Court File and Parties

Court File No.: St. Catharines - 2111-999-10-3873-00

Date: 2014-01-13

Ontario Court of Justice

Between:

TRAVEL INDUSTRY COUNCIL OF ONTARIO Appellant

— And —

PANORAMA TRAVEL & TOURS LTD., ZBIGNIEW KUCHARSKI and BEATA KUCHARSKI Respondents

Before: Justice D.A. Harris

Heard: September 30, 2013

Reasons for Judgment released: January 13, 2014

Counsel:

• Soussanna Karas, for the Appellant
• Timothy J. Law, for the Respondents

Reasons for Judgment

Appeal Against Sentence

HARRIS J.:

Introduction

[1] The three Respondents each entered guilty pleas to trust account violations contrary to sections 27(3) and 27(6) of Regulation 26/05 of the Travel Industry Act, 2002. More specifically:

1. Panorama Travel & Tours Ltd. during the period between and including the 1st day of September in the year 2010 and the 30th day of November in the year 2010 at the City of St. Catharines in the Central West Region when Panorama Travel & Tours Ltd. was a registrant under the Travel Industry Act, 2002; S.O. 2002; Chapter 30; Schedule D and was required to maintain a trust account pursuant to subsection 27(1) of Regulation 26/05 made under the said Act, did commit an offence under paragraph 31(1)(c) of the said Act, by failing to deposit customer funds in a designated trust account within two banking days after receiving them, contrary to subsection 27(3) of the said Regulation.

2. Beata Kucharski and Zbigniew Kucharski during the period between and including the 1st day of September in the year 2010 and the 30th day of November in the year 2010, at the City of St. Catharines in the Central West Region when Panorama Travel & Tours Ltd. was a registrant under the Travel Industry Act, 2002; S.O. 2002; Chapter 30; Schedule D and was required to maintain a trust account pursuant to subsection 27(1) of Regulation 26/05 made under the said Act, did commit an offence under subsection 31(2) of the said Act, by failing to take reasonable care to prevent Panorama Travel & Tours Ltd. from committing an offence under paragraph 31(1)(c) of the said Act of failing to deposit customer funds in a designated trust account within two banking days after receiving them, contrary to subsection 27(3) of the said Regulation.

3. Panorama Travel & Tours Ltd. during the period between and including the 1st day of February in the year 2011 and the 17th day of May in the year 2011 at the City of St. Catharines in the Central West Region when Panorama Travel & Tours Ltd. was a registrant under the Travel Industry Act, 2002; S.O. 2002; Chapter 30; Schedule D and was required to maintain a trust account pursuant to subsection 27(1) of Regulation 26/05 made under the said Act, did commit an offence under paragraph 31(1)(c) of the said Act, by failing to hold customer funds in a designated trust account until payment was made to the supplier of travel services for which the money was entrusted or a refund provided to the customer, contrary to subsection 27(6) of the said Regulation.

4. Beata Kucharski and Zbigniew Kucharski during the period between and including the 1st day of February in the year 2011 and the 17th day of May in the year 2011, at the City of St. Catharines in the Central West Region when Panorama Travel & Tours Ltd. was a registrant under the Travel Industry Act, 2002; S.O. 2002; Chapter 30; Schedule D and was required to maintain a trust account pursuant to subsection 27(1) of Regulation 26/05 made under the said Act, did commit an offence under subsection 31(2) of the said Act, by failing to take reasonable care to prevent Panorama Travel & Tours Ltd. from committing an offence under paragraph 31(1)(c) of the said Act of failing to hold customer funds in a designated trust account until payment was made to the supplier of travel services for which the money was entrusted or a refund provided to the customer, contrary to subsection 27(6) of the said Regulation.

[2] Both counsel agreed that the passing of sentence should be suspended with respect to counts 1 and 2. They disagreed however on the appropriate sentences with respect to counts 3 and 4.

[3] Counsel for the Appellant Travel Industry Council of Ontario (TICO) argued that the appropriate sentences with respect to those charges should be:

1. For Mr. Kucharski – imprisonment for 60 days; or in the alternative a fine of $25,000
2. For Ms. Kucharski - a fine of $5,000
3. For Panorama Travel & Tours Ltd. - a fine of $25,000

[4] Counsel for the Respondents argued that lesser fines were appropriate with respect to Mr. and Ms. Kucharski and made no submissions with respect to the corporation.

[5] With respect to counts 1 and 2, the presiding Justice of the Peace suspended sentence against all three Respondents.

[6] With respect to count 3, she placed Panorama Travel & Tours Ltd. on probation for a period of one year.

[7] With respect to count 4, she ordered that Zbigniew Kucharski and Beata Kucharski must each pay restitution in the amount of $25,000. She also placed them on probation for a period of one year.

[8] The Appellant TICO appealed against all of the sentences imposed, but requests relief with respect to counts 3 and 4 only.

Law

[9] Section 122(1) of the Provincial Offences Act sets out an appellate court's jurisdiction on an appeal from sentence. Essentially I am called upon to consider the fitness of the sentence appealed from and to either dismiss the appeal or vary the sentence within the limits prescribed by law.

[10] The sentence imposed by the presiding Justice of the Peace, however, must be treated with deference on review unless she made an error in principle, failed to consider a relevant factor, or overemphasized appropriate factors or the sentence was manifestly unfit.

[11] The Supreme Court of Canada set out strict parameters for reviewing the fitness of sentences imposed by trial courts in R. v. Shropshire stating that:

An appellate court should not be given free rein to modify a sentencing order simply because it feels that a different order ought to have been made. A variation in the sentence should only be made if the appeal court is convinced that it is not fit, that is to say, that it has found the sentence to be clearly unreasonable.

[12] In R. v. Cotton Felts Ltd., the Ontario Court of Appeal set out the factors that must be considered in determining the appropriate sentence with respect to regulatory offences in Ontario.

The amount of the fine will be determined by a complex of considerations, including the size of the company involved, the scope of the economic activity in issue, the extent of actual and potential harm to the public, and the maximum penalty prescribed by statute. Above all, the amount of the fine will be determined by the need to enforce regulatory standards by deterrence.

[13] Deterrence is the paramount principle of sentencing in these cases. To accomplish this, the fine must be substantial enough to warn others that the offence will not be tolerated. It must not be a mere licence fee for illegal activity.

[14] The Ontario Court of Appeal recently restated the difference between criminal offences and regulatory measures as follows:

While criminal offences are usually designed to condemn and punish past, inherently wrongful conduct, regulatory measures are generally directed to the prevention of future harm through the enforcement of minimum standards of conduct and care.

[15] The maximum sentence for an individual who is convicted of an offence under the Travel Industry Act, 2002 is a fine of not more than $50,000 or imprisonment for a term of not more than two years less a day, or both.

[16] The maximum sentence for a corporation that is convicted of an offence under this Act is a fine of not more than $250,000.

[17] The court making the conviction may, in addition to any other penalty, order the person convicted to pay compensation or make restitution.

Facts

[18] TICO is a self-managed, not-for-profit corporation formed in 1997. TICO has been delegated the authority by the Ministry of Consumer Services to administer the Travel Industry Act, 2002.

[19] TICO's mission is to promote a fair and informed marketplace where consumers can be confident in their travel purchases. TICO also supports the mission of the Ontario Ministry of Consumer Services to maintain a fair, safe and informed marketplace.

[20] Section 27 of the Regulation required that each registrant maintain a trust account for all money received from customers for travel services ("Trust Funds"). The registrant is not permitted to use trust funds, other than to pay the supplier or refund the customer. Only after the supplier has been paid or the customer has been issued a refund, can the registrant transfer the profit portion from the trust account to the general account. This practice ensures that in the case of bankruptcy or insolvency, the customers' money is safe and can be returned to the customers.

[21] Section 24 of the Regulation required that every registrant must ensure that it maintains sufficient working capital to pay operational expenses as they come due. This ensures that the consumer funds deposited into the trust account of the registrant are safe.

[22] TICO provides registrants with a variety of educational resources such as frequent financial inspections, Educational Standards Examination, and Industry Guidelines which are available on-line. In addition, each registrant is required to sign the Terms and Conditions of Registration acknowledging they are informed and bound to comply with the trust accounting provisions. Therefore, from the moment each person becomes a registrant, they are aware of their trust accounting obligations.

[23] As part of the compensatory protection, TICO's Board of Directors administers and manages the affairs of the Ontario Travel Industry Compensation Fund (the "Fund"). The purpose of the Fund is to reimburse customers in the circumstances provided for by section 57 of the Regulation.

[24] Panorama Travel was a TICO registered travel agent since May 1991. In November 2005, Panorama Travel applied for and was approved as a travel wholesaler. As part of the registration requirement as a travel wholesaler, Ms. Kucharski and Panorama Travel signed the Terms and Conditions of Registration detailing Panorama Travel's trust account obligations in case a "risk program" was contemplated.

[25] TICO's financial inspection of September 13, 2010 revealed that Panorama Travel had not followed proper trust accounting. Trust funds were deposited into the general account from which overhead and personal expenses were paid. In addition, Mr. Kucharski admitted to having cash flow problems and confirmed that Panorama Travel had entered into a series of loans and repayments with family members and friends. In fact, during the period between April 2010 and August 2010, 24 loans were received by Panorama Travel ($147,263) and 31 repayments were made ($112,228).

[26] Mr. Kucharski was warned that trust funds were not to be used to pay day-to-day expenses of the corporation and was urged to seek assistance from the Chartered Accountant to establish reliable sources in order to maintain Panorama Travel's working capital. The Inspector discussed the trust accounting rules and procedures with Mr. Kucharski personally and issued the Inspection Report.

[27] As a result of the TICO Inspection in September 2010, the Respondents had actual knowledge of the risks of using trust funds to pay for personal and overhead expenses, were informed of proper trust accounting procedures and had been provided with tools necessary to comply.

[28] As of December 2010, Panorama Travel embarked on a FlyCentralEurope – Air Charter "risk program" with Air Italy Polska (the "Risk Program"). Mr. Kucharski was the author of the Risk Program and at all relevant times was in charge of the day-to-day operations, contracts, negotiations and financial support of the Risk Program. Ms. Kucharski was in charge of ticketing and customer service.

[29] The contract between Panorama Travel and Air Italy Polska provided that $1,091,000 as a security deposit should be paid by Panorama Travel in three installments (January 11, March 8 and April 8, 2011). Payment for each flight ($200,000+) was due on the Wednesday, the week before the departure date. Panorama Travel was to pay for all of the seats on the plane regardless of whether the tickets were sold. If all the seats were sold at a premium, Panorama Travel was to keep the difference as revenues. However, if the flight was not fully sold out, Panorama Travel was to cover the difference to Air Italy Polska at its own loss.

[30] Given the previous history of non-compliance, TICO became gravely concerned that the cash flow and working capital problems might lead to the misuse of trust funds received as part of the Risk Program. As a result, TICO issued official cautions to the Respondents on March 2, March 23, and April 15, 2011, requiring the Respondents to ensure that the Risk Program had proper financial support and that the trust funds remain intact until the payment for each flight was remitted to the airline.

[31] Moreover, the risks of underfunding the Risk Program and proper trust accounting were the subject of personal discussions between Mr. Kucharski and TICO staff.

[32] Despite clear and frequent warnings, the Respondents continued transferring trust funds for purposes not related to the specific travel as directed by consumers:

(a) On March 2, 2011, a TICO Inspector met with Mr. Kucharski and explained in detail the trust accounting rules with respect to the Risk Program. However, on March 8, 2011, $200,000 was transferred from the trust account of Panorama Travel to Air Italy Polska as security deposit payment.

(b) On March 23, 2011, the Registrar sent a letter reiterating the TICO Inspector's instructions and demanding that the security deposit to Air Italy Polska was to be financed by the outside sources and not taken from trust funds – yet another $265,000 were transferred from the trust account of Panorama Travel to Air Italy Polska between March 25 and April 14, 2011.

(c) On April 15, 2011, the Registrar wrote again, requesting that additional working capital be raised to cover security deposits and any trust accounting shortfall in the trust account of Panorama Travel. Despite the above letter, Mr. Kucharski transferred an additional $441,000 from the trust account of Panorama Travel to Air Italy Polska as a security deposit during the period between April 18 and April 26, 2011.

(d) Between February 1 and May 16, 2011, $337,000 of trust funds was transferred to the general account of Panorama and used to pay personal loans, tuition costs and salaries.

[33] In total, during the period from February 1 to May 16, 2011, over $1.1 million in trust funds was transferred by the Respondents as security deposits and payment of personal and business expenses.

[34] On May 17, 2011, following a temporary suspension of its registration under the Act, Panorama Travel voluntarily terminated its registration. The FlyCentralEurope program was cancelled. Panorama Travel's accounts were frozen by TICO. None of the passengers who purchased tickets from Panorama Travel travelled.

Analysis

[35] Counsel for the Appellant argued that the presiding Justice of the Peace erred in that she made a probation order in addition to a restitution order, something that is not permitted pursuant to section 72 of the Provincial Offences Act.

[36] This argument is correct from a purely technical standpoint. A probation order may only be made in conjunction with a suspended sentence, or with a sentence that includes a fine or imprisonment.

[37] The error however is one of form rather than substance.

[38] It would have been permissible for the presiding Justice of the Peace to have accomplished exactly the same result had she suspended the passing of sentence, placed Mr. and Ms. Kucharski on probation, and then, in addition to that, made the restitution orders.

[39] The issue before me is not whether the presiding Justice of the Peace erred in how she structured the sentences that she imposed. Any such errors in structure can be easily corrected. The issue is whether she considered the relevant principles of sentencing and imposed sentences which were fit.

[40] In that regard, the presiding Justice of the Peace referred to Cotton Felts in her Reasons for Sentence. She considered the factors set out in that case and applied them so as to indicate a correct understanding of those principles.

[41] She further took into account the various aggravating factors including:

(a) the fact that "the total amount of the loss to the travelling public and other businesses as a result of Panorama Travel not keeping monies in the trust fund was between $1.2 million and $2.9 million less the $367,000 received as a result of the Superior Court judgment".

(b) that there was more than money lost, that the victims here lost reputations and suffered damage to their business reputations as a result of the Respondents' failure to comply with the law.

(c) that those failures to comply persisted even after repeated instruction by TICO of the need to comply.

(d) that this was a breach of trust and that such offences called for denunciatory and deterrent sentences.

[42] So she took into account all of the highly aggravating factors present in this case.

[43] She also, quite properly, took into account the mitigating factors, including:

(a) the guilty pleas and the fact that they saved the time and expense of a trial;

(b) that the Respondents took responsibility for their actions. They terminated the registration of the corporation and cooperated with TICO. The corporate assets were distributed in accordance with the terms of a judgment of the Superior Court of Justice.

[44] She took into account the fact that for all practical purposes the corporation no longer existed and it would be impossible for anyone to enforce either a fine or a compensation order against the corporation.

[45] She took into account that Zbigniew Kucharski and Beata Kucharski had no assets other than their house and that a restitution order could be enforced upon sale of that house.

[46] She found that the losses caused to the victims of the offences were the result of business incompetence rather than a sophisticated attempt to defraud travelers. The Kucharskis were in over their heads and did not or would not admit it.

[47] She discussed at length the relative merits of imposing fines versus making restitution orders before concluding that the latter were more appropriate.

[48] In doing so she considered decisions of the Supreme Court of Canada and the Ontario Court of Appeal regarding the use of restitution orders in a sentence.

[49] In R. v. Zelensky, Laskin C.J., writing for the majority of the Supreme Court of Canada, identified certain objectives and factors that relate to the making of a restitution order including that:

The concept of compensation is essential to the sentencing process:

(i) it emphasizes the sanction imposed upon the offender;

(ii) it makes the accused responsible for making restitution to the victim;

(iii) it prevents the accused from profiting from crime; and

(iv) it provides a convenient, rapid and inexpensive means of recovery for the victim;

[50] In R. v. Castro, the Court of Appeal states:

A restitution order forms part of a sentence. In accordance with general sentencing principles, a restitution order is entitled to deference and an appellate court will only interfere with the sentencing judge's exercise of discretion on the basis of error in principle or if the order is excessive or inadequate.

[51] I find that the presiding Justice of the Peace considered all of the relevant principles of sentence and all of the relevant factors present in this case.

[52] The only issue left then is whether the sentences imposed by her were manifestly unfit.

[53] The most commonly imposed sentence for similar offences in previous cases has been a fine, and with good reason.

[54] Imprisonment is clearly not called for in most cases of regulatory offences such as these.

[55] Just as clearly, fines will have greater deterrent effect than will making a restitution order which simply requires that offenders return that which they had taken from their victims.

[56] No case however even suggests that just because a fine has been imposed in most cases, it must be imposed in all cases.

[57] Similarly, while I would not suggest that restitution orders should become the norm in these cases, I cannot say that they would never satisfy the need for deterrence and denunciation.

[58] In the particular circumstances of this case, the presiding Justice of the Peace concluded that restitution orders in conjunction with probation orders were the appropriate sentences for Zbigniew Kucharski and Beata Kucharski. She noted that they had both been through personal bankruptcy and been discharged. They had no assets other than their house and a restitution order could be enforced upon sale of that house.

[59] I do not understand why the house could not be sold in order to provide the money needed to pay fines instead. On the other hand, I did not see anything in the record below that indicated that the Kucharskis had sufficient equity in their house to pay either.

[60] In any event, they would lose their house in order to satisfy either fines or restitution orders.

[61] One significant difference between these though is that they could be imprisoned in default of paying a fine.

[62] The presiding Justice of the Peace discussed this possibility at great length in her Reasons for Sentence and made it clear that she chose restitution for the specific purpose of ensuring that neither Zbigniew Kucharski nor Beata Kucharski went to jail because of their inability to pay whatever penalty was ordered by the court.

[63] Both the Supreme Court of Canada and the Ontario Court of Appeal have recognized the need "to prevent offenders from being fined amounts that they are truly unable to pay, and to correspondingly reduce the number of offenders who are incarcerated in default of payment."

[64] Counsel for TICO asked the presiding Justice of the Peace to treat the two differently and to impose fines of $25,000 for Mr. Kucharski and $5,000 for Ms. Kucharski. The Justice of the Peace chose however to treat them both the same. Simple arithmetic tells me that, had she chosen to divide the total fines requested ($30,000) between the two of them equally, she would have fined them $15,000 each.

[65] I fail to see how two restitution orders for $25,000 provide significantly less deterrent or denunciatory effect than two fines of $15,000, especially where the restitution orders are combined with probation. Any differences that do exist certainly do not constitute reversible error with respect to the sentences imposed on Zbigniew Kucharski and Beata Kucharski.

[66] I have not reached the same conclusion with respect to the sentence imposed on Panorama Travel & Tours Ltd.

[67] On the contrary, the sentence fails to recognize the gravity and circumstances of the offence and the serious impact on the victims. It fails to send any message of deterrence or denunciation to other corporations and as a result undermines the intent and effectiveness of the legislation.

[68] The corporation is not entitled to be exempted from such a sentence simply because of the sentences imposed on Zbigniew Kucharski and Beata Kucharski, although those sentences would be a factor to be considered.

[69] The corporation is not entitled to be exempted from such a sentence simply because it is not actively carrying on business. It is not exempt even though it has been wound up and its assets liquidated and $367,000 was distributed in accordance with the terms of a judgment of the Superior Court of Justice.

[70] It is still necessary to send a message to other potential offenders that breaking this law can result in a substantial penalty over and above paying such restitution.

[71] I note here the comments of Zuber J.A. in R. v. Roussy:

A sentence by emphasizing community disapproval of an act, and branding it as reprehensible has a moral or educative effect, and thereby affects the attitude of the public. One then hopes that a person with an attitude thus conditioned to regard conduct as reprehensible will not likely commit such an act.

[72] In the case of Panorama Travel & Tours Ltd., this can be done without fear that anyone will go to jail as a result of an inability to pay the fine.

[73] For all of these reasons, I find that the sentence that was imposed on Panorama Travel & Tours Ltd. was manifestly unfit and cannot stand. A fine will be imposed in its place.

Decision

[74] It is hereby ordered that:

(1) The appeal with respect to counts 1 and 2 is dismissed;

(2) The appeal with respect to count 3 is allowed and Panorama Travel & Tours Ltd. is fined $25,000 with two years to pay the fine; and

(3) The appeal with respect to count 4 is allowed and the sentences imposed on Zbigniew Kucharski and Beata Kucharski are varied to suspended sentences with probation for one year commencing February 20, 2013, on the same terms and conditions as before, plus restitution orders in the amount of $25,000 on the same terms and conditions as before.

Released: January 13, 2014

Signed: "Justice D.A. Harris"

Justice D.A. Harris