer’s enterprise? It's not related. (4) what extent of power did the employer confer on the employee in relation to the victim? Mr. Zito did not have the authority to enter into any contracts, or approve any invoices, on behalf of Enbridge. (5) how vulnerable are potential victims? Liquid Capital had access to expert advisers, including legal advisers, and a due diligence process that it didn't follow. The fraud arose from the circumstances of Liquid Capital’s relationship with WF (and Mr. Cook and Mr. Daoust), and not from any relationship between Liquid Capital and Mr. Zito or Enbridge.
[70] If any action or “inaction” by Mr. Zito in connection with the fraudulent scheme was an independent act of Mr. Zito, it was outside the scope of his employment and without the knowledge or consent of Enbridge. All emails that were allegedly sent by Mr. Zito to WF in connection with the payment of the fraudulent invoices were sent from a personal e-mail address set up in Mr. Zito’s name and not from Mr. Zito’s Enbridge e-mail account. The allegations made against Mr. Zito by Liquid Capital concern transactions solely of a private or personal nature between Mr. Zito and the remaining defendants, other than Enbridge, and were clearly outside the scope of Mr. Zito’s employment with Enbridge.
[71] It is submitted by the plaintiff that the evidence is far more consistent with Mr. Zito investing money in Mr. Daoust’s Virtucall business and being paid back using the money he helped WF obtain fraudulently from Liquid Capital. Mr. Daoust confirmed that he directed cash payments to Mr. Zito from the money defrauded from Liquid Capital. This, however, is not evidence that Mr. Zito was involved in the fraud. The court must consider all of the evidence to determine if the plaintiff has met its burden of proof.
[72] The plaintiff submits that where a principal (i.e., Enbridge), by words or conduct, represents or permits it to be represented that an agent is authorized to act on its behalf, it is bound by the acts of the agent, notwithstanding the determination of authority, to the same extent as it would have been if the authority had not been determined, with respect to any third person dealing with the agent on the faith of any such representation, without notice of the determination of its authority. The actual authority is not relevant:
An “apparent” or “ostensible” authority, on the other hand, is a legal relationship between the principal and the contractor created by a representation, made by the principal to the contractor, intended to be and in fact acted upon by the contractor, that the agent has authority to enter on behalf of the principal into a contract of a kind within the scope of the “apparent” authority, so as to render the principal liable to perform any obligations imposed upon him by such contract. To the relationship so created the agent is a stranger. He need not be (although he generally is) aware of the existence of the representation … The representation, when acted upon by the contractor by entering into a contract with the agent, operates as an estoppel, preventing the principal from asserting that he is not bound by the contract. It is irrelevant whether the agent had actual authority to enter into the contract. … In ordinary business dealings the contractor at the time of entering into the contract can in the nature of things hardly ever rely on the “actual” authority of the agent. His information as to the authority must be derived either from the principal or from the agent or from both, for they alone know what the agent's actual authority is. All that the contractor can know is what they tell him, which may or may not be true. In the ultimate analysis he relies either upon the representation of the principal, that is, apparent authority, or upon the representation of the agent, that is, warranty of authority. The representation which creates “apparent” authority may take a variety of forms of which the commonest is representation by conduct, that is, by permitting the agent to act in some way in the conduct of the principal's business with other persons. By so doing the principal represents to anyone who becomes aware that the agent is so acting that the agent has authority to enter on behalf of the principal into contracts with other persons of the kind which an agent so acting in the conduct of his principal's business has usually “actual” authority to enter into. [Emphasis added].
Freeman & Lockyer (A Firm) v. Buckhurst Park Properties (Mangal) Ltd. [1964] 2 Q.B. 480 (Eng. C.A.) at p. 503-4.
[73] It is submitted that Enbridge created a situation where it is reasonable to infer from all the circumstances that Enbridge reasonably relied on Mr. Zito’s authority that he could confirm WF invoices and sign the Notification Letter. I do not accept this submission. I do not agree that by giving Mr. Zito the title of Collections Manager, Enbridge created a situation to infer that it gave Mr. Zito that authority to confirm the invoices or sign the Notification Letter on Enbridge’s behalf. There was, in my view, no basis for the plaintiff to reach that conclusion, especially when the voicemails were not answered, no one spoke to Mr. Zito and the Agreement upon which the factoring was based was with an entity that did not exist.
[74] Ms. Ferguson, as Manager Customer Care Operations, was Mr. Zito’s direct supervisor. It was Ms. Ferguson’s evidence that their department at that time, the Customer Care Operations department, was responsible for the development and execution of processes, policies and procedures related to customer care programs and services in support of Enbridge Gas’s approximately 2.2 million customers. There were 18 people in her department. Enbridge Gas had approximately 200 to 250 managers in the summer of 2013 and a total of 2,500 employees. It was also Ms. Ferguson’s evidence that although both her and Mr. Zito held the title of “manager” at Enbridge Gas, she was Mr. Zito’s boss and there were five other managers in her department, who she also supervised, besides Mr. Zito.
[75] It was Ms. Ferguson’s evidence that Mr. Zito’s Band level in June 2013 was Band 7 and that Mr. Zito dealt with accounts receivables at Enbridge Gas, not accounts payable. Band levels at Enbridge Gas represented the salary and authority of the individual holding such position. It was also Ms. Ferguson’s evidence that Mr. Zito supported the development of collection strategies by working with Accenture and that he was responsible for the management of collections’ policies, practices and procedures underpinning collection activities at Enbridge Gas. Mr. Zito also gave evidence that his job had nothing to do with factoring or financing. It was both Ms. Ferguson and Mr. Zito’s evidence that, as a Band 7 employee, Mr. Zito had no authority to enter into any contracts, or approve any invoices, on behalf of Enbridge Gas as per the document titled “Authorities and Spending Limits Applicable to Enbridge Gas Distribution Inc.” and the “Contract Selection, Review and Administration Policy”. The evidence of Mr. Daoust, with respect to previous meetings with Mr. Zito to solicit business from Enbridge for Virtucall, does not assist the Plaintiff, as it is unrelated to any knowledge the plaintiff had with respect to Mr. Zito’s role at Enbridge.
[76] The plaintiff also relies on the “indoor management Rule” in s. 19 of the Ontario Business Corporations Act, R.S.O. 1990, c. B.16, which permits it to rely on Mr. Zito’s “apparent” signature on the Notification Letter.
[77] The plaintiff further relies on the case of Courtot Investments Ltd. v. Royal Trust Co., 1980 CarswellOnt 3503 (Ont. S.C.), at para. 39, wherein it was held that the representation of an individual’s authority may come from the title she or he occupies within the business.
[78] It is argued that Enbridge is vicariously liable for the conduct and/or misdeeds of Mr. Zito during the course of his employment. The policy reason for the Court in imposing liability on Enbridge for Mr. Zito’s conduct is because it ultimately employed Mr. Zito to advance its own economic interest and should be placed under a corresponding liability for losses incurred in the course of its business.
[79] The plaintiff submits that the first part of the test for vicarious liability, the fact that Mr. Zito is Enbridge’s employee, is satisfied. I agree. The second part of the test requires that the tortious conduct be committed by the employee in the course of employment. The second part of the test is not satisfied in my view as it is not reasonable to expect that Mr. Zito as “collections manager”, had authority to approve the WF invoices. As Manager Collections, he dealt with customer accounts receivable (i.e., the collection of Enbridge Gas’s bills). He did not deal with Enbridge Gas’s accounts payable. The Notification Letter sent from Liquid Capital was addressed to Enbridge Gas, Attention Accounts Payable (which is not “collections manager”).
[80] The business of the plaintiff is financing, which is unrelated to Enbridge’s business of selling, distributing, transmitting and storing natural gas. Enbridge is not in the business of factoring.
[81] The evidence is that no one at Liquid Capital had spoken to Mr. Zito. The only interactions between the plaintiff and Mr. Zito were the 2 initial emails that were addressed to Mr. Zito’s Enbridge Gas email account on June 7, 2013 and the two copies of the Blackberry emails.
[82] The plaintiff only knew what Mr. Zito’s job title was at Enbridge Gas. The Plaintiff had no knowledge of what Mr. Zito’s authority was or what his job responsibilities were as an employee of Enbridge Gas.
Conclusion
[83] I find that on the basis of the evidence at trial, that because of Mr. Roter’s trust in Mr. Cook, he believed that he could not get his present employer to provide factoring financing for WF because of a conflict of interest. As a result of Mr. Roter’s trust in Mr. Cook, Liquid Capital did not complete its usual due diligence process or speak to Mr. Zito or anyone at Enbridge to confirm the validity of the fraudulent Enbridge Gas invoices and to confirm the contractual relationship between Enbridge Gas and WF until after Liquid Capital entered into the Factoring Agreement with WF and advanced funds. As a result of Mr. Roter’s trust of Mr. Cook, Liquid Capital did not question why “Mr. Zito”, on behalf of Enbridge, responded to all emails relating to the Factoring Agreement from a personal Blackberry e-mail account and not from an Enbridge email account. As a result of Mr. Roter’s trust in Mr. Cook, Liquid Capital advanced funds to WF and was the unfortunate victim of fraud.
[84] For the above noted Reasons, I dismiss the action of the plaintiff.
Costs
[85] As the defendants are the successful parties in this Action, they are entitled to their costs on a partial indemnity basis. If the parties are unable to agree on costs by reason of the operation of the Rules as a result of offers to settle, the defendants may make submissions of no more than two pages, double spaced sent to the plaintiffs, uploaded to CaseLines with a copy sent to my assistant Roxanne Johnson at Roxanne.johnson@ontario.ca by July 14, 2023. The plaintiff may make submissions of no more than two pages, double spaced sent to the defendants, uploaded to CaseLines with a copy sent to my assistant by July 25, 2023. No reply submissions will be accepted. If no submissions are received in this timeline, any issues regarding costs will be considered to have been settled, with no further recourse by either party.
Pollak J. Released: July 5, 2023
