# SUPERIOR COURT OF JUSTICE - ONTARIO
**COURT FILE NO.:** 08-CV-352127PD3
**DATE:** 20130617
**RE:** American Environmental Container Corp., San Juan Products Inc. and KIJO Leasing ULC (Plaintiffs) and Paul Kennedy, Leanne Kennedy, Darren Green, San Juan Products (Canada) Ltd., SJP Enterprises (Canada) Ltd., SJP Enterprises Inc., AECC/San Juan, Oasis Fiberglass Pools Inc., Backyard Oasis, 2001530 Ontario Inc., o/a Southern Comfort and San Juan Enterprises (Canada) Inc. (Defendants)
**BEFORE:** Frank J.
**COUNSEL:**
Avrum Slodovnik, for the Plaintiffs
Paul Kennedy and Darren Green, in person, for themselves and the corporate Defendants for the purpose of this motion [1]
**HEARD:** May 30, 2013
# E N D O R S E M E N T
[1] The plaintiffs move for an order striking the statement of defence pursuant to rule 60.12 of the Rules of Civil Procedure, O. Reg. 575. At the close of submissions, I agreed to delay delivering my decision to give the parties a further opportunity to settle the action and counterclaim. They failed to do so. [2]
[2] This motion results from the Defendants’ response to the order of Strathy J., dated August 14, 2009 but not issued until August 3, 2010, in this action.
[3] The action has followed a tortuous, costly, and what appears to be entirely unproductive course since the issuance of the claim in May 2008. The parties have filed more than five banker’s boxes worth of materials with the court, containing dozens of affidavits in which each side accuses the other of dishonesty, fraudulent business practices, deceit and perjury. For every allegation by one side, there is an exonerating explanation or counter allegation by the other side.
[4] The action arises out of a business arrangement that began in 2001 between the plaintiff American Environmental Container Corp., (“AECC”) a manufacturer and distributor of prefabricated fiberglass swimming pools, and the defendants Paul and Leanne Kennedy and Darren Green when AECC decided to enter the Canadian market. AECC is a Florida corporation owned and controlled by the Sullivan family.
[5] The defendants were employees of AECC and managed its Ontario operations. In 2001, the Sullivans decided to build a facility in Ontario and expand operations here. The undertaking was to be funded through revenue through pool sales in Ontario. Although a business plan was developed for the Canadian operations, only the initial steps were implemented. They consisted primarily of setting up corporate vehicles for the venture. Meanwhile, the parties continued to do business, with the Sullivans shipping millions of dollars’ worth of pools to Ontario for the defendants to sell.
[6] By mid-2007, the relationships between the Sullivans and Paul Kennedy and Darren Green had completely broken down. The plaintiffs claim that the defendants were trying to usurp the AECC business and strip the plaintiff companies of their assets. The defendants say that the plaintiffs were trying to deny them their legitimate interest in the companies and to take away the business they had successfully established. (see Reasons for Judgment of Strathy J., at pg. 10).
[7] The plaintiffs brought a motion in August 2009, before Strathy J. for an order appointing a Receiver pursuant to [section 101](https://www.canlii.org/en/on/laws/stat/rso-1990-c-c43/latest/rso-1990-c-c43.html#sec101_smooth) of the [Courts of Justice Act](https://www.canlii.org/en/on/laws/stat/rso-1990-c-c43/latest/rso-1990-c-c43.html), R.S.O. 1990, c. C.43, for the two corporate defendants named at the time and for related relief. The motion was hotly contested, with accusations flying back and forth between the parties in many affidavits.
[8] Strathy J. dismissed the motion for the appointment of a receiver, but granted a non-dissipation order so as to preserve the property that is the important asset in issue until the trial and an order for full disclosure with respect to accounting issues. Both orders were on consent. Strathy J. left the parties to agree to the terms of the disclosure order, offering to be available to them if they were unable to settle its terms, but said that the order would permit the plaintiffs’ accountant to have full access to the books, records and physical assets of the business in dispute and that he expected the disclosure given by the defendants to be “ample”.
[9] The order was not settled until August 3, 2010, after a re-attendance before Strathy J.
[10] The order requires each of the defendants Paul Kennedy, Leanne Kennedy, Darren Green, San Juan Products (Canada) Ltd. and SJP Enterprises (Canada) Ltd. to give unfettered access to any records in any form whatsoever and lists, without limiting its scope to them, 26 types of records that the defendants must produce. It provides that the records are to include those that are in the defendants “possession, power or control”; it requires the defendants to cooperate with the plaintiffs’ accountant and assist the accountant in gaining immediate access to the information in the records; and, it prohibits the defendants from “altering, erasing or destroying” any records. (The relevant portion of the order is attached as Appendix A)
[11] The plaintiffs maintain that the defendants’ production has been so inadequate as to make the accounting anticipated by Strathy J. impossible. The defendants have provided limited disclosure for the period from December 2009 onward, and no disclosure for the approximately five and a half years prior to that.
[12] The plaintiffs’ position is that the defendants’ have blatantly and deliberately disregarded Strathy J.’s order and that in the absence of any credible explanation the appropriate remedy is the striking of the defendants’ pleading.
[13] The defendants’ position is that they are not in breach of the order. They submit that the plaintiffs themselves have all of the records for the period before November 2009, that they have done everything reasonably required of them to locate the records from that date onward, and that in any event the plaintiffs had access to all of the electronic records.
**Production to date**
[14] It is not disputed that what the defendants have produced in purported compliance with the disclosure order only dates from December 2009, and does not account for approximately $7,000,000 worth of pools.
[15] In October 2010, the defendants purported to comply with Strathy J.’s order by providing an accounting consisting of several pages, relating to pool sales in 2010 and showing only that the pools were purchased by one of the defendants’ corporations. Then, in April 2011, when the plaintiffs’ accountant, Farley Cohen, went to the defendants’ premises in accordance with the order, the defendants gave Mr. Cohen documents relating exclusively to the defendant SJP Enterprises Inc., although the order applied to all current defendants, and covering only the period from December 2009, onward. Some of the documents produced were incomplete or partial. The bulk of records that would be expected to be disclosed in accordance with the order, were not made available to Mr. Cohen.
[16] Mr. Cohen requested additional production in accordance with the order, based on what was produced with respect to SJP Enterprises. None was provided.
[17] In August 2011, the plaintiffs wrote to the defendants, advising that they would be moving to strike the statement of defence based on the defendants’ failure to comply with Strathy J.’s order. The delay in the hearing of the plaintiffs’ motion is not a result of fault on the part of the plaintiffs.
**The defendants’ position**
[18] The defendants maintain that they cannot produce documents for the period before December 2009, because all of those documents were stolen from them by the plaintiffs. This happened, they claim, when the plaintiffs removed a number of pools from the property purchased for the expansion of manufacturing into Ontario and where the defendants had an office.
[19] The plaintiffs admit to taking the pools. Their position is that they did so because they believed that while their lawyers were delaying the settlement of the disclosure order, the defendants were dismantling the property and because a large number of pools had already been removed by the defendants from the property to a location at which they were insulated from recovery.
[20] I do not accept the defendants claim that the plaintiffs took all business records including the computer hard drives on which data was stored. I have arrived at this conclusion for the following reasons:
(a) The plaintiffs did not raise this alleged theft of records until July 2010, more than seven months after the pools were removed. This was shortly after they had terminated the retainer with their counsel and in anticipation of their re-attendance before Strathy J. to settle his order. The first mention of the alleged theft of “accounting data” was by Mr. Bridger in an e-mail to Strathy J., written as agent for the defendants.
(b) The plaintiffs refused to consent to the release of the notes of the police officers who investigated the removal of the pools following the report by the plaintiffs to the Ontario Provincial Police on December 1, 2010. These notes contain what the officers were told was missing.
(c) It is now admitted by the plaintiffs that they did not report the alleged theft of the business records and computers. They say that this is because they did not realize that these things were also taken until afterwards. But, the theft of business records was never reported and it stretches credulity that the loss would not have been noticed, had it occurred, until January or February as Mr. Green attests in his affidavit. There is evidence that the plaintiffs were using the premises daily from November 30, 2009 to December 12, 2009. The defendants first asserted that they had not noticed the theft in response to the plaintiffs’ motion record in which the plaintiffs dispute the theft of accounting records and rely on the fact that the defendants neither reported it to the police nor raised it with the plaintiffs. The assertion leaves unanswered why the defendants did not raise the theft from when they say they became aware of it until July 2010, four or five months later – a course of conduct inconsistent with all that came before.
(d) Both Mr. Kennedy and Mr. Green have admitted that they have no personal knowledge of the records having been taken by the plaintiffs. They rely on the evidence of a former employee of AECC, Paul Perovich. However, Mr. Perovich’s evidence does not assist the defendants. Setting aside the serious issue of whether any weight whatsoever can be placed on his evidence, Mr. Perovich does not say that records or computers were taken by the plaintiffs. Mr. Perovich was present when the plaintiffs surreptitiously removed a number of pools from the property at which they were stored. Although he identifies items that were taken in addition to the pools, he does not say that the documents or computers were taken.
(e) Based on the evidence of Paul Kennedy, all of the records were moved to another location – Mr. Green’s office on Billy Brews Road - by the defendants once the relationship between the parties had deteriorated. This is the same location to which Mr. Cohen was asked to go to review documents. Consistent with that, Mr. Green was able to produce records pre-dating December 2009 for the purposes of his claim made to the plaintiffs for the reimbursement of expenses.
(f) There is reason to doubt the credibility of the defendants. For example, their counsel wrote to Strathy J. on December 9, 2009, alleging that the plaintiffs had taken “approximately 40 pools, the defendants’ entire inventory” and requesting an appointment to deal with the theft. Although the plaintiffs did take a number of pools, as the defendants have admitted, what was said to Strathy J. was not true. Also, evidence with respect to the sale of Mr. Kennedy’s home, absent any credible explanation, is consistent with wrongdoing. And, on the hearing before me, Mr. Bridger speaking on behalf of the defendants argued that the plaintiffs failed to provide an accounting with respect to the period between 2001 and 2003. But, Mr. Bridger withdrew that assertion as soon as counsel for the plaintiffs disputed it, leaving the impression that the defendants were either careless with the facts or prepared to misstate them, hoping not being caught doing so.
(g) Even if there were some doubt as to whether the plaintiffs had the records from before December 2009, I would not accept that as a justification for the defendants’ failure to produce any records for that period. The defendants repeated the allegation that the plaintiffs had taken all of the accounting records when they appeared before Strathy J., on August 2, 2013 and asked him to vary his order because of it. Strathy J. declined to do so. The theft of the documents, therefore, does not excuse the inadequate disclosure.
[21] In my view, based on the evidence before me, the allegation that the defendants cannot produce any records predating December 2009 is simply a concocted excuse designed to enable the defendants to avoid compliance with Strathy J.’s order.
[22] Equally, I reject the defendants’ argument that they are not in breach of the disclosure order because the plaintiffs have access to the defendants’ on-line records. The defendants rely on banking statements in the possession of the plaintiffs as proof of all records being available to the plaintiffs. But, I accept the plaintiffs’ evidence that these statements were given to them by the defendants prior to the commencement of the action. The plaintiffs do acknowledge that at one time they had some limited access to the Ontario business records. But, clearly this does not justify the defendants’ conduct with respect to disclosure.
[23] Finally, I reject the defendants’ insistence that they have done all that is required of them. They have not. The defendants submit that they have searched high and low for documents and have produced everything they have found. But, even if this were true, it is not enough. The order is not limited to disclosure of documents in the defendants’ possession. They are required to produce documents in their control, as well. They admit to having made no effort to obtain documents from any source, apart from a bank from which they failed to pursue what was available.
[24] The defendants’ insistence that they have done all they can is belied by the obvious exclusions from and gaps in the disclosure they have made. By way of example, the records show a payment by SJP Enterprises of $10,000 without anything further: no indication of to whom or why the payment was made. Another example is an exclusion that came to the attention of the plaintiffs by chance. They learned of the sale of a pool by the defendants in 2011. However, the defendants did not disclose any inventory remaining in 2011, let alone the sale of the pool.
[25] I find that the defendants have not complied with the disclosure order.
**Remedy**
[26] As Strathy J. found, it is clear that an accounting is necessary in this case so that there can be a determination of what has been contributed by each party, what each party has received and who owes what to whom. But, by failing to comply with Strathy J.’s order, the defendants have made it impossible for there to be such an accounting.
[27] The breach of the disclosure order is not the defendants only breach of a court order in this action. They several times breached Strathy J.’s non-dissipation order. In breach of that order, Mr. Kennedy agreed to grant a mortgage on the property that is the subject of that order and did so one month after the order was entered. In further breach of that order, the defendants failed to keep the mortgage and property taxes on the property in good standing and did not advise the plaintiffs of the resulting foreclosure proceedings and they failed to deposit into the account of SJP Enterprises Inc., the proceeds of a sale of a pool, a sale that they did not disclose to the plaintiffs. The defendants breached the order of Morgan J. dated August 24, 2012 by not filing a factum in this motion though ordered to do so within 14 days of the date of that order.
[28] The defendants’ conduct in the litigation apart from their outright disregard for the orders of this court does not encourage me to exercise my discretion in their favour. They have failed to comply with their undertakings to the plaintiffs and have given incorrect evidence on cross-examination.[3]
[29] The defendants submit that I should consider their conduct in the context of the conduct of the plaintiffs. They say that the plaintiffs have a history of taking ‘self- help’ action - surreptitiously taking pools stored on the property - and that the plaintiffs have shown themselves to be disrespectful of the court by doing so on the night before Strathy J. was to deliver his decision. To the extent that these actions are to be condemned, they do not excuse the defendants’ breaches and lack of truthfulness.
[30] The plaintiffs argue that there is nothing to be gained by giving these defendants more time to comply with the disclosure order. This is a compelling argument in light of the defendants not having asked for more time to comply and, in their submissions, remaining unequivocal in maintaining that they have met their disclosure obligations.
[31] In asking that the statement of defence be struck despite the non-disclosure order that is the basis for the motion to strike being the first such order breached by the defendants, the plaintiffs direct me to a number of decisions in which a defendant’s pleading has been struck. They submit that the principles enunciated in those cases, even though none of them deal with this situation, support the striking of the statement of defence.
[32] These cases demonstrate the damaging effect to both litigants and the administration of justice of delays caused by non-compliance with court orders. The courts have an obligation to sanction conduct such as that of these defendants not just for the sake of the opposing party, but to protect the administration of justice and maintain the integrity of the court.
[33] I am inclined to grant the order striking the statement of defence pursuant to rule 60.12. However, at the same time, I am mindful of the governing principle underlying the rules that directs that they be “liberally construed to secure the just, most expeditious and least expensive determination of every civil proceeding on its merits.” (see rule 1.04(1))
[34] This action will not be determined on its merits if I strike the defendants’ pleading. There is no question that the defendants’ conduct in this litigation must be sanctioned. But, I am not satisfied that that the conduct should preclude their being given an opportunity to correct their response to the order of Strathy J., so that the issues can be determined on their merits. As a result, I decline to exercise my discretion to strike the statement of defence.
[35] In reaching this conclusion I am mindful of both the defendants’ insistence that they have produced all that is required and their confirmation that they went over the decision of Strathy J. with their counsel as a result of which they should have had no doubt as to the scope of disclosure that was required. These things are consistent with the defendants acting intentionally in not producing the documentation that is a prerequisite to any accounting being done. But, I expect the defendants will recognize, with the benefit of this decision, the inadequacy of their disclosure and the necessity of correcting it.
[36] The indulgence I grant to the defendants in not striking their defence must be on strict terms so as not to create further unfairness to the plaintiffs and so as to limit the delay and expense with which the plaintiffs will have to contend as a result of my decision. Therefore, I order the following:
(a) the defendants are to conduct a further search for documentation that is in their possession and are to make enquires of any potential source of such documentation and obtain from such source whatever it is able to provide, at the defendants’ cost.
(b) Within one week of the date of this endorsement, the defendants are to provide to counsel for the plaintiffs a copy of their written communications with all sources from which they are attempting to obtain documents. Any oral communications are to be confirmed in writing to the subject of those communications. The defendants can begin by taking the steps identified by the plaintiffs in paragraph 55 of their factum as not having been taken to date.
(c) The defendants are to provide copies of responses to their attempts at obtaining documentation to counsel for the plaintiffs upon receipt of those responses and if the responses are oral, to put them into writing and provide those as well.
(d) The documents found or obtained by the defendants are to be forwarded to counsel for the plaintiffs without delay.
(e) As to the extent of disclosure, the defendants can use as their guide the documents requested by Farley Cohen bearing in mind that their obligation extends to all of the corporate defendants, not only SJP Enterprises Inc., and reaches back before December 2009.
(f) After four weeks of the date of this endorsement, the plaintiffs may move for an order striking the defendants’ pleading without notice to the defendants if the plaintiffs are not satisfied with the defendants’ compliance with their disclosure obligations. The plaintiffs will be required to demonstrate to the judge hearing the motion that whatever efforts the defendants have made and whatever disclosure has been received since the making of this order remains inadequate.
[37] The burden placed on the defendants by this order may appear onerous. However, the defendants have known since August 2009 that they were subject to an order for “ample” disclosure. They are entitled to no further indulgence than provided by this order.
[38] The question of costs remains to be determined. Submissions are to be made to me in writing, through Judges’ Administration. They are to be limited to 3 pages, double spaced in length, in the case of the plaintiff’s, in addition to the cost outline already provided to the court. The plaintiffs’ submissions are due within 20 days of the date of this endorsement, to be followed by the defendants within 10 days of that date.
___________________________
Frank J.
Date: June 17, 2013
## APPENDIX “A”
4. THIS COURT ORDERS that the Defendants, including the Defendants added to this proceeding in the Amended Statement of Claim annexed hereto, shall forthwith advise Navigant Consulting or such other accounting firm designated by the Plaintiffs (the “Accountant”) of the existence of and provide unfettered access to any electronic and/or hard copy books, documents, securities, contracts, orders, corporate and accounting records, and any other papers, records and information of any kind, (hereinafter the “Records”) including but not limited to:
(a) general ledger and related accounting books and records (electronic or hard copy);
(b) financial statements;
(c) trial balances;
(d) general journals and journal entry documentation;
(e) accounts receivable journals;
(f) accounts payable journals;
(g) cash receipts/disbursements journals;
(h) cash or cheque requests/vouchers;
(i) cheque books/registers;
(j) asset listings and journals including equipment and inventory;
(k) other similar books and records;
(l) vendor records, including supplier invoices and other back up for all payments;
(m) payroll records and journals;
(n) corporate income and other tax returns and assessments/reassessments, including
all slips and schedules relating thereto, including income tax, GST, sales taxes;
(o) purchase orders, shipping documents, receiving documents, invoices and similar
information (electronic and/or hard copy) relating to pool purchases and sales;
(p) banking records for all bank, loan, line of credit, credit card, investment or other
accounts including but not limited to account application and opening
documentation, submitted net worth statements; account agreements; account
signature cards; account statements; supporting documents for account
transactions (deposits (including direct deposits), cheques (including certified
cheques and cancelled cheques), bank drafts; funds transfers in and out; debit and
credit memos; direct payments (e.g. interact, pre-authorized payments); other
account transactions;) loan applications; and bank correspondence;
(q) access to the same or similar documentation for other accounts related to or
controlled by the Defendants from which funds were received or to which funds
were transferred;
(r) minute books and other corporate records and documents including but not
limited to original and amended articles of incorporation, corporate/
proprietorship registrations, minutes, resolutions, shareholders’ ledgers, directors’
ledgers; and shareholder/partnership agreements;
(s) emails and other correspondence (hard copy or electronic) supporting the receipt or disbursement of funds or other assets (such as equipment, pool inventory);
(t) other documents such as accountants’ working papers, spreadsheets or memos
(hard copy or electronic) supporting the receipt or disbursement of funds or other
Assets (such as equipment, pool inventory);
(u) other documents such as accountants’ working papers; spreadsheets or memos
(hard copy or electronic) relating to the financial statements and corporate tax and
other tax returns;
(v) loan agreements including transactions and any other documentation including
related correspondence and documents, cash receipt and disbursement transactions,
repayments and registrations to substantiate transactions involving Belle Harbour
and John Hamilton;
(w) dealer agreements and related correspondence and documents;
(x) lease agreements relating to the Property and all related correspondence and
documents;
(y) documentation relating to the purchase of the Marysville property including
agreements and correspondence;
(z) documentation relating to all mortgages on the Property including agreements and
correspondence, etc. for all mortgages since the purchase of the Property;
related to the business or affairs of the following entities: San Juan Products (Canada) Limited; 2001530 Ontario Inc. o/a Southern Comfort; Aboriginal Environmental Container Corp. (also known as AECC/San Juan); San Juan Enterprises (Canada) Inc.; SJP Enterprises Inc.; Oasis Fiberglass Pools; Oasis Fiberglass Pools Inc.; Backyard Oasis, and any computer programs, computer hard drives, computer tapes, computer disks, personal digital assistants (for example Blackberries), email servers, file servers, or other data storage media containing any such information (the foregoing, collectively, the “Records”) in each Defendant’s possession power or control, and permit the Accountant to make, retain and take away copies and/or images thereof and grant to the Accountant access during normal business hours to and use of accounting, computer, software and physical facilities relating thereto upon the Accountant providing 24 hours notice requesting such access, provided however that nothing in this paragraph 4 or in paragraph 5 of this Order shall require the delivery of Records, or the granting of access to Records, which may not be disclosed or provided to the Accountant due to the privilege attaching to solicitor-client communication or due to statutory provisions prohibiting such disclosure.
---
[1] For the purposes of this motion, with the indulgence of the plaintiffs, I permitted Trent Bridger, an officer of SJP Enterprises Inc., to make submissions on behalf of the corporate defendants as he has done on previous court attendances.
[2] I received e-mail correspondence directed to my assistant from Trent Bridger, the spokesperson for the defendants, on the date by which the parties were to advise me whether they had settled. As it was apparent from the first page, which included a copy of an e-mail to counsel for the plaintiffs, that Mr. Bridger was not limiting his communication to advising me of the status of the settlement negotiations, I read no further than the portion of the e-mail addressed to my assistant. Subsequently, Mr. Bridger has sent further correspondence to my assistant. I have not looked at it as so long as my decision was under reserve, I would not consider any communication from either side other than notification of settlement.
[3] They testified that all pools had been sold by December 2010. However, one pool is now known to have been sold in September 2011.
minicounsel