SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL LIST

RE: 236523 Ontario Inc., Cachet Homes Inc., One Three Five Wood Investments Inc. and Napa Cabernet Holdings Inc., Plaintiffs

AND:

Steven Nowack, Defendants

BEFORE: D. M. Brown J.

COUNSEL:
N. Wilson, for the Plaintiffs

D. Sloan, for the Defendant

HEARD: October 25, 2013

REASONS FOR DECISION

I. Motions for the appointment of an investigative receiver and to set aside a default judgment

[1] By notice of motion dated August 29, 2013, the plaintiffs applied for various relief, but the primary relief requested at the hearing on October 25, 2013, through its second amended notice of motion, was the appointment of Schwartz Levitsky Feldman Inc. as the receiver of all the assets, undertakings and properties of the defendant, Steven Nowack. The plaintiffs stated that they sought the appointment of an investigative receiver similar to the one appointed in Loblaw Brands Ltd. v. Thornton[1] in order to ascertain what Nowack had done with the substantial sums of money they had invested through him.

[2] Nowack opposed the appointment contending that he had shown, through productions made in response to (the far too large number of) orders of this Court, what had happened to the investment funds. On his part Nowack sought to set aside the default judgment granted against him on July 18, 2013.

[3] For the reasons set out below, I decline to grant the plaintiffs’ request for the appointment of an investigative receiver, I set aside the Default Judgment, and I direct the trial of this action in March, 2014.

II. Nature of the plaintiffs’ claim

A. The foreign currency investment contracts

[4] On February 5, 2013, Cachet Homes Inc., whose principal is Mr. Desi Auciello, a lawyer, entered into a contract with Nowack for the investment of $500,000 in currency trading. As matters transpired, between February 4 and March 4, 2013, Cachet invested $1.5 million with Nowack.

[5] Anthony Montemarano and Rino Montemarano also entered into currency trading investment contracts with Nowack through their companies, the plaintiffs One Three Five Wood Investments Inc. and Napa Cabernet Holdings Inc. Those two contracts were dated January 31, 2013. One Three Five invested $500,000 and Napa Cabernet invested $1 million.

[6] All three contracts provided that the investor was “granting Nowack the authority to trade and invest in currency as Nowack may see fit, utilizing his proprietary trading system and methodology”. The investment funds were to be “held in an account in Nowack’s name at a brokerage firm of Nowack’s choice” and “all trading of currencies using the Funds shall be conducted in Nowack’s Account on behalf of the Investor, and at Nowack’s sole discretion through the Account”.

[7] Each contract obliged Nowack to provide monthly profit, loss and balance statements to the investor, which were to include “a copy of the original statement issued by the forex Account issuer”. Other provisions addressed how the parties were to split trading profits and losses, although Nowack guaranteed a certain minimum profit within 90 days. Paragraph 14 stated:

14. Subject to paragraph thirteen of this agreement, Investor fully acknowledges and accepts that he is at risk for the loss for all of the Funds and that he has been made fully aware by Nowack of the substantial risks associated with the trading and investing of the Funds.

Paragraph 13 provided, in part:

13. Nowack will indemnify the Investor from and shall be liable to Investor for any loss of the Funds in the Account, and guaranteed profit, detailed in this agreement…

[8] The plaintiffs consolidated their separate contracts into one investment agreement with Nowack dated March 4, 2013, with 2363532 Ontario Inc. as the sole investor with Nowack. The March Agreement recognized that $2.5 million had been invested with Nowack and a further $1.5 million would be advanced. The agreement recited that the funds were held in a foreign exchange trading account with FXCM, LLC. Nowack retained sole trading discretion, but he agreed that “such Funds of the Investor representing the Investor’s share of the Account shall be held by Nowack in trust for the Investor as Beneficiary thereof”. As security for the Funds, Nowack agreed to provide the investor with an executed account withdrawal form and a power of attorney to Auciello over the trading account. Under section 12 of the March Agreement Nowack agreed to return the funds to the investor in accordance with an agreed upon schedule. Sections 17 and 18 stated:

17. Nowack will indemnify the Investor from and shall be liable to Investor for any loss of the initial Funds in the Account howsoever caused except through his trading activities in the Account in accordance with this agreement.

18. Subject to paragraph 12 of this Agreement, Investor fully acknowledges and accepts that he is at risk for the loss of all of the Funds in the Account and that he has been made fully aware by Nowack of the substantial risks associated with the trading and investing of the Funds.

[9] Ultimately the plaintiffs invested a total of $3 million with Nowack.

B. Performance of the March Agreement and the signing of the Termination Agreement

[10] After they had signed the March Agreement and had advanced a total of $3 million, the plaintiffs learned that Nowack was involved in a lawsuit in which another investor alleged that Nowack had wrongfully refused to return invested funds. Then began a series of events in which the plaintiffs asked for the return of their funds, Nowack gave various reasons why that would not be possible in a short period of time and, eventually, the parties negotiated a Termination Agreement dated April 18, 2013 which required the total amount invested, plus accrued profits – US $5.089 million – to be repaid by May 21, 2013.

[11] In the Termination Agreement Nowack represented that the funds had been deposited in FXCM LLC. Trading account No. 00242979.

[12] Nowack did not repay any of the funds.

[13] On June 7 the plaintiffs commenced this action. Their claim for damages in the amount of the Canadian dollar equivalent of US $5.089 million sounds in conversion, breach of contract, misappropriation, breach of trust, fraudulent and/or negligent misrepresentation, breach of fiduciary duty and unjust enrichment.

[14] On June 10, 2013, FXCM informed the plaintiffs that Nowack did not have an account with FXCM, LLC, as he had represented. Nowack had an account with FXCM’s England branch. The account number was not 0024979, as Nowack had represented. There were no funds in Nowack’s account and FXCM had frozen the account.

[15] In late October Nowack was charged with three counts of fraud over $5,000 relating to the plaintiffs’ investments with him.

[16] The principal defence Nowack proposes to assert, as set out in his draft July 17, 2013 statement of defence, is as follows:

[The Defendant] did in fact invest all of the money that had been entrusted to him for the purposed of trading in the currency market and that unfortunately, all of the money that had been invested was in fact lost. This of course was a risk that was known to the Plaintiffs as being a possibility and in fact this is what occurred.

In the end result, the Defendant states that he is not responsible for the losses and that there are no monies owing to the Plaintiffs in these unfortunate circumstances.

C. The orders made in this proceeding

[17] The history of the orders made by this Court in this proceeding is relevant to the disposition I intend to make of this motion, so I shall briefly summarize them:

(i) On June 11, 2013, Wilton-Siegel J. issued an ex parte order freezing Nowack’s TD bank account and other accounts;

(ii) On June 18, Mesbur J. ordered Nowack to file a better of affidavit which included copies of the records from his TD bank account and Forex account and to provide an irrevocable direction to both the TD Bank and FXCM authorizing them to release to the plaintiffs Nowack’s statements from February 1, 2013 until the date of the order;

(iii) On June 20, Mesbur J. wrote that the affidavit filed by Nowack was “vague”, did not respond to the allegations made against him, and raised “more questions than they answer”. The account documents he had produced lacked running balances and transaction dates. Mesbur J. wrote that Nowack had admitted he had lied when he made certain statements to the plaintiffs and he had admitted to attempting to make certain bank transfers when no funds had existed to cover the transactions. Although Mesbur J. dissolved the earlier ex parte injunction for want of full and frank disclosure by the plaintiffs, she ordered Nowack to preserve all his accounts in the world, deliver a statement of defence within 15 days, submit to examination by the plaintiffs as to where their funds might be, and to provide directions to FXCM (UK) and Barclays Bank in the Isle of Mann similar to those which she had ordered on June 18, as well as providing an amended direction to FXCM (US), and to give the plaintiffs signed copies of those directions;

(iv) On July 2, Mesbur J. settled her order of June 18;

(v) On July 12, I adjourned the continued motion for five days to enable Nowack to retain new counsel;

(vi) On July 17, I found that Nowack had breached the order of Mesbur J. by failing to file a defence and failing to provide the required authorizations. I ordered him, as Item 1 of the relief granted, to attend for examination on July 22 “to answer all questions relating to the funds provided to him (or any related company or trust) by the plaintiffs, including what happened to every cent of those funds” and, as Item 2, to bring to the examination “each and every single piece of paper or piece of data which demonstrates what has happened to every single cent of the plaintiffs’ funds provided to him.” I adjourned the request for certain other relief sought by the plaintiffs;

(vii) On August, 1 Wilton-Siegel J. held that the plaintiffs’ “motion is premature for a number of reasons” and set August 30 as the hearing date. The plaintiffs had obtained default judgment on July 18 and Nowack wanted to set it aside;

(viii) Wilton-Siegel J. adjourned the August 30 hearing because the plaintiffs wanted to amend their claim to seek the appointment of a receiver and to find Nowack in contempt;

(ix) When the contempt motion came back on before Mesbur J. on September 13, she wrote that the plaintiffs had encountered difficulty in serving Nowack with the contempt motion materials which raised “a suspicion that Mr. Nowack is evading personal service”. Mesbur J. gave directions for service on Nowack and ordered him to submit to further examinations on October 2. As well she ordered him to “sign the proper authorizations he has been ordered to sign”;

(x) On October 1, the plaintiffs sought to adjourn the scheduled hearing to bring a motion to strike out parts of an affidavit. I refused the adjournment request;

(xi) On October 4, I adjourned the motion to October 25 because of matters which had arisen on Nowack’s October 2 examination and ordered examinations of Nowack and Auciello for October 15. I wrote, in part:

I shall be reviewing the evidence about the information provided by Mr. Nowack in light of the requirements set out in Items 1 + 2 of my July 17/13 endorsement.

III. The information about the funds disclosed by Nowack to date

[18] In the evidence filed to date, Nowack has deposed that he did not steal any of the plaintiffs’ funds, but lost it all through foreign currency trading. To the date of the hearing, Nowack had given the plaintiffs the following information about the funds they had provided to him:

(i) Just prior to his July 25 examination Nowack had provided a lengthy (2,206 pages) PDF file of FXCM account records and he turned over TD Bank account statements. The FXCM statements covered the period January 31, 2013 through to April 18, 2013. He gave 9 undertakings and made 17 refusals. The transcript ran to just over 200 pages;

(ii) Pursuant to an authorization signed by Nowack, on August 2 FXCM provided the plaintiffs with an electronic copy of a “FXO Combined Account Statement” for the period June 3, 2013 through to June 26, 2013;

(iii) Nowack’s September 15 affidavit offered no further specific evidence about what had happened to the plaintiffs’ funds;

(iv) On September 16, Nowack provided the plaintiffs with signed authorizations for his accounts at the CIBC, Forex Capital Markets, Ltd., Forex Capital Markets, LLC, Forex Capital Markets, Inc., Barclays plc. and TD Canada Trust;

(v) By counsel’s letter of October 1, Nowack provided answers to many of the undertakings and refusals given on his July 25 examination;

(vi) The transcript of Nowack’s October 2 examination ran to about 150 pages. His CIBC bank account statements were marked as an exhibit; the plaintiffs had obtained them pursuant to an authorization signed by Nowack. Five undertakings were given and 16 refusals were made;

(vii) On October 9 Nowack provided copies of bank statements from the TD Canada Trust. That institution provided the plaintiffs with further records on October 22; and,

(viii) The transcript of Nowack’s October 15 examination ran to about 60 pages. He gave two undertakings and made 46 refusals. On the examination Nowack’s counsel took the position that the defendant would refuse to answer any questions about persons to whom the plaintiffs’ funds had been transferred (Q. 1259);

IV. Analysis

A. Setting aside the default judgment

[19] As a result of discussions which took place at the hearing, plaintiffs’ counsel advised that his clients would not oppose the setting aside of the Default Judgment granted on July 18, 2013. In light of the events which led up to the requisitioning of that default judgment and the events at the hearing before me on July 17, 2013, that was a most proper concession by the plaintiffs. Accordingly, I set aside the Default Judgment dated July 18, 2013 and require Nowack to serve and file his proposed statement of defence dated July 17, 2013, found at Tab 2B of the defendant’s Motion Record dated September 20, 2013, no later than December 11, 2013.

B. Plaintiffs’ request for the appointment of an investigative receiver

[20] The plaintiffs adduced evidence that they had transferred $3 million to Nowack. The defendant so acknowledged in paragraph 4 of the Termination Agreement. In his October 1 answer to an undertaking (Q. 263), Nowack identified entries on FXCM account documentation which appeared to record the transfer into that account of $2.37 million. The plaintiffs submitted that Nowack still had not accounted for the receipt of just over $600,000 of their funds.

[21] Nowack’s undertaking answer acknowledging the receipt of the $2.37 million was based on the records for the Forex Capital Markets account number 6100001931 in his name. On October 21 the plaintiffs learned from Forex that Nowack held another account, number 6100001930. By the time of the hearing the plaintiff had not received statements for that 930 account.

[22] The plaintiffs submitted that Nowack still had not explained the transfers of monies out of the Forex 931 account. In their submission the plaintiffs described the present state of the information about what had happened to their funds as follows:

(i) it appeared that Nowack had incurred trading losses of over $2.1 million of the funds invested by the plaintiffs;

(ii) Nowack had not accounted for the receipt of $630,000 of the plaintiffs’ funds; and,

(iii) Nowack had not accounted for $192,000 in withdrawals from his trading account.

[23] The defendant argued that the documents he had produced provide a complete explanation of what had happened to the plaintiffs’ funds. The defendant pointed out that the FXCM trading records showed not only the transfer into and out of the 930 account, but also the commissions charged by FXCM on the trades conducted. Those records disclosed on that on total funds transferred of $3.6 million, trading losses amounted to $2.47 million and commissions charged totaled $1.314 million. Nowack submitted that under the terms of the contract he was not responsible for any trading losses.

[24] The plaintiffs pointed out that in my July 17 endorsement I had ordered Nowack “to answer all questions relating to the funds provided to him (or any related company or trust) by the plaintiffs, including what happened to every cent of those funds” and to bring to his July examination “each and every single piece of paper or piece of data which demonstrates what has happened to every single cent of the plaintiffs’ funds provided to him.” The plaintiffs submitted that Nowack had not complied with those orders notwithstanding his attendance on three examinations: July 25, October 2 and October 15, 2013. The evidence supports their submission on that point, especially in light of Nowack’s refusal on his October 15, 2013 examination to explain certain transfers of funds out of his foreign exchange account.

[25] On this motion the question that arises is whether the defendant’s failure to explain, through his pre-trial examinations and productions, what had “happened to every single cent of the plaintiffs’ funds provided to him” justifies the appointment of an investigative receiver prior to any adjudication at trial of the merits of the plaintiffs’ claim against the defendant. For several reasons I conclude that it does not.

[26] First, given my order setting aside the Default Judgment, the law applicable to the appointment of a receiver in-aid-of-execution does not apply.

[27] Second, the cases relied upon by the plaintiffs are distinguishable in material respects. In Loblaw Brands[2] I appointed an investigative receiver, but in that case the defendant had not responded in any fashion to the plaintiff’s proceedings. In the present case, Nowack did attempt to file a statement of defence, but discovered that default judgment had issued the previous day, and Nowack, either directly or through the authorizations he signed, provided many trading account and bank account records to the plaintiffs. The extent of that production has led the plaintiffs to conclude, at least in a preliminary (non-binding) fashion, that approximately 70% of their invested funds might well have been lost through foreign exchange trading activity. Next, the decision in Boughner v. Greyhawk Equity Partners Limited Partnership (Millenium) referred to by counsel involved the issue of the distribution of funds by a receiver; it did not recount the basis upon which the receiver initially had been appointed.[3] Finally, the case of Zayed v. Cook[4] involved the recognition of a foreign proceeding under Part XIII of the Bankruptcy and Insolvency Act, a very different circumstance than the present case.

[28] Third, the Rules of Civil Procedure, and in the present case several orders of judges of this Court, impose production and discovery obligations on the defendant. Like any party, if the defendant refuses to answer questions on examination or fails to answer undertakings, then he “may not introduce at the trial the information that was not provided, except with leave of the trial judge”: Rule 31.07(2). In addition, if a party fails to answer any proper question on an examination or fails to produce a document that he is required to produce, the court, on motion, may strike out the party’s defence: Rule 34.15(1)(b). In sum, a court may draw adverse inferences against a party who fails to comply with his production and discovery obligations.

[29] Finally, an alternative and more appropriate remedy to the appointment of an investigative receiver exists in the circumstances of this case. The plaintiffs want to find out what happened to the funds they invested with Nowack and they have asked this Court to adjudicate what liability, if any, attaches to Nowack. The most appropriate way to deal with those issues, and therefore the most appropriate remedy to grant, is to order that this action move to a quick trial date.

[30] In many ways this is a factually simple case: (i) the plaintiffs must establish that they advanced funds to the defendant for specified investment purposes; (ii) the plaintiffs must demonstrate whether the defendant has repaid any funds to them; (iii) the defendant must explain what happened to the plaintiffs’ funds; and, (iv) armed with that explanation, the parties must establish what, if any, liability then follows in light of the terms of the agreements they have entered into, in particular the final Termination Agreement. From the evidence filed on this motion, the facts concerning Issues (i) and (ii) do not seem to be in dispute. The defendant has led some evidence in respect of Issue (iii), but the plaintiffs contend that he has not yet provided a full explanation. Issue (iv) involves a matter of mixed fact and law – i.e. the application of the terms of the parties’ contracts to the facts as established.

[31] Given the lack of factual complexity in this action, I direct that a hybrid trial take place before me, and I give the following directions in respect of that trial:

(i) The trial shall take place during the week of either March 3 or 10, 2014, for three (3) days. The parties shall consult and inform me, by joint letter, no later than December 11, 2013, which dates they have chosen. If the defendant does not respond to the plaintiffs’ communications, they may appear before me at a 9:30 appointment on December 12 or 13, at which time I will fix the trial date;

(ii) The defendant shall serve and file his statement of defence no later than December 11, 2013. If the defendant does not do so, the plaintiffs may note the defendant in default and may set a date for a motion for default judgment before me;

(iii) If the defendant delivers a statement of defence, the plaintiffs shall deliver any Reply no later than December 18, 2013;

(iv) In her June 20, 2013 reasons, Mesbur J. ordered that affidavits of documents were to be served within 30 days of the close of pleadings. Given the productions and examinations which already have taken place, I vary that part of her order and direct that the parties exchange sworn affidavits of documents by December 24, 2013. The defendant submitted that the police had seized all his records on October 23. If that was the case, the defendant can obtain from the plaintiffs copies of the account documents which have been produced to date in this action and, of course, the defendant as the holder of the various accounts has the power and control to direct the production of those documents simply by contacting the relevant financial institution to obtain further copies. I see no reason why the execution of a search warrant should impede the ability of the defendant to produce an affidavit of documents in this case;

(v) No later than January 17, 2014, the plaintiffs shall serve affidavits containing the evidence-in-chief of any witness whom they intend to call at trial. In respect of Desi Auciello, his affidavit of June 6, 2013 may stand, in part, as his evidence-in-chief if the plaintiffs so elect; Messrs. Rino and Anthony Montemarano must file more fulsome affidavits;

(vi) No later than February 7, 2014, the defendant shall serve affidavits containing the evidence-in-chief of any witness whom he intends to call at trial, including himself. Nowack may rely on his September 15, 2013 affidavit for part of his examination-in-chief;

(vii) Examinations of Auciello and Nowack have already occurred, although not in the context of a formal examination for discovery. The transcripts of those examinations may be used in the same manner as transcripts of examinations for discovery. The plaintiffs may conduct up to another 5 hours of examination of Nowack, such examination to take place during the weeks of January 20 or 27; Nowack may conduct up to 5 hours of examinations of all plaintiffs, in total, such examinations to take place during the weeks of January 20 or 27;

(viii) No later than Tuesday, February 11, 2014, the plaintiffs shall serve and file a trial record which contains (i) all pleadings, (ii) all affidavits exchanged by the parties on which they intend to rely as part of the evidence-in-chief of their witnesses, as well as (iii) a copy of these Reasons;

(ix) The parties shall attend a trial management conference before me on Thursday, February 13, 2014; and,

(x) The trial shall be set for three (3) days. The affidavits of a witness shall stand as his or her evidence-in-chief with the right of a party to conduct up to a further 45 minutes of viva voce examination-in-chief. The cross-examination of each witness shall not exceed two hours. While these are modest amounts of time, as I have already said, the evidence indicates that this is not a factually complex case.

[32] Three final comments. First, there have been times over the past few months when it was uncertain as to whether Mr. Sloan was representing Nowack. To eliminate any confusion about the service of documents on Nowack, I order that service of documents on the defendant may be effected by serving a copy on Mr. Sloan, together with sending an electronic copy by email to Nowack at srecordsworldwide@gmail.com, the email address used in my July 17 endorsement. If Nowack changes (or has changed) his email address, then it is up to him to notify plaintiffs’ counsel about his new email address.

[33] Second, given that Nowack has appeared before this Court on occasion without a lawyer, I wish to make it clear to him that he must comply with the directions for trial which I have given in these Reasons whether or not he is represented by counsel. Nowack is a sophisticated individual. The key issues are simple: what happened to the plaintiffs’ funds, and what consequences flow from such use of the funds in light of the contracts between the parties. The information about the former lies completely within the knowledge of Nowack. Accordingly, I will not entertain any requests by the defendant for the extension of due dates on the basis that Nowack is no longer represented by counsel. Also, the trial will proceed whether or not Nowack is represented by counsel.

[34] Third, Nowack failed to attend on certain scheduled examinations. As a result, the trial date which I have set is peremptory to Nowack. There will be no adjournment. The trial shall proceed whether or not Nowack decides to attend.

[35] As to the costs of the plaintiffs’ motion to appoint a receiver and the defendant’s motion to set aside the Default Judgment, I order that the costs shall be in the cause.

D. M. Brown J.

Date: December 5, 2013

[1] (2009), 78 C.P.C. (6th) 1228 (Ont. S.C.J.).

[2] Ibid., para. 16.

[3] 2012 ONSC 3185; affirmed 2013 ONCA 26.

[4] (2009), 62 C.B.R. (5th) 114 (Ont. S.C.J.).