The United States of America et al. v. Yemec et al.

[Indexed as: United States of America v. Yemec]

100 O.R. (3d) 321

2010 ONCA 414

Court of Appeal for Ontario,

Moldaver, MacPherson and Watt JJ.A.

June 8, 2010

Conflict of laws -- Foreign judgments -- Enforcement -- Defences -- "Loss of meaningful opportunity to be heard" not constituting new defence to enforcement of foreign judgment -- That defence indistinguishable from natural justice defence.

Injunctions -- Undertaking as to damages -- Damages inquiry -- Mareva injunction and Anton Piller order obtained by United States dissolved on basis that U.S. failed to make full and frank disclosure, failed to establish strong prima facie case that defendants' conduct was fraudulent and failed to show that there was risk of dissipation of assets -- Motion judge not erring in ordering immediate damages inquiry -- Strong presumption existing that party who gives damages undertaking to obtain interlocutory injunction should be held to undertaking -- Alleged illegality of defendants' operations not constituting special circumstances justifying refusal to grant damages inquiry in circumstances of this case.

The defendants operate cross-border telemarketing businesses selling Canadian and foreign lottery tickets to consumers in the United States. In 2002, the U.S. government brought proceedings in Illinois and Ontario to prevent the defendants from continuing to operate. They obtained a Mareva injunction and an Anton Piller order in the Ontario proceedings. Those orders, which were obtained ex parte, were subsequently dissolved on the grounds that the U.S. lacked standing, had failed to make full and frank disclosure, had failed to establish a strong prima facie case that the defendants' conduct was fraudulent and had failed to show that there was a risk of dissipation of assets. In 2004, the U.S. obtained a permanent injunction and a $19 million judgment against the defendants in Illinois. In 2005, it amended its Ontario claim, adding a claim to enforce the Illinois judgment in Ontario. The U.S. moved for partial summary judgment to enforce the 2005 portion of the Ontario claim (effectively enforcing the Illinois judgment). The defendants moved to stay the Ontario action. They also sought to have the damages undertakings which were given by the U.S. when the Mareva and Anton Piller orders were granted, enforced immediately. The motion judge dismissed the U.S. motion on the basis that there was a genuine issue as to whether the defendants were denied a meaningful opportunity to be heard in the U.S. proceedings. He stayed the 2002 part of the Ontario claim on the basis that it was plain and obvious that the U.S. had no standing to bring an action in Ontario seeking to recover damages on behalf of a group of U.S. consumers allegedly harmed by the defendants. He granted the motion to enforce the damages undertakings, ordering an immediate damages inquiry and immediate payment of any damages awarded. The U.S. appealed and the defendants cross-appealed.

Held, the appeal should be allowed in part; the cross-appeal should be dismissed.

There is no new defence to enforcement of a foreign judgment based on the loss of a meaningful opportunity to be heard. A meaningful opportunity to be heard is indistinguishable from the natural justice defence. The defendants did, in fact, [page322] have a meaningful opportunity to defend the U.S. proceedings. There was no basis for refusing to enforce the injunctive relief component of the U.S. order. The terms of the injunction, which prohibited the defendants from engaging in the telemarketing of any product or service to any person in the U.S., were clear and specific, and enforcement of the U.S. order did not place an undue burden on the Canadian justice system.

The motion judge did not err in ordering an immediate damages inquiry relating to the U.S. government's undertakings. This was not an appropriate case in which to depart from the strong presumption that a party who gives an undertaking to obtain an interlocutory injunction should be held to the undertaking. In the circumstances of this case, the alleged illegality of the defendants' business did not constitute a special circumstance justifying departure from the general presumption that damages undertakings are to be enforced. The U.S. government was aware of the general nature of the defendants' business at the time it sought the ex parte orders. Effectively, it now sought to avoid an inquiry into damages on the basis that the undertakings were worthless from the outset since there can be no damages flowing from the termination of an illegal operation. To give effect to that argument would be to undermine the serious nature of a damages undertaking. It was not clear that the defendants' damages claim was plainly unsustainable.

The motion judge did not err by failing to find that the U.S. government's conduct in the U.S. court proceedings was an abuse of process such that the 2005 Ontario action should be stayed. As the U.S. did not intend to pursue any of the claims in the 2002 statement of claim if its appeal with respect to the enforcement of the U.S. court order in Ontario was allowed, it was not necessary to decide the issue of the U.S. government's standing to sue in Canada on behalf of a group of American consumers for damages allegedly sustained by individuals in that group.

APPEAL AND CROSS-APPEAL from the order of Belobaba J. (2009), 2009 44418 (ON SC), 97 O.R. (3d) 409, [2009] O.J. No. 3546 (S.C.J.) allowing, in part, a motion to stay an action; APPEAL from the order for an immediate damages inquiry.

Cases referred to

Beals v. Saldanha, [2003] 3 S.C.R. 416, [2003] S.C.J. No. 77, 2003 SCC 72, 234 D.L.R. (4th) 1, 314 N.R. 209, J.E. 2004-127, 182 O.A.C. 201, 39 B.L.R. (3d) 1, 39 C.P.C. (5th) 1, 113 C.R.R. (2d) 189, 127 A.C.W.S. (3d) 648; King v. Drabinsky (2008), 91 O.R. (3d) 616, [2008] O.J. No. 2961, 2008 ONCA 566, 295 D.L.R. (4th) 727, 168 A.C.W.S. (3d) 79, 58 C.P.C. (6th) 223, apld Columbia Picture Industries Inc. v. Robinson, [1987] Ch. 38 (Q.B.); R. v. World Media Brokers Inc., 2003 42526 (ON CA), [2003] O.J. No. 1737, 171 O.A.C. 99, 174 C.C.C. (3d) 385, 57 W.C.B. (2d) 321 (C.A.), affg 1998 27760 (ON CJ), [1998] O.J. No. 4049, 132 C.C.C. (3d) 180, 40 W.C.B. (2d) 119 (C.J.), consd Other cases referred to Federal Trade Commission v. World Media Brokers, 415 F.3d 758 (7th Cir. Ill. 2005), affg 2004 U.S. Dist. LEXIS 3227 (N. Dist. Ill. 2004); Gu v. Tai Foong International Ltd., 2003 20380 (ON CA), [2003] O.J. No. 264, 168 O.A.C. 47, 30 C.P.C. (5th) 260, 120 A.C.W.S. (3d) 128 (C.A.); Nelson Burns & Co. v. Gratham Industries Ltd., 1987 9814 (ON CA), [1987] O.J. No. 1100, 25 O.A.C. 89, 18 C.I.P.R. 153, 23 C.P.C. (2d) 279, 19 C.P.R. (3d) 71, 7 A.C.W.S. (3d) 304 (C.A.); Nordstrom v. Baumann, 1961 51 (SCC), [1962] S.C.R. 147, [1961] S.C.J. No. 76, 31 D.L.R. (2d) 255, 37 W.W.R. 16; Pro Swing Inc. v. Elta Golf Inc., [2006] 2 S.C.R. 612, [2006] S.C.J. No. 52, 2006 SCC 52, 273 D.L.R. (4th) 663, 354 N.R. 201, J.E. 2006-2235, 218 O.A.C. 339, 41 C.P.C. (6th) 1, 52 C.P.R. (4th) 321, 152 A.C.W.S. (3d) 70, EYB 2006-111169; R. v. Farinacci, 1993 3385 (ON CA), [1993] O.J. No. 2627, 109 D.L.R. (4th) 97, 67 O.A.C. 197, 86 C.C.C. (3d) 32, 25 C.R. (4th) 350, 18 C.R.R. (2d) 298 (C.A.); [page323] United States v. Yemec (2005), 2005 8709 (ON SCDC), 75 O.R. (3d) 52, [2005] O.J. No. 1165, 196 O.A.C. 163, 12 C.P.C. (6th) 318, 131 C.R.R. (2d) 312, 138 A.C.W.S. (3d) 156 (Div. Ct.), affg (2003), 2003 23436 (ON SC), 67 O.R. (3d) 394, [2003] O.J. No. 3863, 233 D.L.R. (4th) 169, [2003] O.T.C. 877, 125 A.C.W.S. (3d) 1060 (S.C.J.); United States v. Yemec (2010), 100 O.R. (3d) 394, [2010] O.J. No. 1061, 2010 ONSC 1409, 2010 1409 (Div. Ct.); Vieweger Construction Co. v. Rush & Tompkins Construction Ltd., 1964 53 (SCC), [1965] S.C.R. 195, [1964] S.C.J. No. 60, 48 D.L.R. (2d) 509; Yukong Line Ltd. v. Rendsburg Investments Corp., [2000] EWCA Civ. 358 (C.A.)

Statutes referred to

Competition Act, R.S.C. 1985, c. C-34 [as am.] Crimes and Criminal Procedure, 18 U.S.C. 1301, 1302 Criminal Code, R.S.C. 1985, c. C-46, s. 206 [as am.] Federal Trade Commission Act, 15 U.S.C. 45(a)

Rules and regulations referred to

Telemarketing Sales Rule, 16 CFR Part 310

Treaties and conventions referred to

North American Free Trade Agreement

Authorities referred to

Zuckerman, A.A.S."The Undertaking in Damages -- Substantive and Procedural Dimensions" (1994), 53 Cambridge L.J. 546

Glenn Hainey, Malcolm N. Ruby and Duncan C. Boswell, for appellants. David E. Wires and Saba Ahmad, for respondents.

The judgment of the court was delivered by

MACPHERSON J.A.: --

A. Introduction

[1] This appeal by the United States of America and the United States Federal Trade Commission (the "U.S." or the "U.S. government") arises from events that began in 2002 and that have resulted in several judicial proceedings in Toronto and Chicago.

[2] The appeal raises two central issues: (1) whether an Illinois court order granting $19 million in damages and a permanent injunction against the defendants [See Note 1 below] should be enforced in [page324] Canada; and (2) whether an Ontario court order requiring the U.S. to respond to damages undertakings it had made in order to obtain a Mareva injunction and an Anton Piller order should be affirmed.

B. Facts

[3] For some 20 years, the defendants operated cross-border telemarketing businesses selling Canadian and foreign lottery tickets to consumers in the United States. Typically, the defendants sold packages of tickets costing between $100 and $500, which included a mark-up of between five and eight times cost.

[4] In the fall of 2002, the U.S. government brought proceedings in Illinois and Ontario to prevent the defendants from continuing to operate.

[5] In October 2002, District Court Judge Amy St. Eve granted an ex parte "Temporary Restraining Order with Asset Freeze and Order to Show Cause Why a Preliminary Injunction Should not Issue" against the defendants, excluding Bungaro, Bunting and several of the corporate defendants. Within days, Nordheimer J. of the Ontario Superior Court of Justice issued a Mareva injunction and an Anton Piller order against them.

[6] The Mareva and Anton Piller orders were eventually set aside by Gans J., (2003), 67 O.R. (3d) 394, [2003] O.J. No. 3863 (S.C.J.) and his order was upheld by the Divisional Court (2005), 75 O.R. (3d) 52, [2005] O.J. No. 1165 (Div. Ct.). In the meantime, in 2002, the U.S. brought a $30 million action in Ontario on behalf of consumers allegedly harmed by the defendants. It also brought proceedings against the defendants in Illinois, obtaining a permanent injunction and a $19 million judgment against them. In 2005, the U.S. amended its Ontario claim, adding a claim to enforce the Illinois judgment in Ontario and tracing claims against Bungaro, Bunting and Jackpots & Prizes.

[7] The decision under appeal arises from three motions before Belobaba J. In the first, the defendants asked that the damages undertakings, which were given to the Ontario Superior Court by the U.S. when the Mareva and Anton Piller orders were granted, be enforced immediately and any damages awarded be paid forthwith. The motion judge granted the motion, ordering an immediate damages inquiry and immediate payment of any damages awarded.

[8] In the second, the U.S. moved for partial summary judgment to enforce the 2005 portion of the Ontario claim (effectively enforcing the Illinois judgment). The motion judge dismissed this motion on the basis that there was a genuine issue as to [page325] whether the defendants were denied a "meaningful opportunity to be heard" in the context of the U.S. proceedings. The U.S. brought a motion before the Divisional Court for leave to appeal this interlocutory decision. Molloy J. granted leave, and the appeal was transferred to this court: (2010), 2010 ONSC 1409, 100 O.R. (3d) 394, [2010] O.J. No. 1061, 2010 1409 (Div. Ct.).

[9] In the third, the defendants moved to stay the Ontario action or, in the alternative, to strike the damages portion of the pleadings. The motion judge allowed the motion in part, staying the 2002 portion of the Ontario claim on the basis that it was plain and obvious that the U.S. government had no standing to bring an action in Ontario seeking to recover damages on behalf of a group of U.S. consumers allegedly harmed by the defendants.

[10] The motion judge paints a picture of the defendants as upstanding business people who have suffered serious harm as a result of the Mareva injunction and Anton Piller order granted on bad affidavit evidence. The harm was compounded, says the motion judge, when a parallel, cross-border proceeding was commenced by the U.S. government, and the defendants' efforts to mount a proper defence to the U.S. proceedings were impeded by the wrongfully obtained Ontario orders. In the motion judge's view, it is time to remedy the great injustice done to the defendants.

[11] In contrast, the U.S. paints a very different picture of the defendants as persons who have flouted U.S. and Canadian law and unfairly taken advantage of consumers.

[12] There are other facts, relating to both the defendants' lottery ticket sales activities and to the various decisions made in the Illinois and Ontario courts, relevant to the disposition of the appeal. However, in my view it is preferable to refer to these additional facts in the context of the legal issues to which they relate.

C. Issues

[13] The issues on the appeal are: (1) Did the motion judge err in dismissing the U.S.'s motion to enforce the Illinois court's judgment against the defendants? In particular, is there a defence to enforcement of a foreign judgment based on the "loss of a meaningful opportunity to be heard"? (2) Did the motion judge err by ordering an immediate damages inquiry relating to the U.S. government's undertakings made [page326] to the Ontario superior court in support of obtaining a Mareva injunction and an Anton Piller order? In particular, did the motion judge err by failing to find that there were "special circumstances" to refuse a damages inquiry, namely, that the only damages the defendants can establish result from their inability to carry on an enterprise that is illegal in the United States and Canada? (3) Did the motion judge err by concluding that it was plain and obvious that the U.S. government did not have standing to sue in Canada on behalf of a group of American consumers who were allegedly harmed by the defendants?

[14] The issue on the defendants' cross-appeal is: (4) Did the motion judge err by declining to find that the U.S. government's attempt to enforce the Illinois court's judgment in Ontario was an abuse of process?

D. Discussion

(1) Enforcement of the U.S. judgment

(a) Background and motion judge's reasons

[15] As noted above, the U.S. brought a motion for partial summary judgment, seeking enforcement of the 2005 portion of the statement of claim. In effect, it sought enforcement of the Illinois court's 2004 judgment granting a permanent injunction and US$19 million in damages, and added tracing claims against Bungaro, Bunting and Jackpots & Prizes.

[16] The motion judge agreed that there were no genuine issues for trial concerning the defences of jurisdiction, natural justice or public policy, as outlined in Beals v. Saldanha, 2003 SCC 72, [2003] 3 S.C.R. 416, [2003] S.C.J. No. 77 ("Beals"). However, he found that there was a genuine issue for trial concerning a fourth "new defence", namely, the denial of a "meaningful opportunity to be heard".

[17] Before the motion judge, the defendants argued that they were denied a meaningful opportunity to be heard in the U.S. context. They said they could not present a full defence in the U.S. because they were invested in setting aside the ex parte orders in Canada. They also pointed to evidence that they lacked access to business documents and computers, making finding documents and instructing counsel difficult. They claimed they were afraid to enter the U.S. for fear they would be detained. They pointed to the fact that within two weeks after having their bank accounts frozen, documents seized and business [page327] premises shut down, they were expected to mount a defence in the U.S. proceeding.

[18] The defendants said that they were forced to agree to the preliminary injunction in November 2002 because they did not have the financial means and access to documents to prepare an oral evidentiary hearing to defend the case on the merits. In addition, they argued they had no choice but to give consent to the use by the Federal Trade Commission ("FTC") of the seized documents because it had requested financial disclosure that could not be provided since the required documents and assets had been seized or frozen. Finally, they pointed out that Gans J. had asked the U.S. government's lawyer to delay the U.S. action until the Ontario dissolution motion had been decided, but his request was ignored.

[19] At footnote 80 of his reasons, the motion judge outlined the evidence that the defendants submitted they would have put before the U.S. court if they had had a full opportunity to present their case: evidence about the legality of their business operation in Canada and their relationship with the Atlantic Lottery Corporation (which was their source of lottery tickets for a time), the fact the telemarketing script relied on by the U.S. court was discarded in 1990, and evidence regarding an agreement between the United States and Canada relating to deceptive marketing practices, recent amendments to the Competition Act, R.S.C. 1985, c. C-34 and the implications of the North American Free Trade Agreement on cross-border sales of government-sponsored lottery tickets.

[20] The motion judge held that there were triable issues relating to the new "meaningful opportunity to be heard" defence. The core of his reasoning encompasses the following propositions.

[21] The Supreme Court of Canada stated in Beals that the list of available defences is not closed. The new defence of "loss of a meaningful opportunity to be heard" must be different in scope and content from the natural justice defence. It must relate not to the process and procedures of the foreign court but to some significant unfairness in the way the litigation has proceeded or has been conducted.

[22] In addition, the defendants have provided evidence in support of the submission that they did not receive a full and fair opportunity to defend the U.S. proceedings because of the way the plaintiffs conducted the litigation. They allege that they could not present a full and fair defence in the U.S. because they were invested in setting aside the ex parte orders in Canada.

[23] Finally, there are material facts in dispute and genuine issues for trial, including: (1) Is the "new defence" available in [page328] this case? (2) Were the defendants denied a meaningful opportunity to be heard? (3) Should the U.S. judgment be enforced in Canada?

[24] Accordingly, the motion judge dismissed the U.S. government's motion for partial summary judgment, thus declining to enforce the U.S. order.

[25] Justice Molloy granted leave to appeal from the motion judge's decision refusing the motion for partial summary judgment. She found that the proposed appeal raised an issue of importance and she questioned the correctness of the decision.

(b) Legal analysis

[26] With great respect, I do not agree with the motion judge's analysis. In my view, there is no "new" or fourth defence -- a meaningful opportunity to be heard -- that should be added to the three categories identified in Beals. Nor do I think that the defendants were deprived of a meaningful opportunity to be heard in the U.S. court proceedings. I reach these conclusions for several reasons.

[27] First, under Beals any new defence to foreign judgment enforcement must be "narrow in scope" and "raise issues not covered by the existing defences": para. 42. In my view, a meaningful opportunity to be heard is indistinguishable from the natural justice defence. On this point, I agree with what Molloy J. said, at para. 10 of her reasons granting leave to appeal:

The main difficulty I have with the reasoning of the motion judge is in determining how the "new defence" he articulated is different from the natural justice defence traditionally available as recognized in Beals and on which he held the defendants had failed to demonstrate a genuine issue for trial. The right to be heard is one of the cornerstones of natural justice. A right to be heard that is not meaningful would not comply with the traditional test for natural justice: Baker v. Canada (Minister of Citizenship and Immigration), 1999 699 (SCC), [1999] 2 S.C.R. 817 at para. 30 and 32. Therefore, the addition of the word "meaningful" does nothing to change the nature of the test already recognized in Beals.

[28] Second, in King v. Drabinsky (2008), 2008 ONCA 566, 91 O.R. (3d) 616, [2008] O.J. No. 2961 (C.A.), this court rejected the submission that a fourth category or defence -- a denial of a meaningful opportunity to be heard -- should be added to the Beals categories, as the proposed new category raised the same considerations as under the rubric of the natural justice defence. As explained by Lang J.A., at para. 41:

The appellants argue that a fourth category of defence should be added to the categories accepted in Beals on the basis of a denial of a meaningful opportunity to defend. In my view, as aptly identified by the application judge, the considerations raised by the appellants under the proposed new [page329] category are the same considerations as under the rubric of the natural justice defence. I would not give effect to the appellants' arguments on this issue.

[29] Third, in my view it is clear that the defendants had a full, fair and "meaningful" opportunity to defend the U.S. proceedings, first before District Judge St. Eve in the United States District Court and then in an appeal de novo heard by the United States Court of Appeals for the Seventh Circuit.

[30] The defendants retained Chicago lawyer Rakesh Amin, and the U.S. points to evidence that the defendants paid him at least $120,000 in legal fees to appear on their behalf in the U.S. proceedings. The U.S. and Ontario orders permitted the defendants to seek access to frozen assets to pay legal fees. Through their lawyer, the defendants filed a defence, engaged in discovery, brought motions, requested and obtained extensions and contested an FTC summary judgment motion. They also filed and argued an unsuccessful appeal de novo.

[31] Six computers, identified by George Yemec as necessary to conduct his business, were returned to him on October 7, 2002 -- the first business day after the Anton Piller order was executed. Soon after the execution of the ex parte orders, the U.S. government offered to locate and return any documents that defendants' counsel wished to review. Five boxes of materials were copied and delivered to counsel. Offers were also made to return all original documents, subject to certain conditions.

[32] Defendants' counsel never raised the issue of lack of access to documents that were seized pursuant to the Anton Piller order in the U.S. proceedings.

[33] Counsel for the U.S. government did not review any of the documents seized under the Anton Piller order, or in the sealed Ontario court file, until defendants' counsel expressly indicated the defendants' consent. Mr. Amin explicitly acknowledged that his consent permitting the FTC to use documents produced in the Ontario litigation was unconditional.

[34] The use of Ontario documents in the U.S. proceedings was not inconsistent with Gans J.'s order, which ordered the return of seized documents"subject to any order of the United States District Court". In any event, the defendants had an independent obligation to produce relevant documents under applicable U.S. discovery rules.

[35] Fourth, a number of the arguments made on this appeal about the fairness of the U.S. court proceedings were raised before, and addressed by, Judge St. Eve in the Illinois summary judgment proceedings.

[36] In her reasons, Judge St. Eve explained why Yemec's affidavit in the Canadian proceedings could be used by the U.S. in [page330] the Illinois proceedings. She noted that the defendants consented to the FTC using Canadian documents in the U.S. proceeding. She also considered Gans J.'s order relating to the return of documents to Yemec and concluded: "In fact, Justice Gans specifically contemplated a ruling from this Court that Defendants cannot restrict the FTC's use of Defendants' documents from the Canadian proceeding . . . The FTC properly relied upon Yemec's sworn affidavit": Federal Trade Commission v. World Media Brokers Inc., 2004 U.S. Dist. LEXIS 3227 (N. Dist. Ill. 2004), at p. 6.

[37] In addition, Judge St. Eve granted the defendants a requested adjournment to investigate the reliability and authenticity of certain documents, which they failed to utilize [at p. 6 (QL)]:

. . . Defendants attack the reliability and authenticity of the FTC's evidence contained in the declaration of the FTC's investigator, Alan Krause. (R. 38-1, Defs.' Mem. In Opp. To the FTC's Mot. For Partial Summ. J. ("Defs.' Opp. Mem.") at 10.) This attack has no merit. Defendants filed a motion pursuant to Federal Rule of Civil Procedure 56(f) for an extension of time to allow for needed discovery concerning the quality and authenticity of the FTC's investigation, which was conducted by Mr. Krause. (R. 33-1, Defs.' Rule 56(f) Mot. For Extension of Time.) The Court granted the motion and gave Defendants an additional three weeks to file their response brief, expressly to allow them to depose Mr. Krause. (See Minute Order, Sept. 17, 2003.) Defendants, however, made no attempt to schedule Mr. Krause's deposition. (See R. 39-1, FTC's Reply Mem. at 8.) Mr. Krause swore to the truth of his declaration and the authenticity of the exhibits attached to his declaration. Defendants had the opportunity to depose Mr. Krause to support their speculation that Mr. Krause's declaration and exhibits are "incorrect" and "unreliable", but they chose not to do so.

[38] Judge St. Eve also addressed the defendants' complaint about lack of access to relevant documents [at p. 6 (QL)]:

Defendants complain that the FTC relies on evidence that Defendants "cannot review or dispute" and "cannot investigate." (R. 38-1, Defs.' Opp. Mem. at 13.) Defendants refer to specific exhibits and tape recordings referenced in Mr. Krause's declaration. Defendants, however, have had more than one year to request and listen to the tape recordings cited by the FTC as evidence of certain material facts. The FTC made more than six boxes of supporting documents available to Defendants when the FTC responded to Defendants' document requests in July 2003. (R. 39-1, FTC's Reply Mem. at 9.) Defendants cannot now complain that they chose not to review those documents.

[39] In summary on this point, on the basis of the U.S. District Court record, including the comprehensive reasons for judgment of Judge St. Eve, there is nothing to suggest any unfairness to the defendants in the U.S. summary judgment proceeding. The defendants had a meaningful opportunity to be heard. [page331]

[40] Fifth, and particularly crucial in my view, in their appeal to the United States Court of Appeals for the Seventh Circuit, the defendants made no natural justice or denial of a meaningful opportunity to be heard argument. The appeal related almost entirely to the defendants' submission that Judge St. Eve erred by holding Yemec and Rapp liable for the various corporations' allegedly deceptive practices: Federal Trade Commission v. World Media Brokers, 415 F.3d 758 (7th Cir. Ill. 2005).

[41] For these reasons, I conclude that there is no "new" defence relating to "a meaningful opportunity to be heard". Such a defence is extremely circumscribed by a fair reading of Beals and King v. Drabinsky. In any event, even if there were such a defence, the defendants have not established it in this case. The U.S. court proceedings, trial and appeal, were fair throughout. The defendants received, and exercised, a meaningful opportunity to be heard.

[42] I now turn to a different argument relating to the enforcement of the U.S. judgment. On this appeal, the defendants challenge, for the first time, whether the Ontario courts should enforce the injunctive relief component of the U.S. court order, which includes the following ban on telemarketing as well as other injunctive relief:

IT IS THEREFORE ORDERED THAT Defendants George Yemec, Anita Rapp, and the Canadian Corporate Defendants, are hereby permanently restrained and enjoined from engaging in, participating in, or assisting in the Telemarketing, in any manner, of any product or service to any person in the U.S.

[43] In support of this submission, the defendants rely on Pro Swing Inc. v. Elta Golf Inc., 2006 SCC 52, [2006] 2 S.C.R. 612, [2006] S.C.J. No. 52, at para. 14, where Deschamps J. stated that "[t]he recognition and enforcement of equitable orders will require a balanced measure of restraint and involvement by the domestic court that is otherwise unnecessary when the court merely agrees to use its enforcement mechanisms to collect a debt".

[44] I do not accept the defendants' submission. Not only was this issue not raised before the motion judge but the scope of the injunction was not challenged before the United States Court of Appeals.

[45] In any event, I see no basis on the merits for refusing to enforce the injunctive relief component of the U.S. court order. In Pro Swing, Deschamps J. enumerated some of the factors to consider in determining whether a foreign equitable order should be enforced in Canada, at para. 30:

Relevant considerations may thus include the criteria that guide Canadian courts in crafting domestic orders, such as: Are the terms of the order clear and specific enough to ensure that the defendant will know what is expected from him or her? Is the order limited in its scope and did the originating court retain the power to issue further orders? Is the enforcement the least [page332] burdensome remedy for the Canadian justice system? Is the Canadian litigant exposed to unforeseen obligations? Are any third parties affected by the order? Will the use of judicial resources be consistent with what would be allowed for domestic litigants?

[46] In my view, these factors line up almost entirely in favour of enforcement of the United States court order.

[47] The terms of the injunction are simple, clear and specific; it would be obvious to the defendants what they cannot do in the United States.

[48] The order could have been narrower, restraining only telemarketing activities relating to the sale of foreign lottery tickets. However, given Judge St. Eve's ultimate conclusion that the defendants' activities constituted deceptive practices in violation of the Federal Trade Commission Act (the "FTC Act"), 15 U.S.C. 45(a) and the Telemarketing Sales Rule, 16 CFR Part 310, I cannot say that a complete prohibition of telemarketing aimed at people in the United States is unfair or unreasonable. Moreover, Judge St. Eve's order specifically directed that the District Court would retain jurisdiction to enable any party to seek modifications to the order.

[49] Enforcement of the U.S. court order does not place an undue burden on the Canadian justice system.

[50] I can see no unforeseen obligations to which the defendants will be exposed. Compliance with U.S. law is not, of course, an unforeseen obligation.

[51] The U.S. court order does affect some third parties (it requires the defendants to provide information about their customers). However, this information is needed in light of the $19 million damages award; it is unlikely that consumers will object on privacy grounds to the release of contact information that might assist the U.S. government to distribute that amount.

[52] Finally, enforcement of the U.S. court order is consistent with the types of orders that would be allowed for domestic litigants.

[53] For these reasons, I reject the defendants' submission that the Ontario courts should not enforce the injunctive relief component of the U.S. court order.

(2) The immediate damages inquiry

(a) Background and motion judge's reasons

[54] I now turn to the second issue, namely, whether the motion judge erred in ordering an immediate damages inquiry relating to the U.S. government's undertakings given in October 2002. To put this issue into context, it is necessary to return to the events of that time. [page333]

[55] On October 3, 2002, the U.S. bought an ex parte motion before Nordheimer J. for a Mareva injunction and an Anton Piller order. The U.S. claimed that the defendants enticed senior citizens in the United States to purchase packages of tickets in foreign lotteries and that the customers were subsequently told they had won prizes but must pay significant amounts of money in advance to claim them on the pretext that it was necessary to pay government duties or taxes.

[56] Based on the material before him, which included allegations of such "up-front fee fraud", Nordheimer J. was satisfied that the U.S. had made out a "strong prima facie case of fraud" and granted a Mareva injunction. He was also satisfied that the test for granting an Anton Piller order had been met.

[57] As a condition of obtaining the orders, the U.S. government gave two undertakings to the court, agreeing to "abide by any Order concerning damages that the Court may make if it ultimately appears that the granting of the Order has caused damages to the Defendants for which the Plaintiff ought to compensate the Defendants".

[58] Having obtained the ex parte orders, the U.S. raided the defendants' Toronto premises, seized computers and more than 250 boxes of documents, and froze their bank accounts. The effect was to shut down the defendants' business virtually overnight.

[59] One year later, in October 2003, Gans J. dissolved the interim orders, concluding that the U.S. lacked standing, had failed to make full and frank disclosure to Nordheimer J., had failed to establish a strong prima facie case that the defendants' conduct was fraudulent, and had failed to show that there was a risk of dissipation of assets: (2003), 2003 23436 (ON SC), 67 O.R. (3d) 394, [2003] O.J. No. 3863.

[60] He found that the representations made to Nordheimer J. "were more hyperbolic than they were fair, let alone factual": para. 37. He also found that the allegations of "up-front fee" fraud were traversed, if not neutralized, by evidence from George Yemec: para. 46.

[61] Justice Gans' decision was upheld by the Divisional Court on the basis that he had reasonably concluded that there was not a strong prima facie case of fraud and that the defendants had failed to establish a real risk of dissipation of assets: (2005), 2005 8709 (ON SCDC), 75 O.R. (3d) 52, [2005] O.J. No. 1165 (Div. Ct.).

[62] The Divisional Court noted evidence that the demand for up-front fees came from other telemarketers in other companies located in British Columbia and Quebec. Alan Krause, the FTC investigator who swore the affidavit that was submitted before Nordheimer J. and Gans J., had referred to statements contained [page334] in several victim declarations that were appended as exhibits, but they did not implicate the Yemec defendants. At most, there was a triable issue with respect to the up-front fee issue.

[63] The defendants' motion seeking enforcement of the damages undertakings came before the motion judge in April 2009. The U.S. vigorously resisted the motion, arguing that the undertakings should not be enforced or, in the alternative, that they should not be enforced immediately. The government's key submission was that there were "special circumstances" for the court not to order a damages inquiry: the defendants' lottery-ticket telemarketing business was illegal in Canada and the United States, and the defendants could claim no damages arising from the termination of an illegal business.

[64] After reviewing the considerable evidence put forward by the U.S. concerning the legality of the defendants' telemarketing business, the motion judge concluded that this was not an appropriate case to depart from the general presumption that damages undertakings are to be enforced.

[65] With regard to the legality of the defendants' business in Canada, he [at para. 116] "could not find on the evidence before [him] that the Yemec organization over its twenty years of successful operations was engaging in conduct that was clearly in breach of Canadian criminal law". That said, he found that the resale of Canadian lottery tickets to Americans would probably contravene s. 206 of the Criminal Code, R.S.C. 1985, c. C-46 following this court's decision in R. v. World Media Brokers Inc., 2003 42526 (ON CA), [2003] O.J. No. 1737, 174 C.C.C. (3d) 385 (C.A.).

[66] As to the legality of the defendants' business in the United States, he was not persuaded that [at para. 117] "the nature of the illegality that [had] been established under U.S. law [was] sufficient to relieve the plaintiffs of their obligations on their undertaking[s]". He noted that the defendants were not charged with violating the criminal lottery-mailing provisions under 18 U.S.C. 1301 and 1302. In his view [at para. 117]"[t]he ultimate disposition in the U.S. proceeding turned on a real but relatively esoteric breach of an FTC telemarketing sales rule".

[67] The motion judge weighed the U.S.'s conduct with the defendants' conduct, concluding [at para. 118]:

The court is obliged to compare and balance the conduct of both sides. Here, one side wrongfully obtained extraordinarily intrusive ex parte remedies on bad affidavit evidence that ended up destroying the businesses and lives of the individual defendants. The other side used a telemarketing script (which Mr. Yemec insists was actually revised in 1990) that breached an FTC sales rule, a breach that caused little if any damages to anyone. There is no comparison. [page335]

[68] The motion judge also rejected [at para. 131] the submission that the defendants' damages claim was "plainly unsustainable". In his view, the defendants had adduced "some credible evidence" that they had suffered loss as a result of the ex parte orders and they deserved their day in court to present evidence and make argument.

(b) Legal analysis

[69] I agree with the motion judge that this is not an appropriate case to depart from the strong presumption that a party who gives an undertaking to obtain an interlocutory injunction should be held to the undertaking.

[70] As the Supreme Court of Canada affirmed in Vieweger Construction Co. v. Rush & Tompkins Construction Ltd., 1964 53 (SCC), [1965] S.C.R. 195, [1964] S.C.J. No. 60, at p. 207 S.C.R."the rule is, that whenever the undertaking is given, and the plaintiff ultimately fails on the merits, an inquiry as to damages will be granted unless there are special circumstances to the contrary".

[71] This court has since elaborated on the special circumstances test in Gu v. Tai Foong International Ltd., 2003 20380 (ON CA), [2003] O.J. No. 264, 168 O.A.C. 47 (C.A.), at para. 58, where it affirmed the following passage from Nelson Burns & Co. v. Gratham Industries Ltd., 1987 9814 (ON CA), [1987] O.J. No. 1100, 25 O.A.C. 89 (C.A.), at paras. 10-11:

Since the decision of the Supreme Court of Canada in Vieweger an important change has taken place in the law with respect to interlocutory injunctions. As a result of a decision of the House of Lords in American Cyanamid Co. v. Ethicon Ltd., 1975 2598 (FC), [1975] A.C. 396, the balance of convenience test has largely displaced an earlier view that an applicant could obtain an interlocutory injunction only if he could show a strong prima facie case. Whatever the differences may be between the two standards it is now plain that in Ontario interlocutory injunctions are now easier to obtain than was the case prior to the American Cyanamid case.

Because of this change and because of the number of such injunctions that are sought, it is appropriate to emphasize the serious nature of the undertaking to pay damages which is a condition of the issuance of the interlocutory injunction. In the ordinary course the unsuccessful plaintiff must understand that he is obliged to pay damages in accordance with his undertaking without quibble, and courts generally will be unsympathetic towards those who seek to resile from such an obligation. (Emphasis added)

[72] In my view, there are three main reasons the U.S. should not be permitted to resile from its undertaking.

[73] First, the orders were dissolved as a result of the U.S. government's wrongful conduct in obtaining the ex parte orders, including leading Nordheimer J. to believe that the defendants were involved in up-front fee fraud even though the consumer [page336] complaints did not relate to the defendants. I observe that the U.S. has since abandoned its allegations based on such evidence.

[74] As explained by A.A.S. Zuckerman in his article "The Undertaking in Damages -- Substantive and Procedural Dimensions" (1994), 53 Cambridge L.J. 546, at p. 557"a plaintiff who suppresses facts that would count against his application strips the defendant of his procedural protection [notice and the opportunity to be heard] and causes an ex parte order to be made when it might otherwise have been denied". To prevent such abuse, notes the author, it is important to have effective and robust sanctions. "Without an adequate sanction of damages, and absent contempt or abuse of process, the worst that a plaintiff who fails to disclose the full facts has to fear is a discharge of the ex parte injunction with costs": p. 559.

[75] Second, the U.S. submits that there should be no damages inquiry because the defendants operated illegally in Canada and the United States, and it is contrary to public policy to recover damages arising from the termination of an illegal business. However, the government was aware of the general nature of the defendants' business at the time it sought the ex parte orders. The FTC had been investigating the defendants' business since 1999. It is evident that the reason the government brought proceedings against the defendants in both Canada and the United States was the belief that the defendants were operating in contravention of Canadian and U.S. law.

[76] Effectively, after wrongly obtaining the ex parte orders, the U.S. now seeks to avoid an inquiry into damages on the basis that the undertakings were worthless from the outset since there can be no damages flowing from the termination of an illegal operation. In my view, to give effect to such an argument in these circumstances would be to undermine the serious nature of a damages undertaking.

[77] Third, while the quantum of any damages is an open question, I am not persuaded that the defendants' damages claim is "plainly unsustainable", to borrow from the language of Yukong Line Ltd. v. Rendsburg Investments Corp., [2000] EWCA Civ. 358 (C.A.), at para. 35. I say this notwithstanding ample evidence that the defendants contravened Canadian and U.S. law in operating their lottery-ticket telemarketing business.

[78] While I agree with the motion judge's conclusion that the defendants' conduct should not absolve the U.S. from undergoing a damages assessment, I do not agree entirely with his assessment of the illegality of the defendants' business. In my view, he erred in concluding that there was no evidence that, over its 20 years of [page337] operations, the Yemec organization had not engaged in conduct "that was clearly in breach of Canadian criminal law".

[79] In 1998, Fairgrieve J. found [at para. 3] World Media Brokers Inc. and Grand Print Inc. -- two of the defendants in this case -- guilty under s. 206 of the Criminal Code for having "offer[ed] for sale . . . shares of tickets in" a Spanish lottery: R. v. World Media Brokers Inc., 1998 27760 (ON CJ), [1998] O.J. No. 4049, 132 C.C.C. (3d) 180 (C.J.). His decision was upheld by this court on appeal: 2003 42526 (ON CA), [2003] O.J. No. 1737, 174 C.C.C. (3d) 385 (C.A.). This conviction is clear evidence of illegality. As Arbour J.A. stated in R. v. Farinacci, 1993 3385 (ON CA), [1993] O.J. No. 2627, 86 C.C.C. (3d) 32 (C.A.), at p. 37 C.C.C."[a] conviction . . . constitutes a legal, conclusive finding of guilt. . . . [I]t is enforceable unless and until reversed".

[80] While World Brokers only dealt with the resale of Spanish lottery tickets, I agree with the motion judge's view that the case signals that the resale of Canadian lottery tickets would also contravene s. 206 of the Criminal Code.

[81] In addition, there is strong evidence that the defendants' lottery ticket telemarketing business contravened U.S. law. Judge St. Eve's judgment, together with the Court of Appeals' decision, are conclusive proof that Yemec, Rapp and the named corporate defendants contravened the FTC Act and the FTC's Telemarketing Sales Rule. They were found liable based on the undisputed facts that they sold foreign lottery tickets to U.S. consumers, mailed foreign lottery materials to U.S. consumers and misrepresented to those consumers that their activities were legal.

[82] While they were not charged and convicted criminally under 18 U.S.C. 1301 or 1302 (the lottery mailing provisions), Judge St. Eve expressly found that "the Corporate Defendants' representations were deceptive with respect to 18 U.S.C. 1301".

[83] On appeal before the Court of Appeals for the Seventh Circuit, Yemec and Anita Rapp argued that Judge St. Eve had erred in holding them jointly and severally liable for the $19 million in consumer redress. Circuit Judge Rovner rejected this submission, concluding that there was ample evidence that they knew that selling Canadian lottery tickets to U.S. consumers was illegal. That evidence included the United States Postal Service's 1991 order requiring Yemec and Rapp to "cease and desist from engaging in the conduct of any lottery scheme for the distribution of money by lottery, chance or drawing of any kind in which any use of the United States mail is involved".

[84] It will be up to the damages inquiry judge to determine, considering this and other evidence of illegality, whether the defendants have sustained any compensable damages, taking [page338] into account the principles of causation, remoteness, foreseeability and mitigation, and the general rule of public policy that precludes a person from benefitting from his or her own crime: Nordstrom v. Baumann, 1961 51 (SCC), [1962] S.C.R. 147, [1961] S.C.J. No. 76, at p. 156 S.C.R.

[85] Taking into account those principles, it may be difficult for the defendants to prove that they have suffered compensable damages. Nonetheless, I am not satisfied that their entire damages claim is plainly unsustainable such that they should be denied the opportunity to present their evidence and make full argument.

[86] I note, for instance, the decision in Columbia Picture Industries Inc. v. Robinson, [1987] Ch. 38 (Q.B.). An issue in Columbia Picture was what, if any, damages the defendants could recover on a damages undertaking. Scott J. concluded that the defendants "[could not] expect to be compensated for damage to the illicit part of the businesses", which involved selling pirated videotapes: p. 87. However, he awarded damages in the amount of [pound]10,000, recognizing that the combination of the Anton Piller order and Mareva injunction made it impossible for the defendants to obtain credit, that the retention of business documents made any continuity of business very difficult, and that there was a legitimate part to the defendants' business, albeit a small part. In his view"[t]he defendants' chance to continue on a small scale a legitimate business was impaired by the ex parte order being obtained and executed": p. 88.

[87] In conclusion, while evidence of illegality is an important consideration in determining whether to order a damages inquiry, I agree with the motion judge that, taking into account the circumstances of this case, there should be an assessment of damages to determine what, if any, compensable damages the defendants have sustained as a result of the wrongfully obtained orders.

[88] I will address the timing of the damages inquiry below, as the timing question ties into my disposition of the other issues raised on the appeal and cross-appeal.

(3) Standing

[89] The motion judge concluded that it was plain and obvious that the U.S. government did not have standing to sue in Canada on behalf of a group of unnamed American consumers for damages allegedly caused by the defendants. This conclusion related to the 2002 Ontario claim by the U.S. for $30 million in damages and injunctive relief. [page339]

[90] At the oral hearing of this appeal, counsel for the U.S. government indicated that if this court allowed the appeal with respect to the enforcement of the U.S. court order in Ontario, then the U.S. government did not intend to pursue any of the claims in the 2002 statement of claim.

[91] As set out above, I would allow the appeal on the issue of enforcing the U.S. court order. Accordingly, it is not necessary to decide the issue of the U.S. government's standing to sue in Canada on behalf of a group of American consumers for damages allegedly sustained by individuals in this group. In these circumstances, I would decline to address this issue.

(4) The cross-appeal: abuse of process

[92] The defendants contend that the motion judge erred by failing to find that the U.S. government's conduct in the U.S. court proceedings was an abuse of process such that the 2005 Ontario action should be stayed. I disagree. In brief compass (four paragraphs), the motion judge dismissed this claim. He said [at para. 189]:

The defendants' submissions alleging abuse of process are essentially the same as those that were advanced in the second motion alleging denial of natural justice and violation of public policy . . . . One could further conclude, a fortiori, that there can therefore be no basis for finding an abuse of process.

[93] I agree with this reasoning and conclusion. However, I make this observation. The linkage and overlap the motion judge correctly sees between natural justice and abuse of process are precisely the same linkage and overlap that exist between natural justice and the proposed "new" defence of a meaningful opportunity to be heard.

E. Disposition

[94] I would allow the appeal and order that the U.S. court order be enforced in Ontario. I would dismiss the appeal with respect to the damages inquiry in Ontario. As the only outstanding proceeding is the damages inquiry, it shall be held forthwith and enforcement of the $19 million damages component of the U.S. court order is to be stayed until the damages inquiry in Ontario is concluded. Finally, I would dismiss the cross-appeal.

[95] It seems to me that success on the appeal is about equally divided. Accordingly, I would suggest that there should be no costs of the appeal. However, if counsel are of a different view, they may make brief written submissions to the court within two weeks of the release of these reasons.

Appeal allowed in part; cross-appeal dismissed.

Notes

Note 1: The U.S. discontinued the action against a number of the corporate and personal defendants. Of the seven original personal defendants, only four remain: George Yemec, Anita Rapp, Julia Bungaro and Nelson Bunting.