SUPERIOR COURT OF JUSTICE - ONTARIO

COMMERCIAL LIST

COURT FILE NO.: CV-12-9652-00CL
DATE: 20130318

RE: PROMO-AD & ASSOCIATES INC., Plaintiff

A N D:

LILA KELLER (a.k.a. LYLA KELLER), JANICE LUFTSPRING, EDWARD FRIEDMAN, TAMMY HITTNER, MARK DOYLE, DOYLE AND SONS LITD., MARK KLEIN, IN HOUSE PRINTING SERVICES LIMITED, PEAR HEALTHCARE SOLUTIONS INC., TURQUOISE IMAGES INVESTMENTS LTD., 2B CREATIVE GROUP, AND CIRCLE WITHIN MARKETING INC., Defendants

BEFORE: MESBUR J.

COUNSEL: Fred Tayar and Colby Linthwaite, for the Plaintiff

Allan Rouben, for the Defendants Lila Keller, Mark Doyle, Doyle and Sons Ltd., Mark Klein, In House Printing Services Limited, Pear Healthcare Solutions Inc., Turquoise Images Investments Ltd., 2B Creative Group and Circle Within Marketing Inc. (the “Keller Defendants”)

Ronald Flom and Robert Trifts for the Defendant Edward Friedman

M. Norman Grosman for the Defendant Janice Luftspring

No one appearing for the defendant Tammy Hittner, who did not participate on the motions.

HEARD: February 5 and 6, 2013

E N D O R S E M E N T

Nature of the motions:

[1] On March 21, 2012 the plaintiff moved without notice before Spence J seeking a Mareva injunction against all the defendants, and an Anton Piller order against all the defendants except Janet Luftspring. Spence J made the order, which prohibited all the defendants from dissipating their assets pending further order (the Mareva order) and also permitted the law firm Aird & Berlis LLP, acting as Independent Supervising Solicitor (ISS) to enter the premises of the Anton Piller defendants and seize documents and materials, subject to certain conditions.

[2] There have been various amendments to the order, some made by Spence J and one by Campbell J. I will discuss these more fully, below.

[3] The defendants have moved to set aside the Anton Piller order and Mareva injunction. The plaintiff seeks to have it continued. The defendant Friedman has also moved to strike certain paragraphs of the statement of claim. The parties have spent the last eleven months dealing with their respective motions. They have conducted cross-examinations over 20 days. They have produced mountains of material for this motion. I mention this to point out that instead of actually dealing with the underlying lawsuit, the parties’ resources and energy have been deflected by these motions.

[4] At the outset of the hearing I raised the issue of when the case might be ready to go to trial. I did so because it is always important for the court to have an idea of the likely lifespan of any interlocutory order that might be made. I worked out a realistic timetable with counsel in order to get the case ready for trial. I have set it out at the conclusion of these reasons.

Some background facts to this lawsuit:

The parties

[5] The plaintiff is one of a number of corporations effectively controlled by an individual named Joshua Lapsker. The plaintiff was incorporated in 1992 and is a successor to other similarly named companies. It is in the business of selling promotional items and preparing publications and seminars for the pharmaceutical industry.

[6] The defendant Edward Friedman is a chartered accountant with a lengthy professional relationship with Mr. Lapsker and all of the Lapsker companies. He acted as an advisor to the plaintiff and has overseen the plaintiff’s business. His role was to oversee the plaintiff’s operations and report to Mr. Lapsker.

[7] Lila Keller was the president of the plaintiff. She worked for the plaintiff and a predecessor for 28 years. In 1998 she became president of the plaintiff. Keller’s role was to develop the pharmaceutical side of the business. In her work with the plaintiff Keller was entitled to be paid commissions.

[8] In House Printing Services Limited provides printing services for the plaintiff. Mark Klein is the principal of In House Printing. Klein is also the sole officer and director of Turquoise Images Investments Ltd., which carries on business out of the same business address as In House Printing. Circle Within Marketing Inc. also carries on business out of the same business premises as In House Printing. Klein and Keller are the officers and directors of Circle Within.

[9] Pear Healthcare Solutions Inc. began operations in June 2010. It is in a similar business to the plaintiff’s. Keller incorporated it.

[10] Mark Doyle is Keller’s son-in-law and the principal of Doyle and Sons Ltd.

[11] The defendants Lila Keller, Mark Doyle, Doyle and Sons Ltd., Mark Klein, In House Printing Services Limited, Pear Healthcare Solutions Inc., Turquoise Images Investments Ltd., 2B Creative Group and Circle Within Marketing Inc. will be referred to as the Keller defendants.

[12] The defendant Janice Luftspring was the secretary of the plaintiff. She has worked for the plaintiff as a commissioned sales person for 28 years. Her role was to run the promotional side of the plaintiff’s business. The plaintiff continues to employ her.

[13] It is unclear what 2B Creative Group is. There is no record of it as a registered business of any kind. Significant cheques were issued to 2B from the plaintiff, and from 2B to the plaintiff.

Plaintiff discovers suspicious transactions

[14] In 2008 the bank contacted Mr. Lapsker about a series of wire transfers totalling about $1.8 million from various Lapsker companies (not including the plaintiff) to Friedman bank accounts and those of friends or corporations associated with Friedman. The bank described the transactions as unusual and perhaps suspicious. Although Friedman eventually returned just over $1.7 million to the various Lapsker companies, he had the plaintiff, Promo-Ad fund the reimbursement.

[15] Mr. Lapsker became even more suspicious when he discovered what he thought were excessive commissions the plaintiff paid to Keller and Luftspring. He began to suspect a fraud. He, on behalf of the plaintiff eventually retained a chartered accountant named Klasner to investigate the amounts actually paid to them.

[16] Although the plaintiff asked Mr. Klasner to go back to 1992 in his review of what might be questionable transactions, Mr. Klasner was only able to review the period since 2006. That was the date on which complete records for the plaintiff began. Mr. Klasner conducted his investigation over a period of six months. During that time, he was involved in discussions with all the individual defendants. As a result of his investigation he concluded it was likely the plaintiff was a victim of a long-term and sophisticated fraud. It was his investigation and conclusions that led to the plaintiff commencing this action, and seeking the Anton Piller order and Mareva injunction.

Motion before Spence J

[17] The plaintiff moved before Spence J without notice on March 21, 2012. The motion record contained a 40-page affidavit from the accountant, Mr. Klasner, supported by 71 exhibits, as well as an affidavit from Mr. Lapsker.

[18] Mr. Lapsker deposes, among other things, that Keller and Luftspring’s employment contracts with the plaintiff provided for commissions of 50% of the profits that the company made on each of their respective sales. Mr. Lapsker goes on to say that 1995 contracts providing for commissions of 60% plus an additional 12.5% of company profits “are fraudulent.” He says he would never have permitted a Lapsker company to pay a salesperson that rate of commission. As a result, he concluded Keller and Luftspring had likely misappropriated significant funds from the plaintiff, relying on what he characterized as fraudulent employment contracts.

[19] Mr. Klasner’s affidavit sets out in detail his review of the plaintiff’s financial statements and records, and concludes records were manipulated, including “netting” of certain expenses against sales so that the actual expenses, including payments to various third parties would not be recorded on the financial statements. He found a discrepancy between revenues reported in the company records, and those reported on the financial statements. Keller and Friedman explained to Mr. Klasner that the plaintiff habitually paid bribes to employees of important customers in order to secure their business, and these bribes were paid without the knowledge of the customers themselves. This was the way in which the bribes were concealed in the financial statements.

[20] In the course of his investigation, Mr. Klasner also discovered payments the plaintiff made to a number of companies apparently controlled by Keller or the Keller defendants. This included Circle Within Marketing Inc. Mr. Klasner also discovered payments in the hundreds of thousands of dollars to the defendant Klein, who controls the defendant In House Printing Services Limited. Mr. Klasner viewed these payments as suspicious.

[21] Mr. Klasner also discovered significant payments to Keller’s son-in-law, the defendant Mark Doyle.

[22] Mr. Klasner then identified, among other things, what he described as unusually high charges for printing and preparing promotional kits. He was troubled by the fact that many invoices for these services did not contain particulars of the work that was actually done.

[23] After outlining a number of other suspicious transactions, including Keller’s incorporation of what appears to be a competing business to that of the plaintiff, Mr. Klasner went on to set out what he thought Keller, Luftspring and Friedman’s responses and explanations to the allegations against them might be. He concluded, however, that even accepting these potential explanations[^1] as accurate, these defendants had “overpaid” themselves more than $4 million in the period he analyzed.

[24] Mr. Klasner went on to note that he had been unable to review many relevant documents. The plaintiff’s pre-2006 records are incomplete and missing. He was led to believe many documents were stored in Keller’s home office. He was also told that some pre-2010 project files had been shredded and destroyed.

[25] On the basis of this affidavit material, and the plaintiff’s undertaking as to damages, Spence J was apparently satisfied the necessary criteria for granting an Anton Piller order and Mareva injunction had been met. He made the order the plaintiff requested, although he provided no written reasons for his decision.

[26] One of the provisions of the Anton Piller order (paragraph 10) permitted the ISS to remove electronic evidence for a period of 72 hours in order to conduct its search of the data. The order appointed the law firm Aird & Berlis as ISS.

Amendments to the order

[27] The day following the order, namely on March 22, 2012, the plaintiff’s counsel appeared before Spence J again, seeking an amendment to the order he had made the day before. Spence J granted the request. The amendment added the offices of Lila Keller, Tammy Hittner, Mark Doyle and Janice Luftspring to the locations that could be entered for the purpose of executing the Anton Piller order.

[28] The next day, March 23, 2012, the plaintiff was back before Spence J, again. By this point the defendants had been served and were in attendance. This time the plaintiff wanted to extend the 72-hour period provided in paragraph 10 of the order from Friday March 25 to Monday April 2. Spence J commented on the potential prejudice to the plaintiff if the order were not granted and the potential prejudice to the defendants if it were. He declined to grant the extension based on submissions made late in the day on an emergency basis. He adjourned the motion until March 27 at 9:30 a.m., and extended the period until the return of the matter.

[29] At the defendants’ request, Spence J suspended the application of paragraph 21 of the original Anton Piller order. That provision would have allowed the plaintiff access to the documents the ISS seized. That paragraph remains in suspension. Accordingly, the plaintiff has not been entitled to see any of the documents in the ISS’ possession.

[30] The defendants also sought an order to permit them access to their bank accounts in order to meet expenses in the ordinary course of business. Since Spence J had no material from the defendants, he declined to make any order that day, and adjourned that issue to March 27 as well.

[31] On March 27 the parties were back before Spence J. He ordered the return of the motion to be on March 29. He extended the 72-hour period until the return of the motion. He also made an order permitting the individual defendants access to their bank accounts for living expenses at various monthly rates.

[32] The matter came back before Spence J on March 29, 2012 to deal with all the orders he had made up to this point. He continued those orders until the return of the original motion or the defendants’ motion to set aside the original order, whichever occurred first.

[33] Spence J’s reasons commented further on the original order, and the reasonableness of various provisions of it in light of the guidance set out in Celanese[^2] and CIBC v. Credit Valley.[^3] He made provision for payment out of significant sums to the individual defendants, as well as to their counsel for the purpose of retainers. Spence J concluded his endorsement with provisions concerning scheduling the defendants’ motion to set aside the Anton Piller order. He ordered that the original order, as amended, continue until the motion or motions to set it aside.

[34] The parties then appeared before Campbell J on May 15, 2012. His endorsement reads:

2 motions are to be scheduled – that of the plaintiff to continue the injunctive relief and that of the defendant Friedman to set aside both injunctive motions. Counsel for the plaintiff seeks an early return date for both motions but counsel for Friedman due to trial commitments seeks a more leisurely pace.

Responding material from Friedman to be served by May 29/12 and reply material if any by June 29/12. Cross-examinations to be completed by July 20 – 1 day hearing for both motions.

[35] Campbell J’s endorsement continued “Consent order to vary Mareva signed.” Counsel did not, however, provide me with a copy of the amended Mareva order. I am therefore unaware of what provision or provisions were varied.

[36] In the course of preparing their motions to set aside the orders, the Keller defendants retained the services of Alan Zysman, a forensic accountant, to comment on and critique the work Mr. Klasner had done. The plaintiff then responded with an affidavit from William Dovey, a chartered business valuator, chartered accountant and CA-designated specialist in Investigative and Forensic Accounting. The plaintiff had consulted with Mr. Dovey before the original motion for the Anton Piller/Mareva order was heard. Mr. Dovey reviewed Mr. Klasner’s work, and in particular the affidavit Mr. Klasner swore setting out his findings and conclusions. Mr. Dovey’s role was to ensure that Mr. Klasner’s affidavit employed sound and appropriate accounting methodology.

[37] In order to fulfil his role, Mr. Dovey met with Mr. Klasner and Mr. Lapsker and reviewed some of Mr. Klasner’s underlying analysis. Mr. Klasner explained to Mr. Dovey the accounting methodology he had used. Mr. Dovey also reviewed various preliminary drafts of Mr. Klasner’s affidavit. Mr. Dovey concluded that the accounting methodology Mr. Klasner had employed was sound and appropriate.

[38] Mr. Dovey went on to respond to the comments raised in Mr. Zysman’s report. Mr. Zysman then responded with a further report. Both Mr. Zysman and Mr. Dovey were cross-examined at length.

[39] Although it was initially only Friedman who intended to move to set aside the Anton Piller/Mareva orders, the other defendants, except for Tammy Hittner, eventually launched their own motions for the same relief. All parties delivered lengthy material to support their motions. The plaintiff delivered responding material. As I have mentioned, completing cross-examinations took twenty days. All the motions to set aside the Anton Piller order and Mareva injunction, together with the Friedman motion to strike, came on for hearing before me.

The Friedman motion to strike:

[40] Friedman takes the position that the pleadings in the claim that relate to allegations that Friedman stole money from other Lapsker companies should be struck. He says these pleadings are irrelevant to the relief sought in the statement of claim, and are scandalous and embarrassing. He says these other Lapsker companies are not plaintiffs in this action and no remedy is sought in connection with those companies. Friedman suggests that the primary purpose of the impugned paragraphs is “to cast Friedman in a bad light and to foster a narrative atmosphere of guilt and suspicion concerning Friedman throughout the pleading.”

[41] Friedman points out that since the pleading alleges that Friedman stole the money, but later repaid it, the allegations are wholly irrelevant to the relief sought in the claim.

[42] The plaintiff takes the position that the allegations are relevant to the claim for damages for breach of fiduciary duty. It says it has now learned that the “repayment” of the allegedly stolen money to Lapsker companies came from money the plaintiff says Friedman misappropriated from the plaintiff itself. As a result, the plaintiff says the pleading is relevant to the core issue in this action.

[43] I agree with the plaintiff’s position. It seems to me that allegations concerning Friedman’s taking money from other companies, but repaying it from money taken from the plaintiff is relevant to the issue of breach of fiduciary duty and other relief the plaintiff seeks against Friedman. Since the pleading is relevant, it cannot be embarrassing. As a result, the motion to strike is dismissed.

Motions to set aside Anton Piller /Mareva orders: Alleged material non-disclosure:

[44] The defendants take the position that the plaintiff failed to make full, fair and frank disclosure when it moved without notice to obtain the Anton Piller order and Mareva injunctions. In looking at the question of material non-disclosure it will be best to address the issue from the point of view of each group of defendants separately. This is particularly so since there was no Anton Piller order in relation to Luftspring. First, however, it is important to set the issue in its appropriate legal context.

The legal framework

[45] Anton Piller orders and Mareva injunctions are the most extraordinary of extraordinary remedies. They effectively provide for a civil search warrant, in the case of an Anton Piller order, and for execution before judgment in the case of a Mareva injunction. Mareva injunctions essentially freeze a defendant’s assets so that they will be available to pay a judgment if the plaintiff is successful in obtaining judgment.

[46] The seminal Canadian case on Anton Piller orders is the Supreme Court of Canada’s decision in Celanese Canada Inv. v. Murray Demolition Corp.[^4] There, Binnie J speaking for the court set out the purpose of Anton Piller orders, the criteria needed to grant them and necessary safeguards that must be in place when an order is made.

[47] Anton Piller orders are granted to ensure that unscrupulous defendants are not able to circumvent the court’s processes by, on being forewarned, making relevant evidence disappear. Their usefulness is especially important in the modern era of heavy dependence on computer technology, where documents are easily deleted, moved or destroyed.

[48] The orders should only be granted in the clear recognition of their exceptional and highly intrusive character and, where granted, the terms should be carefully spelled out and limited to what the circumstances show to be necessary. Those responsible for their implementation should conform to a very high standard of professional diligence. Otherwise, the moving party, not its target, may have to shoulder the consequences of a botched search.

[49] There are four essential conditions for the making of an Anton Piller order. First, the plaintiff must demonstrate a strong prima facie case. Second, the damage to the plaintiff of the defendant’s alleged misconduct, potential or actual, must be very serious. Third, there must be convincing evidence that the defendant has in its possession incriminating documents or things, and fourthly it must be shown that there is a real possibility that the defendant may destroy such material before the discovery process can do its work.[^5]

[50] The order should appoint a supervising solicitor who is independent of the plaintiff or its solicitors and is to be present at the search to ensure its integrity. The responsibilities of the ISS have now been set out in the Commercial List’s model order. Here, the original Anton Piller/Mareva followed the general framework and wording of the model order.

[51] In the case of Mareva injunctions the court may freeze a defendant’s exigible assets where there is a genuine risk those assets will disappear before trial. To support a Mareva a plaintiff must show a strong prima facie case, a real risk of dissipation, and a balance of convenience favouring the plaintiff. Since a Mareva is in essence an interlocutory injunction, the plaintiff must also satisfy the criteria for interlocutory injunctions set out in RJR-MacDonald.[^6]

[52] There is no “fraud exception” for Mareva injunctions.[^7] That is to say, the stringent requirements to obtain a Mareva are not loosened simply because the plaintiff’s case is founded on allegations of fraud against the defendants. A party alleging fraud, even with a strong prima facie case, should be in no better position in accessing the court’s discretion to impose a Mareva than any other litigant, unless the party establishes the traditional criteria, namely:

a) Making full and frank disclosure;

b) Fairly stating the points against it; and

c) Giving grounds for the belief that there is a real risk of assets being removed before a judgment or award is satisfied.

[53] As with any order made without notice, a moving party bears a heavy onus to disclose all material facts to the presiding judge, whether those facts favour that party’s position or the position of the other party or parties. The Rules of Civil Procedure require it, as does case law developed over the years.[^8] The test of materiality is an objective one. What this means is that the moving party must put before the court all matters which are relevant to the court’s assessment of the application. Thus, the question might be put in this way: had the original judge known the facts which the responding parties say were material, and not disclosed, is it likely the order would still have been granted?

[54] Because the moving party bears this onus, if it fails to meet that burden by failing to disclose material information, the original order can be set aside. The court, however, retains discretion to continue the order in whole or in part even in the face of non-disclosure.

[55] Another issue is the general role of the judge reviewing the original order, but with the benefit of a full evidentiary record from all parties. Ordinarily, the court would be bound by a prior decision of a judge of the same court. Since, however, the original orders were made without notice, the court reviewing the ex parte order must hear the matter de novo. This is particularly so where the judge granting the Anton Piller order and Mareva gave no recorded reasons for granting the order in the first place.[^9]

Discussion:

[56] I turn now to the complaints each groups of defendants raises in relation to material non-disclosure. Each takes the position the plaintiff failed to make disclosure of significant facts that would have had a bearing on Spence J’s decision to grant the order in the first place. The essence of their arguments is that had the plaintiff disclosed the information they say it should have, Spence J would not have made the orders he did. They say the plaintiff failed to meet its burden to disclose all material facts both in favour of, and contrary to, granting the orders. As a result, they say the court must set aside the ex parte orders.

[57] The defendants also take the position there was insufficient evidence before Spence J to support the orders he made. They suggest the plaintiff’s materials failed to make out all the requirements necessary for the court to grant either an Anton Piller order or a Mareva injunction. They say the order should be set aside on that basis alone.

Friedman

[58] In his notice of motion, Mr. Friedman sets out thirty three examples of what he characterizes as material non-disclosure. In his factum, he summarizes the facts he says the plaintiff failed to disclose as follows:

a) Offsetting debts owed by Lapsker Companies to Friedman;

b) The existence of Lapsker Company records known to Lapsker and Klasner which address the offsetting amounts owed to Friedman;

c) The existence of a written Consulting Agreement between Lapsker and Friedman;

d) The history of systemic financial irregularities and unreliable financial documents in the Lapsker Companies was not known to Justice Spence;

e) Friedman simply had no Promo-Ad documents – he only had his own bank records;

f) There was no history or evidence of document destruction or reason to believe Friedman would destroy anything; and

g) If documents were going to be destroyed one would think it would have been done during the six month investigation.

[59] As to items (a) to (c), these are really aspects of the same issue. In essence Friedman alleges the plaintiff did not disclose that Promex (another Lapsker company) kept records of amounts Friedman owed pursuant to borrowings he had made. He suggests no money was “missing”, and the loan was paid back in full on demand. He relies on offsetting amounts owing from other Lapsker companies to answer the allegations of malfeasance against him. He says had Spence J known about all these other financial arrangements, he would not have made the order.

[60] At first blush, Mr. Friedman’s position has some merit. It appears, however, that he “repaid” the loan or loans to from other Lapsker companies by using money from the plaintiff. It seems to me that even if this had been disclosed, it would have supported the suggestion that Friedman had misappropriated funds, and supported the order made. The existence of a consulting contract, however, might have lent some weight to Friedman’s other allegations.

[61] Friedman’s allegations of a long history of financial irregularities and unreliable financial statements detract from Lapsker’s position that he relied on the financial statements. Friedman also alleges that Lapsker failed to disclose that he had trained Keller and Luftspring to attract and maintain corporate clientele through the payment of bribes. Since Lapsker vehemently denies either training them, or even knowing about the systemic culture of bribes and kickbacks, I fail to see how this could be seen as a failure to disclose. If, however, Friedman’s allegations are true, then he may well have an answer to the allegations against him. That, however, is a matter for trial.

[62] Friedman alleges the plaintiff put forward no evidentiary basis to support the belief Friedman had relevant documents, books and records of the plaintiff at his office. The motion materials on the return of the ex parte motion contained the affidavits of Mr. Klasner and Mr. Lapsker. Mr. Klasner’s affidavit sets out a history of his review of the plaintiff’s books and records, and his reasons for concluding that Friedman was a participant in what he characterizes as a massive fraud. His affidavit does not, however, contain a single word suggesting Friedman has any documents or records relevant to the alleged wrongdoing. Celanese requires convincing evidence that Friedman has possession of incriminating documents. The plaintiff put forward no evidence of any documents Friedman might have – incriminating or otherwise.

[63] Celanese also required compelling evidence that there is a real possibility the defendant will destroy the incriminating evidence. The plaintiff’s affidavit evidence contains nothing to suggest any risk of Friedman destroying evidence.

[64] Similarly, Mr. Lapsker’s affidavit says nothing about Friedman having any relevant or incriminating documents in his possession. Mr. Lapsker does not suggest Friedman would likely destroy documents. All he says is that Friedman has a history of “wiring funds stolen from my businesses offshore, and then moving those funds around the world.”[^10] While this statement might support granting a Mareva injunction, I am not persuaded there was sufficient evidence before Spence J to grant an Anton Piller order against Friedman. The Anton Piller order must be set aside.

[65] As to the Mareva, the essence of it requires there be a real risk of assets being removed before a judgment is satisfied. While I am satisfied the plaintiff has made out a strong prima facie case of fraud, and given the allegations of fraud the balance of convenience would favour the plaintiff[^11], I am not satisfied the plaintiff has made out a sufficiently strong case there is a real risk Friedman will remove assets from the jurisdiction.

[66] I say this for a number of reasons. First, the Klasner investigation went on for a period of six months. During that time, Friedman apparently cooperated with Klasner, answered his questions, and provided him with documents and information he requested. Surely if he were going to destroy evidence or move assets offshore, he would have done so during this period.

[67] Second, Friedman did return funds to other Lapsker companies (albeit from the plaintiff’s funds). While this is evidence of deceitful or clandestine behaviour, it also suggests a willingness to repay when confronted with the deceit.

[68] Third, Friedman raises a real issue of set-off of the “misappropriated” funds against other sums he says he is owed by other Lapsker companies. If he is correct about what he is owed, those sums would provide significant protection to Mr. Lapsker in relation to what he characterizes as the misappropriated funds. Even if the trial judge determines Friedman misappropriated funds, and has no assets, the plaintiff could still assign the judgment in whole or in part to the other Lapsker companies, who could then set off any amounts they owe Friedman against what Friedman might owe under the judgment. In this way, the plaintiff is protected against any potential dissipation, even if dissipation were likely.

[69] Since I am not satisfied, on the totality of the evidence, that the plaintiff has made out a real risk Friedman will or is likely to dissipate assets pending trial, the Mareva injunction must also be set aside.

The Keller defendants

[70] As I have mentioned, the Keller defendants retained Mr. Zysman to comment on and critique Mr. Klasner’s affidavit and findings. In addition, the Keller defendants point out additional information they say the plaintiff should have disclosed.

[71] Mr. Zysman says Klasner failed to disclose a number of things in his affidavit in support of the original Anton Piller/Mareva. Some are what I would characterize as being of an accounting nature, or dealing with how Klasner dealt with certain calculations. These items are open to debate among experts, and are not what I would call failures to disclose material facts. Mr. Zysman does, however, point to some other items which could be characterized as Klasner’s failure to disclose. They are:

a) The existence of a 1991 employment agreement between the plaintiff and Keller that also provided a commission of 60%;

b) Klasner’s review and partial verification of the Commission Reports

[72] Mr. Klasner’s affidavit and report make reference to and rely on three employment contracts relating to Keller. These are contracts for 1992, 1995 and 2010. The Klasner affidavit makes much of the 1995 contract providing for commission of 60% for Keller, which both Klasner and Mr. Lapsker characterize as “highly suspicious”, of likely fraudulent. Mr. Lapsker deposed he would never have approved a commission rate of 60%. Notwithstanding these assertions, Klasner was provided with a copy of a 1991 employment contract with Luftspring, which had a 60% commission rate. Keller deposes she had an identical contract. Klasner should have disclosed the 1991 contract as well, since it contradicts, to some degree, his assertion the 1995 Keller contract is “suspiciously prejudicial” to the plaintiff. The plaintiff was obliged to disclose all evidence, both favourable to and contrary to the relief sought. I see the failure to disclose the 1991 contract as material.

[73] Mr. Klasner also apparently reviewed Commission Reports and prepared a summary showing the overpayment to Keller was just under $54,000. He did not, however, include this calculation in his report. Instead, the report suggests overpayment of at least $4 million or perhaps more than $9 million, although this amount is not differentiated, as it should be, among the various defendants. Mr. Zysman suggests Mr. Klasner should have disclosed his review of the Commission Reports and the work performed to verify amounts according to the Commission Reports, as well as the alternative calculation to support the overpayment. I agree. This information was relevant, and should have been disclosed, since it could have cast a slightly different light on the magnitude of the fraud claim against Keller.

[74] In addition to the items identified by Mr. Zysman, the Keller defendants say the plaintiff also failed to disclose the following information in its motion material in support of the ex parte order:

a) That Keller had retained a lawyer who had written to the plaintiff’s lawyer;

b) That Keller had repaid over $93,000 to the plaintiff and agreed to repay about $611,000 more;[^12]

c) That Keller is suffering from ovarian cancer and undergoing treatment in Toronto;

d) That Keller was still considered an employee with authority to sign cheques;

e) That the plaintiff continued to use the services of the defendant In House Printing;

[75] Would this information have changed the outcome before Spence J? I think so. The fact Keller had a lawyer who had been in communication with plaintiff’s counsel, and the fact of her repaying significant funds and negotiating to repay even more money are facts Spence J should have known. They cast a different light on Keller that might have been material to Spence J’s decision.

[76] Similarly, the facts surrounding Keller’s health issues go to the question of whether she herself was a flight risk. That fact diminishes the likelihood of removing assets.

[77] The plaintiff also did not disclose that the Keller defendants’ assets are all in Ontario (with the exception of a Florida condominium owned by the defendant Klein and his spouse), and they all have strong ties to Ontario.

[78] The fact Keller was still considered an employee with authority to sign cheques is also a material omission. To support this position, Keller relies on the court’s reasoning in Sparkle Ventures Inc. v. At My Accounting Department Inc.[^13] which suggests that the state of communication between the plaintiff and the defendant is a relevant factor in determining whether there are grounds for believing there is a risk of assets being removed or dissipated before the judgment or award is satisfied. The court commented “if the defendant has continued to communicate with the plaintiff in the days immediately before the motion is brought, a court might conclude that less risk exists about possible asset dissipation”. While the court noted continued communication might lead the court to the opposite conclusion, “the simple point is that the state of communication between the moving party and the responding party in the days leading up to the motion is a material fact which might influence how the court would exercise its discretion.”[^14]

[79] The court in Sparkle Ventures concluded that the moving party’s failure to disclose continued communications with the responding party on the eve of the motion constituted a failure to meet its obligations to make full and frank disclosure. The court set aside the Mareva in that case. Here, the same reasoning applies. Failing to disclose Keller’s continued employment and authority within the plaintiff is a failure to make full and frank disclosure sufficient to set aside both the Anton Piller order and the Mareva injunction against Keller.

[80] In coming to this conclusion I recognize the plaintiff has made strong allegations against Keller in terms of her having some of the plaintiff’s records in her home, and her having directed or participated in shredding of some records. The evidence points to records being shredded in the ordinary course of business. The fact Keller has records stored in her home is not, in and of itself, sufficient to support either an Anton Piller order or a Mareva.

[81] Similarly, the fact the plaintiff continues to do business with In House is a material fact that should have been brought to Spence J’s attention. It goes to the “state of communication” between the parties on the eve of the motion. Since that material information was not disclosed, the orders should be set aside against In House.

[82] As to the other Keller defendants, the allegations against them were not nearly specific enough to support either an Anton Piller order or a Mareva injunction.

[83] As a result, the Anton Piller order and Mareva injunction will be set aside against all the Keller defendants.

Luftspring

[84] Luftspring is in a slightly different position than the other defendants. Only a Mareva injunction was sought and ordered against her.

[85] By way of background, Luftspring is 65 years old, with a grade ten education. She is married and has three grown children. She has worked for the plaintiff for more than 30 years, acting as a commissioned sales person for 28 of those years. In fact, notwithstanding the allegations against her, at the time the order was made she was still working for the plaintiff and continues to do so even today.

[86] Luftspring’s three children reside in Ontario. All her assets are in Ontario. She has lived in the same home for sixteen years. Her lawyer suggests there is no evidence to show that she is likely to hide, remove or dissipate assets.

[87] Luftspring suggest there are five material misrepresentations or elements of material non-disclosure the plaintiff made. She says that as a result the Mareva order as it relates to her should be set aside.

[88] First, she points to the fact that the original material failed to disclose she was still employed by the plaintiff, and the plaintiff had no plans to end the relationship. She, too, relies on the reasoning in Sparkle Ventures Inc.

[89] In my view, Spence J would have had a very different impression of the situation concerning Luftspring had he known she was still working for the plaintiff. The plaintiff has attempted to answer this allegation in its responding material, saying it has put checks and balances in place to ensure Luftspring can do no more harm. It relies on her lengthy institutional knowledge of the work of the plaintiff to keep her on in this capacity. While this may be an answer, it is information that should all have been placed before Spence J. I see this as a failure on the plaintiff’s part to make full and frank disclosure of the situation concerning Luftspring.

[90] Second, Luftspring alleges the plaintiff failed to disclose the depth of her ties to Ontario. She points to the fact the plaintiff’s initial material showed no evidence of her seeking to hide, remove or dissipate her assets. In fact, on cross-examination, the plaintiff asked Luftspring virtually nothing about her assets.

[91] Third, it is only in its responding material that the plaintiff says for the first time that Luftspring’s alleged wrongdoing is limited to signing cheques for “crumbs”. She says that had her alleged wrongdoing been described in this way in the initial material it is unlikely Spence J would have found it sufficient to support a Mareva. I tend to agree.

[92] Fourth, now the plaintiff says either Luftspring was involved in the alleged fraud or she failed in her duties to the corporation. This was not the position the plaintiff took before Spence J. Again, this places her alleged wrongdoing in a very different light than how it was presented to Spence J. Luftspring says this is an element of material non-disclosure that should result in the Mareva being set aside.

[93] Last, both Luftspring and her son swear that Mr. Lapsker told her that he felt she had been duped by the other defendants. Mr. Lapsker, for the plaintiff, does not deny this.

[94] Luftspring suggests that all these factors taken together would have resulted in Spence J determining there was no strong prima facie case against her, and denying the Mareva against her. I agree. As a result the Mareva will be set aside as against Luftspring.

Disposition:

[95] The Friedman motion to strike is dismissed.

[96] The Friedman motion to set aside the Anton Piller order and Mareva injunction against him order is granted.

[97] The Keller defendants’ motion to set aside the Anton Piller order and Mareva injunction against them is granted.

[98] The Luftspring motion to set aside the Mareva injunction against her is granted.

[99] Within thirty days the ISS will return the seized documents to the defendants from whom they were seized. The ISS will retain its inventory of all documents that were seized, but will keep that inventory completely confidential, and will communicate nothing about it to the plaintiff, pending further order. This order is made, in part, to ensure the preservation order made below is followed.

[100] All defendants are ordered to preserve in Ontario all documents the ISS returns, and to keep them available for the discovery process. Any failure to do so will result in significant sanctions. The fact the ISS is directed to keep its inventory of seized documents will be a potential way to determine whether all documents have in fact been preserved.

Timetable:

[101] The parties have expended inordinate amounts of time and expense on this motion, while pleadings are not yet closed. As is often the case, their attention has been consumed by the Anton Piller order instead of being focused on the underlying lis among the parties. As a result, at the commencement of the hearing I discussed and crafted a reasonable timetable with counsel to bring the case to its conclusion. Accordingly, the parties will abide by the following timetable:

a) Friedman will deliver his statement of defence within 14 days of the release of these reasons;

b) The plaintiff will deliver its reply to the Friedman defence within 10 days of receiving it;

c) All parties will deliver their affidavit of documents within 30 days of the close of pleadings;

d) Examinations for discovery will be completed within 7 months of the delivery of affidavits of documents. To the extent possible, the parties will use the cross-examinations for this motion in lieu of discovery. Questions that were asked and answered on cross-examination may not be asked again. On the discoveries themselves, the parties will use what is sometimes called the “American rule”, namely, there will be no refusals to answer questions. Instead, if a party objects to a question the objection will be made on the record. The witness will answer the question. If necessary, the trial judge will determine whether the question was proper. If it was not, the answer will not form part of the discovery;

e) When examinations for discovery have been scheduled, the parties will arrange a 9:30 appointment with Morawetz J, Team Leader of the Commercial List, to schedule a settlement conference to be held after the completion of discoveries. If possible, a trial date will also be scheduled at this appointment;

f) For this 9:30 appointment all parties will file their Trial Readiness Briefs so that Morawetz J will have a realistic idea of how many days the trial will require;

g) For the settlement conference, all parties will file comprehensive settlement conference briefs which will include rule 49 settlement offers. The individual parties are required to attend the settlement conference in person. Each corporate party will have an individual in attendance with authority to speak for the corporation, make decisions on its behalf concerning settlement, and be able to bind the corporation.

Costs:

[102] I encourage the parties, as well as the ISS, to resolve the issue of costs of these motions. If they have been unable to do so within two weeks of the release of these reasons they will make written submissions to me. The submissions themselves will be no longer than three pages. They will include a bill of costs which will set out each billing lawyer’s year of call and actual billing rate to his client. If a party opposing a cost request fails to file its own bill of costs I may take this failure into account when I consider any objection that party makes to the costs the other party seeks.[^15]

MESBUR J.

Released: 20130318

[^1]: Including, for example, that the contract providing for 60% commissions was valid
[^2]: Celanese Canada Inc. v. Murray Demolition Corp., 2006 SCC 36, the leading Canadian case on Anton Piller orders.
[^3]: Canadian Imperial Bank of Commerce v. Credit Valley Institute of Business and Technology, 2003 12916 (ON SC).
[^4]: Note 2, above
[^5]: Celanese, supra, citations omitted
[^6]: RJR-MacDonald Inc. v. Canada (Attorney General) (1994) 1994 117 (SCC)
[^7]: Sibley & Associates LP v. Ross 2011 ONSC 2951
[^8]: Chitel v. Rothbart (1982) 1982 1956 (ON CA)
[^9]: PricewaterhouseCoopers LLP v. Phelps 2010 ONSC 1061
[^10]: Lapsker affidavit sworn 16 March 2012, paragraphs 12-15 and 33.
[^11]: The plaintiff alleges the money that was fraudulently removed actually belongs to the plaintiff. If so, Friedman has no right to the funds, which should be preserved for the plaintiff’s benefit.
[^12]: The repayment of $611,000 was apparently held up over the wording of a release.
[^13]: Sparkle Ventures Inc. v. At My Accounting Department Inc. [2011] O.J. No. 1442 (S.C.J.)
[^14]: Ibid, paragraph 39
[^15]: Frazer v. Haukioja (2010), 2010 ONCA 249