Wilson & Ford Limited v. Mahmood et al., 2012 ONSC 3043

Court File and Parties

Court File No.: CV-11-105598-00
Date: 20120910
SUPERIOR COURT OF JUSTICE - ONTARIO

RE: Wilson & Ford Limited , Plaintiff

AND:

Tahir Mahmood, Shazma Tahir, Peter Gordon Spurgeon, Sandra Lyn Spurgeon, and P. & S. Spurgeon Enterprises Inc., Defendants

BEFORE: The Honourable Mr. Justice M. McKelvey

COUNSEL:
Roger Bourque, for the Plaintiff

Harjaap Mann, for the Defendants

Timothy McGurrin, for the Defendants

HEARD: May 3, 2012

ENDORSEMENT

Introduction

1The issues on this motion relate to the Statement of Defence of the defendant, Tahir Mahmood. The plaintiff has brought a motion to strike out several portions of the this defendant’s Statement of Defence, pursuant to Rule 25.06, 25.10, and 25.11 of the Rules of Civil Procedure (the “Rules”).

Background

2The plaintiff in this action operates a business which supplies food packaging and equipment. The president of the company is Mr. Frank Lippa. There are a number of defendants in the action, including Tahir Mahmood who was the controller of the company. It is alleged in the plaintiff’s Statement of Claim that between January 2010 and July 2011, Mr. Mahmood forged the signature of an authorized signing officer on a large number of cheques, which were made payable to a company that had no relationship or dealings with the plaintiff company. It is alleged that Mr. Mahmood breached both contractual and fiduciary duties owed to the plaintiff in converting approximately $840,000 for his own use and in fraudulently manipulating the plaintiff’s books and records to conceal that conversion.

3The thrust of the defence by Mr. Mahmood is that his actions were authorized and directed by Mr. Lippa. He asserts that he was told by Mr. Lippa to supply the cheques to the company in question (P & S Spurgeon Enterprises “Spurgeon”) and that after the delivery of the cheques, Spurgeon would return 80 per cent of the funds to him and Spurgeon would keep the other 20 per cent. Mr. Mahmood asserts that the payments to him were compensation for his co-operation with Mr. Lippa in making a series of adjustments to the financial books and records of the entities he controlled, including the corporate plaintiff in this action.

Rule 25.06(1) provides that:

Every pleading shall contain a concise statement of the material facts on which the party relies for the claim or defence, but not the evidence by which those facts are to be proved.

Rule 25.06(8) provides that:

Where fraud, misrepresentation, breach of trust, malice, or intent is alleged, the pleading shall contain full particulars, but knowledge may be alleged as a fact without pleading the circumstances from which it is to be inferred.

Rule 25.11 states:

That the court may strike out all or part of a pleading, with or without leave to amend, on the ground that the pleading or other document:

(a) may prejudice or delay the fair trial of the action;

(b) is scandalous, frivolous, or vexatious;

(c) is an abuse of the process of the court.

4With these basic principles in mind, I turn now to the portions of the Statement of Defence which are the subject of the motion by the plaintiff.

Paragraph 13 of the Statement of Defence

5Paragraph 13 of the Statement of Defence of Mr. Mahmood reads as follows:

The defendant, Tahir Mahmood, was instructed by Frank Lippa that he was to report only to Frank Lippa and to ensure Dan Margorian, a vice-president with the plaintiff, was kept as removed from financial matters of the company as possible. Tahir Mahmood was told by Frank Lippa that Mr. Margorian was not trustworthy because he aspired to take over Heat Sealing Packaging and Equipment Limited (a division of the plaintiff).

6The plaintiff’s position is that the underlined portion of this paragraph should be struck because the allegations concerning Mr. Lippa and the plaintiff’s vice-president, Daniel Margorian are not relevant to Mr. Mahmood’s defence, are not material facts, but evidence and are made for the tactical purpose of causing dissention and distrust among the plaintiff’s chief officers. It is argued that they therefore constitute an abuse of the process of the court and are scandalous, frivolous, and vexatious.

7The defendant, on the other hand, argues that the inclusion of this allegation is material to the defence of Mr. Mahmood as it serves to illustrate the nature of the relationship which existed between Mr. Lippa and the defendant Mr. Mahmood.

8In the Ontario Court of Appeal decision in Quizno’s Canada Restaurant Corps. v. Kileel Developments Ltd. (2008), 2008 ONCA 644 , 92 O.R. (3d) 347, the court comments that a fair trial requires a defendant to be able to put forward a full defence. The court goes on to state:

A defendant is entitled to plead whatever materials facts it chooses to in response to a plaintiff’s allegations, provided the allegations are relevant and of at least marginal probative value and the probative value is not outweighed by the prejudicial effect.

Later in the Reasons, the court goes on to state that the circumstances in which a judge will apply the prejudice vs. probative value test will be very limited. Generally, therefore, the test which should be applied in assessing a pleading, is whether it is relevant as a defence to the plaintiff’s claim subject to the residual direction of a court to strike a pleading where its marginal probative value is outweighed by its prejudicial effect.

9The defence being advanced by Mr. Mahmood is that he was following instructions by Mr. Lippa and that he was given the funds to compensate him for following Mr. Lippa’s directions regarding the accounting procedures to be followed. The direction which is alleged to have been given by Mr. Lippa was to ensure that Mr. Margorian was kept as removed from the financial affairs of the company as possible is relevant to that defence because it relates to the theory that Mr. Mahmood was being compensated for manipulating the books of the company and the allegation to keep Mr. Margorian away from the records of the company would be part of that plan. I further conclude that the pleading cannot be struck on the basis that its probative value is marginal as compared to its prejudicial value. This allegation is an integral part of Mr. Mahmood’s defence theory which is being advanced in the action. I therefore conclude that the material facts as set out in paragraph 13 are consistent with Mr. Mahmood’s right to make a full defence to the Statement of Claim. I decline to strike out any portion of paragraph 13 of the Statement of Defence.

Paragraph 14 of the Statement of Defence

10Paragraph 14 of the Statement of Defence reads as follows:

Frank Lippa constantly sought new ways of making the company’s accounting systems less accessible for Mr. Margorian. Frank Lippa made it clear on many occasions that he did not appreciate that Mr. Margorian was able to see payments made to vendors and others. Frank Lippa and Tahir Mahmood would often have meetings to discuss how Mr. Margorian could be kept isolated from financial matters when Mr. Margorian was absent from the office.

The issues with respect to paragraph 14 would appear to be the same as those with respect to paragraph 13. For the reasons outlined above, I decline to strike paragraph 14 of the Statement of Defence.

Paragraph 15 of the Statement of Defence

11Paragraph 15 of the Statement of Defence reads as follows:

Frank Lippa also had issues with David Cooper, the former accountant to Heat Sealing Packaging and Equipment Ltd. Frank Lippa was unsettled to the fact that David Cooper disagreed with Frank’s methods of avoiding tax and other liabilities.

12The plaintiffs’ counsel argues the issues Mr. Lippa may have had with Mr. Cooper are of no relevance to the action. There does not appear to be any other allegation in the Statement of Defence which links any issues between Mr. Lippa and Mr. Cooper to the payments made to Spurgeon or Mr. Mahmood. In response, Mr. Mann took the position that Mr. Cooper’s involvement was relevant. He asserted that Mr. Cooper had been dismissed by Mr. Lippa for failing to manage the accounts in the way that was directed by Mr. Lippa. He further stated that Mr. Mahmood was motivated to follow the instructions given to him by Mr. Lippa, recognizing that failure to do so would likely result in his dismissal as well. The link suggested by Mr. Mann to the defendant’s theory of the case is not found anywhere in the Statement of Defence. It is not an inference which I would draw from the pleading as it stands.

13In summary Paragraph 15 does not appear to have any relevance to the defence of the action as currently pleaded. I therefore conclude that paragraph 15 should be struck, but in light of the assertion by Mr. Mann that a link can be drawn to the defence theory of the case, I grant leave to the defendant to deliver an amended pleading.

Paragraph 17 of the Statement of Defence

14Paragraph 17 of the Statement of Defence reads as follows:

From approximately 2005-2010, Frank Lippa transferred approximately $3 million from Heat Sealing Packaging and Equipment Ltd. to some of the other entities mentioned in paragraph 16 herein presumably for the purposes of making questionable investments and avoiding tax liabilities. It is the defendant, Tahir Mahmood’s understanding, that the TD Bank pulled a line of credit issued to the plaintiff as a result of their lack of confidence in Mr. Lippa’s financial practices.

The plaintiff objects to the underlined portion of paragraph 17. With respect to the second part of the first sentence, it is suggested that the use of the word “presumably” indicates that the defendant is speculating as to the purposes for the transfer of the funds referred to in the paragraph. As such, this does not represent a pleading of a material fact.

15It appears that the use of the term “presumably” may have been an unfortunate choice of words in paragraph 17. It was noted that if that word is removed from the pleading it would take the pleading outside the realm of speculation. I do agree, however, in its current form, that this portion of paragraph 17 does not represent the pleading of a material fact. I therefore order that the words, “presumably for the purposes of making questionable investment and avoiding tax liabilities” be struck from paragraph 17 but with leave to the defendant to amend.

16With respect to the last sentence of the paragraph, plaintiff’s counsel questioned what relevance a decision by the TD Bank, to pull the plaintiff’s line of credit could have on the defence being advanced by Mr. Mahmood. With respect to the relevance of this allegation, Mr. Mann argued that it related to the defendant’s belief that Mr. Lippa was engaging in a pattern of fraudulent activity that was not in the best interests of the plaintiff corporation. Mr. Mann was asked about the allegation of fraud because while there are certainly allegations that Mr. Mahmood was being asked to follow accounting practices as dictated by Mr. Lippa nowhere in the Statement of Defence is there a specific allegation of fraud as against Mr. Lippa. I allowed both counsel to make submissions on this specific issue. Mr. Mann argued that the allegations set out in paragraphs 14 and 17 of the Statement of Claim were tantamount to an allegation of fraud. I disagree with this position. Rule 25.06(8) specifically provides that where fraud is alleged, the pleadings shall contain full particulars from which the claim of fraud is to be inferred. In my opinion, if there is an allegation of fraud, this type of very serious allegation needs to be specifically pleaded as well as the material facts relied upon so that opposing parties will be aware of the case they have to meet. The pleading in its current form does not meet this standard. As it stands, the second sentence of paragraph 17, in my view, is deficient in that it does not in its current form raise an issue that is relevant to the defence of the plaintiffs’ claim. In addition, to the extent that it is intended to support an allegation of fraud it fails to comply with the requirements of Rule 25.06(8). The second sentence of paragraph 17 is therefore struck with leave granted to the defendant to amend.

Paragraph 24 of the Statement of Defence

17Paragraph 24 of the Statement of Defence reads as follows:

Subsequently, on or around July 28, 2011, the defendant, Tahir Mahmood was called into a meeting with Frank Lippa and Dan Margorian and was accused of falsely issuing cheques to P&S. Tahir Mahmood was completely taken by surprise by this allegation, and can only assume that Dan Margorian caught on to Frank Lippa’s practices. Frank Lippa’s dealings made Tahir Mahmood an easy target for blame.

18The issue raised by the plaintiff’s counsel with respect to paragraph 24 relates to the portion of the pleading which, once again, is based on speculation, similar to the issue raised with respect to the use of the word “presumably” in paragraph 17. For the reasons set out above, I order that the last portion of paragraph 24 starting with, “and can only assume” be struck with leave granted to the defendant to amend.

Reference to the Terms “Questionable Investments” and Similar Terms in the Statement of Defence

19On numerous occasions in the Statement of Defence, the defendant employs the terms “questionable investments”, “questionable practices”, “questionable duties”, “questionable investment opportunities”, “creative adjustments”, and “creative accounting”. The details of the practices in question are not set out in the Statement of Defence. However, plaintiff’s counsel advised that he is not seeking particulars. His position is that these terms should be struck on the basis that they are intended to cast the plaintiff and its officer, Frank Lippa, in a bad light and are made for the tactical purpose of discouraging the plaintiff from proceeding with the action. Defence counsel denies that these terms have been used to create a negative picture of the plaintiff or Mr. Lippa and that there will be evidence at trial to support these claims.

20In Sun Life Assurance Co. of Canada v. 401700 Ontario Ltd. (1991), 3 O.R. (3d) 684, one of the issues related to the use of certain terms that were defined in the pleadings. These included terms such as “honest employees” and “conspirators”. In its decision, the court stated:

I reiterate that defined terms and descriptive phrases in a pleading are generally within the discretion of the party pleading. They are often of assistance to the smooth flow of the pleading. However, defined terms in a pleading should not be inflammatory, nor create an unnecessarily repetitive and prejudicial flavour.

21It is significant, in my view, that there are no material facts specifically pleaded which would appear to justify the use of most of the terms complained of in the statement of defence. For example, in paragraph 18, it is alleged, “in addition to the above questionable practices, Tahir Mahmood was instructed by Frank Lippa to make all sort of creative adjustments and produce adjusted financials for all of the entities he controlled.” No material facts are pleaded to clarify the description of the adjustments requested. In paragraph 21 there is reference to new “questionable” investment opportunities but again there is no allegation as to what these were or how they are relevant to the issues in this action. In the absence of material facts to support the use of the terms in question and the relevance to the issues in this action I conclude that the terms complained of are unnecessarily conclusive and inflammatory.

22For the above reasons, the above-noted terms are struck wherever they appear in the pleadings with leave to amend granted to the defendant.

Order

23An order will issue in accordance with these reasons. Where I have granted leave to the defendant Mahmood to deliver an amended Statement of Defence, the amended pleading is to be delivered within 20 days of the release of these reasons.

Costs

24If counsel is not able to agree on costs, an appointment may be taken out through the trial co-ordinator’s office to schedule a date to address the issue of costs. Counsel are to file brief written submissions with respect to costs at least two days before the hearing with respect to costs. If no arrangements are made by either counsel within 45 days of the release of this decision to schedule an appointment to deal with costs then there will be no order as to costs of this motion.