COURT FILE AND PARTIES

COURT FILE NO.: CV-12-00109730-00
DATE: 20120727
SUPERIOR COURT OF JUSTICE - ONTARIO

RE: S.W. Hospitality Inc. and Wild Wing Restaurants Inc., Plaintiffs/Moving Parties

AND:

1461486 Ontario Inc. and Raffaele Montone, Defendants/Respondents

BEFORE: The Honourable Mr. Justice P.D. Lauwers

COUNSEL: Doug LaFramboise, for the Moving Parties

Carita Pereira and Andrea Stoddart, for the Respondents

HEARD: July 27, 2012

ENDORSEMENT

[ 1 ] The plaintiffs’ motion is for an order under Rule 45 of the Rules of Civil Procedure (the “Rules”) attaching the bank accounts of 1461486 Ontario Inc. and Mr. Montone, and an order in the nature of Mareva injunction to prevent Mr. Montone from selling, encumbering, or disposing of his residential property at 5 Churchill Drive, Stouffville, Ontario. The plaintiffs also seek an order requiring immediate disclosure of all the defendants’ bank records from the date Mr. Montone started working for the plaintiffs to the present, and an order requiring the defendants to cease contacting, soliciting business from or engaging in business with the plaintiffs’ existing franchisees.

[ 2 ] The plaintiffs are franchisors of fast food restaurants. The defendant, Montone, was employed by the plaintiffs, most recently as president, with the particular responsibility of selling franchises. The plaintiffs derive revenue from the sale of franchises and also by royalty payments made by franchisees. During the latter days of their relationship, for tax reasons, the defendant, 1461486 Ontario Inc. was interposed between the plaintiffs and Mr. Montone and he became an independent contractor.

[ 3 ] Mr. Montone swears that there was an oral contract between him and the owner of the plaintiffs, Richard Smiciklas, by which he was to be paid $180,000.00 as a base salary and commission of $10,000.00 per franchise sale transaction. Mr. Montone also has a promissory note from the plaintiffs in the amount of $180,000.00 on which $18,000.00 has been paid.

[ 4 ] The plaintiffs submit that Mr. Montone abused his position by diverting franchise funds from the plaintiffs to the numbered company. Mr. Montone swears that this arrangement was made with the concurrence of the plaintiffs as a more tax-efficient way for the plaintiffs to pay what they owed Mr. Montone.

[ 5 ] Mr. Montone’s affidavit sets out a series of transactions from October 31, 2011 to May 25, 2012 that were five cheques paid by franchisees directly to 1461486 Ontario Inc. that were deposited into 1461486 Ontario Inc.’s bank account. The total is $160, 650.00. The plaintiffs believe that more funds were received from franchisees.

[ 6 ] The plaintiffs submit, relying on the affidavit of Mr. Smiciklas, that the depredations of the defendants created financial jeopardy for the plaintiffs, although that seems to have been attenuated. Zihar Kanji, director of operations with S.W. Hospitality Inc., swears that in a telephone conversation with Mr. Montone on May 28, 2012: “Ralph disclosed to me that he had absconded with $160,000.00 of monies intended for S.W. Hospitality and Wild Wing Restaurants.”

[ 7 ] There is clearly a substantial credibility issue on the merits.

The Issues

[ 8 ] The facts give rise to three issues:

(i) Does Rule 45 of the Rules apply to funds allegedly diverted by the defendants from the plaintiffs?

(ii) Can the plaintiffs prove an entitlement to a Mareva injunction in respect of Mr. Montone’s personal residence?

(iii) Have the plaintiffs established entitlement to effectively non-competition protection?

I address each issue in turn.

The Application of Rule 45

[ 9 ] Rule 45 of the Rules provides as follows:

45.01(1) The court may make an interim order for the custody or preservation of any property in question in a proceeding or relevant to an issue in a proceeding, and for that purpose may authorize entry on or into any property in the possession of a party or of a person not a party.

(2) Where the property is of a perishable nature or likely to deteriorate or for any other reason ought to be sold, the court may order its sale in such manner and on such terms as are just.

45.02 Where the right of a party to a specific fund is in question, the court may order the fund to be paid into court or otherwise secured on such terms as are just.

[ 10 ] The test for an interim order under Rule 45.01 is set out by Sach J. in Taribo Holdings Ltd. v. Storage [2002] O.J. No. 3886, at para. 5 :

…there is no dispute between the parties that in order to obtain an order under Rule 45 the moving party must establish that:

1. The assets sought to be preserved constitute the very subject matter of the dispute;

2. There is a serious issue to be tried regarding the plaintiffs' claim to that asset, and;

3. The balance of convenience favours granting the relief sought by the applicant or moving party, News Canada Marketing Inc. v. T.D. Evergreen supra [ [2000] O.J. No. 3705 ], at paragraph 14.

[ 11 ] The law with respect to 45.02 is set out by the Court of Appeal in Sadie Moranis Realty Corp. v. 1667038 Ontario Inc. 2012 ONCA 475 , [2012] O.J. No. 3029 at paras. 17 to 21 :

17 Rule 45.02 is part of Rule 45 which, as its title suggests, provides for the interim preservation of property pending litigation. The Rule is a limited exception to the law's deep-seated aversion to providing a plaintiff with execution before a trial. The risk of such an order, because of its invasive nature, is well explained by Sharpe J.A. in Injunctions and Specific Performance , looseleaf 3d ed. (Aurora: Canada Law Book, 2012), at para. 2.760:

Clearly, pre-trial execution of any kind poses definite problems. Attachment of assets or interference with disposition of assets will often constitute a serious interference with the defendant's affairs. That interference may be more readily justified where the plaintiff's right is specifically related to the asset in question. However, where the plaintiff asserts a general claim and looks to the assets only as a means of satisfying a likely or possible monetary judgment against the defendant, interference with the defendant's assets is more difficult to justify.

18 In my view, the policy approach dictated by this caution must inform the test required by rule 45.02. In News Canada Marketing Inc. v. TD Evergreen, a Division of TD Securities Inc. , [2000] O.J. No. 3705 (S.C.), at para. 14 , Nordheimer J. put forward a test which does that, and which I would adopt:

I conclude therefore that the appropriate test for relief under rule 45.02 should require the plaintiff to establish that:

(a) the plaintiff claims a right to a specific fund;

(b) there is a serious issue to be tried regarding the plaintiff's claim to that fund;

(c)_the balance of convenience favours granting the relief sought by the plaintiff.

19 The first of these requirements, the one under special scrutiny in this appeal, faithfully reflects the language of rule 45.02. It requires that there be a specific fund readily identifiable when the order is sought. It also requires that the plaintiff assert a legal right to the specific fund as a claim in the litigation. While I do not find it to be a helpful descriptor, I think it is in this sense that past jurisprudence has sometimes described the specific fund as "earmarked to the litigation".

20 The second and third requirements, though not centrally in issue in this case, are equally important in manifesting the policy behind the rule. They ensure that interference with the defendant's disposition of assets is limited to cases where the plaintiff has a serious prospect of ultimate success, and there is something compelling on the plaintiff's side of the scales, such as a real concern that the defendant will dissipate the specific fund, that is sufficient to outweigh the defendant's freedom to deal with his or her property.

21 Framed in this way, the test will not be met where a plaintiff's claim is for damages. That is so even if a specific fund is identifiable in the factual matrix of the litigation, because a claim for damages is not a claim to a legal right to that fund. In Asante Financial Management Ltd. v. Dixon (2004), 8 C.P.C. (6th) 57 (Ont. S.C.) , Wilton-Siegel J. put it this way, at para. 28:

There is a subtle but important difference between an amount that may be owing to the plaintiff and a right of the plaintiff to a fund.

[ 12 ] The plaintiffs argue that the specific franchise fees diverted by the defendants are its property and are capable of being recognized as forming a specific fund as they sit in the numbered company’s bank account, assuming that they are still there. Further, Mr. LaFramboise asserts that there is an equitable tracing right to follow those funds in the event that the defendants have moved them elsewhere, as a natural incident of Rule 45.

[ 13 ] The defendants argue that the plaintiffs claim damages so that the principle in paragraph 21 of Sadie Moranis Reality Corp. applies and Rule 45.02 does not apply.

[ 14 ] I note that pleadings are easily amended pursuant to Rule 26.01 of the Rules. It is important not to become overly technical at an early stage of a lawsuit. There is no doubt that in this motion the plaintiffs are claiming relief under Rule 45.

[ 15 ] Considering the relevant factors, then, I find that the funds in the numbered company’s accounts are capable of being a specific fund under Rule 45.02. Although the Court of Appeal noted in Sadie Moranis Realty Corp. that a distinct claim to a proprietary interest in the fund is not necessary under Rule 45.02, in this case such a claim is easily made out. The money diverted by the defendants belongs to the plaintiffs, they assert.

[ 16 ] I have no hesitation in saying that there is a serious issue to be tried concerning the plaintiffs’ claim to the fund. The contest is one of credibility. There has been no cross-examination on the affidavits and very little production.

[ 17 ] Turning to the balance of convenience, I find that there is a real contest. The plaintiffs assert that the money in the numbered company’s accounts is theirs. Mr. Montone submits that the plaintiffs’ pursuit has made it impossible for him to secure employment in the business and he relies on his savings for his daily living expenses. There is accordingly a risk that the funds will be dissipated.

[ 18 ] One telling aspect of the evidence thus far is that the evidence upon which the plaintiffs rely in their material was largely obtained from the hard drive of the laptop computer used by Mr. Montone while he was employed by the plaintiffs. That computer was retrieved from Mr. Montone. The hard drive had been erased. It was restored by experts. The defendants do not suggest that the material relied on by the plaintiffs derived from the hard drive is not accurate. The material disclosed an intention on Mr. Montone’s part to continue diverting franchise fees and to use them to pay down a debt that he owed to the Canada Revenue Agency.

[ 19 ] Most importantly, however, Mr. Montone does not explain why he found it necessary to erase the contents of the hard drive. I am prepared to draw an adverse inference as to Mr. Montone’s credibility from the action of erasing the hard drive and from his failure to explain that action.

[ 20 ] I recognize the competing tensions but I do not have enough evidence on which to reconcile them. I can see no valid business reason why the plaintiffs would have agreed to their diversion to the numbered company, as Mr. Montone alleges. The plaintiffs have a very strong claim to the funds in the numbered company’s account. I find that the balance of convenience favours the plaintiffs. I find the plaintiffs’ undertaking as to damages to be adequate.

[ 21 ] I order that the numbered company’s bank accounts be frozen and that the defendants be obliged to produce full bank records concerning the operation of the numbered company’s accounts and the personal accounts of Mr. Montone from the inception of his employment by the plaintiffs to the present day, to be produced within five days of the date of this decision.

The Mareva injunction in respect of Mr. Montone’s personal residence

[ 22 ] In relation to the house, there is no evidence put forward by the plaintiffs that Mr. Montone is dissipating his assets. There is no basis, therefore, for a Mareva injunction and I decline to grant it now, but the plaintiffs may proceed with another such motion on better evidence should they obtain it.

Non-competition protection

[ 23 ] In relation to the non-competition relief sought by the plaintiffs, there is no evidence that the defendants are competing with the plaintiff so I decline to grant this relief as well.

[ 24 ] Mr. LaFramboise seeks costs on a partial indemnity basis in the amount of about $7,700.00, inclusive of disbursements and HST. Ms. Pereira seeks costs calculated on a similar basis in the amount of about $13,500.00 and asks that they be paid forthwith. In light of the outcome of this motion, I fix costs at $7,700.00 payable in the cause.

[ 25 ] Order accordingly.

Justice P.D. Lauwers

Released: July 27, 2012