Court File and Parties

COURT FILE NO.: CV-13-5380-00 DATE: 20140219 SUPERIOR COURT OF JUSTICE – ONTARIO

RE: Cardinal Meat Specialists Limited, Plaintiff AND: Zies Foods Inc., Caitlin International Trading Inc., Bill Jarvis, Eric Jarvis, Scott Zies and Louise Zies, Defendants

BEFORE: Ricchetti, J.

COUNSEL: A. Hamilton and J. Martin, for the Plaintiff ("Cardinal Meats") K. Menear and James Fu, for the Defendants Zies Foods Inc. ("Zies Foods"), Scott Zies and Louise Zies (collectively "Zies Defendants") M. Roefe for the Defendants Caitlin International Trading Inc. ("Caitlin"), Bill Jarvis and Eric Jarvis ("Caitlin Defendants")

HEARD: February 13, 2014

ENDORSEMENT

THE MOTION

[1] This is a motion by the Plaintiff seeking a Mareva injunction.

[2] There are two distinguishing features of this motion. First, the Caitlin Defendants do not oppose the relief sought. Secondly, this motion was heard on notice to all the defendants and on a full record, including extensive cross-examinations of some of the affiants and Rule 39 examinations, Rules of Civil Procedure, R.R.O. 1990, O. Reg. 194. However, it is important to note that the Zies Defendants did not cross-examine the Cardinal Meat affiants.

[3] The Zies Defendants oppose the motion.

THE FACTS

[4] Cardinal Meats is in the business of processing meat products.

[5] Scott Zies and Louise Zies ("the Zies'") are principals of Zies Foods. Both are shareholders. The other shareholder of Zies Foods is the S.R. Zies Family Trust. Manufacturer's Direct Foods is another corporation in which the Zies' have a 50% interest.

[6] Eric Jarvis is the principal of Caitlin. He sometimes goes by the name of Bill Jarvis. Caitlin operates out of a residential home and has no business assets such as transportation, warehouse or other assets useful in the meat supply or processing business.

[7] Scott Zies worked at Cardinal Meats from the early 1980's until about 1998. He left for a short time but returned in 2000. Scott Zies, through Zies Foods, became the exclusive purchasing agent for Cardinal Meats.

[8] Scott Zies denies he was an employee directly or indirectly through his corporation. However, it is clear that Cardinal Meats paid Scott Zies, through Zies Foods an annual salary. Cardinal Foods had rejected a commission arrangement when Scott Zies returned to Cardinal Meats in 2000.

[9] Scott Zies had the discretion to source the meats needed by Cardinal Meats in its business and the discretion to negotiate a price for the meat with the supplier. Upon being advised of the transaction Scott Zies had negotiated with the supplier, Cardinal Meats would issue a purchase order to the supplier in accordance with the terms Scott Zies had negotiated. There is not a single meat purchase transaction, in the motion record, over the many years leading up to August 2013 where Cardinal Meats did anything but proceed in accordance with the terms Scott Zies had negotiated with the meat supplier. In my view, based on the record before me, whether or not Scott Zies was an employee of Cardinal Meat, directly or through Zies Foods, he had the complete discretion on behalf of Cardinal Meats to source and fix the price for the purchase of meats. As a result, Scott Zies had a fiduciary duty to Cardinal Meats to act in Cardinal Meats’ best interests when dealing with suppliers and negotiating prices for the meats to be purchased by Cardinal Meats.

[10] Unfortunately, Scott Zies had his own interests in mind when negotiating and arranging Cardinal Meats' supply. An e-mail chain in the motion record described Scott Zies' scheme. Scott Zies would negotiate with a meat supplier such as Export Packers, a quantity of meat and a price of $1.95 per pound. Scott Zies would then have Export Packers invoice Caitlin for the meat at the specified price of $1.95 per pound. Scott Zies would then tell Cardinal Meats that it had finalized the supply of meats with Caitlin at the price of $2.15 per pound. Export Packers would deliver the meat directly to Cardinal Meats. Cardinal Meats would pay Caitlin $2.15 per pound. Caitlin would pay Export Packers $1.95 per pound. Caitlin and Zies Foods would split the $.20 per pound. On one shipment, the $.20 per pound would be approximately $50,000.

[11] This system of negotiation and payment is admitted by Eric Jarvis. Sometimes, Caitlin would send Scott Zies' share to Manufacturers' Direct Food - the company which Louise Zies had a 50% interest.

[12] The monies would flow through to Zies Foods or Manufacturer's Direct Foods. From Zies Foods, some of the monies would be expended and a significant portion would go to the Zies Family Trust. From 2001 to 2012 this amounted to approximately $1,800,000. The monies would be distributed out from the Zies Family Trust to Scott Zies, Louise Zies and their children.

[13] From 2004 to August 2013, this mark up from Export Packers alone amounted to approximately $600,000. This does not include other suppliers which Scott Zies used or may have used.

[14] When confronted in August 2013, Scott Zies denied receiving monies from Caitlin and tried to suggest that Caitlin was adding value to the transaction. The difficulty with this is that Eric Jarvis has admitted that substantial monies were paid to Zies Foods (a fact which is not in dispute). In addition, there is no evidence Caitlin did anything to warrant an increase in price. Neither the Zies Defendants nor the Caitlin Defendants have suggested any value added by Caitlin. Confronted with this evidence, Scott Zies suggested he would work off the amount he owed Cardinal Meats. This was not acceptable to Cardinal Meats.

[15] This action was commenced by Cardinal Meats.

[16] Scott Zies now takes the position that he was a commissioned broker and his arrangements with Caitlin were for him to receive his commission on the meat purchase. The difficulty with this position is that Scott Zies did not challenge Cardinal Meat's evidence that his salary or pay from Cardinal Meats was based on him expressly not receiving any commissions on the meat purchases. More importantly, Scott Zies does not even suggest that Cardinal Meats was aware of his commissioned arrangement - that Scott Zies would indirectly receive commissions for the meat purchases. If Scott Zies was a commissioned broker for Cardinal Meats, why did he need to keep his commissions secret from Cardinal Meats? No explanation is offered by Scott Zies. If Scott Zies was a commissioned broker, why would Scott Zies surreptitiously use Caitlin, essentially a basement office, to split his commissions and put his commissions through without showing his name? This was also not explained by Scott Zies.

[17] Scott Zies' comments after confronted with the results of Cardinal Meats investigation was nothing short of an admission that his fraudulent scheme had been found out and a desire to repay Cardinal Meats. It was not an apology but rather an admission that he had a legal obligation to repay Cardinal Meats for monies he improperly received.

[18] In his affidavit materials, Scott Zies makes bald allegations which did not specifically deny Cardinal Meats’ allegations or provide any support for his assertions that he did nothing wrong. For example, while expressly not denying Cardinal Meats detailed assertions that Scott Zies was paid a significant salary (higher than the prior purchasing manager) and it was agreed between Scott Zies and Cardinal Meats that there would be no commissions on meat purchases, Scott Zies' position was that "they didn't agree that he couldn't make commissions." However, Scott Zies provides no factual basis for this statement or how this assertion makes any sense with the evidence before this court.

[19] While this issue will be ultimately decided at trial, the fraud or breach of fiduciary duty committed on Cardinal Meats is clear and no valid or even credible explanation has been advanced by the Zies Defendants. The evidence before me does not suggest that there are reasonable defences on the merits. Scott Zies' activities and those of Zies Food in the motion record establish an overwhelming prima facie case of fraud where the monies were funnelled through Caitlin, through Zies Foods, through the Zies Family Trust and Manufacturer's Direct, to Scott Zies, Louise Zies and their family.

[20] As a result, I have no hesitation concluding that a very strong prima facie case of fraud, conspiracy to defraud and breach of fiduciary duty has been made out on the materials before me with respect to the Zies Defendants. I will set out below why I arrive at this conclusion regarding Louise Zies as the Zies Defendants make separate submissions regarding her.

[21] Let me go on to deal with other significant factual issues in the motion record before me.

Lack of Documentation

[22] The Zies Defendants were asked to produce numerous documents, many of which are relevant business records and would have been required to be maintained for tax and other purposes, but the Zies Defendants deny that virtually all of these documents do not exist or are in their possession.

[23] The records from which the fraudulent scheme was discovered were from Export Packers and eventually, from Caitlin. While some of the documentation produced by Export Packers shows Scott Zies negotiating the meat purchases through e-mail as late as the summer of 2013, he has produced no such documentation.

[24] What little the Zies have produced is troubling. The Zies produced the ledger for Zies Foods and the bank statements for Zies Foods. Given the allegations and the evidence in the Cardinal Meats’ affidavits, these are without question clearly relevant and central to the allegations. The difficulty is that the Zies Foods’ ledger and the Zies Foods’ bank accounts have many lines redacted. It is impossible to tell what assets came in and out of the company since the balance column is completely redacted. The Zies Defendants say the items redacted are irrelevant to the issues before the courts. In my view, there are highly relevant to the claim. Further, the complete un-redacted documents are highly relevant to the claims by the Zies Defendants since they alleged they have disclosed all their assets and have dissipated none of their assets. These assertions by the Zies Defendants have absolutely no credibility when they choose to produce only a portion of the financial documentation at the center of the dispute.

Scott Zies and Zies Foods

[25] I have reviewed Scott Zies’ affidavits. I agree with the concerns set out in the Cardinal Meats factum at paragraphs 91 to 105 regarding the language used by Scott Zies in his affidavits. Simply put, the affidavits either contain bald statements with no support for such statements or language which does not directly dispute or even engage the very serious allegations of fraud made by Cardinal Meats.

Louise Zies

[26] I find that Louise Zies was aware of the fraudulent scheme. She was an equal shareholder of Zies Foods. She received income in some years from Zies Foods. She swore in her affidavit that she had no role in Zies Foods but the corporate records disclose otherwise.

[27] Louise Zies is a trustee of the Zies Family Trust which receives its monies from Zies Foods. The Zies Family Trust has paid out approximately $1.8 million dollars in the past 11 years. As a trustee she would know this. In 2012 alone Louise Zies received $354,000 from the Zies Family Trust.

[28] Louise Zies did not disclose the existence of the Zies Family Trust in her affidavits to this court at the return of the motion on December 12, 2013 when the Zies Defendants sought to proceed to have the motion proceed on its merits. When an undertaking was given to produce the 2013 records for Zies Family Trust none have been forthcoming despite its year end being January 31. The explanation for not answering this undertaking was not satisfactory.

[29] While purporting to have disclosed all her assets, she failed to disclose the existence of Manufacturer's Direct Foods or that she owned 1/2 of the shares.

[30] There are numerous inconsistencies in Louise Zies' affidavits and cross-examination that make it difficult to put any weight on the statements in her affidavits.

[31] Counsel's suggestions that the corporate records are wrong and these are just technicalities, is far from explaining Louise Zies' involvement in the fraudulent scheme over the years.

[32] The claim against Louise Zies is for unjust enrichment and a strong prima facie case is made out on the record before me.

Dissipation of Assets

[33] For the reasons set out above, little or no reliance can be placed on the affidavits of Scott and Louise Zies.

[34] I have grave concerns that the Zies' will place assets out of the reach of Cardinal Meats unless a Mareva injunction is granted.

New Bank Account

[35] Shortly after the receipt of the motion materials, the Zies opened a new bank account, in case the court had granted the injunction on December 12, 2013. This new bank account was not disclosed to the court on December 12, 2013.

RRSP

[36] The Zies started to cash out their RRSP in the amount of $40,000 in November 2013. It is not clear what "started" means.

Zies Foods

[37] As stated above, the bank statements and ledger for Zies Foods have been redacted. Therefore, it is impossible for this court to determine what Zies Food's assets are and whether they have been the subject of dissipation.

[38] The statement that "Zies Foods holds no properties or assets in Ontario, other than a business bank account" with a balance of $11,000 and $51,000 overdrawn on a line of credit is hard to accept given the redacted ledgers and bank statements.

[39] Given that these documents are within the control of the Zies Defendants, I draw an adverse inference that the disclosure of the complete documents would not have been favourable to the Zies Defendants.

Zies Family Trust

[40] Documentation as to 2013 was not provided despite the undertaking given. Counsel says that the Trust was simply a flow through to the individuals. That may be so, but documentation showing that the Zies Family Trust has no assets would have assisted. More importantly, did any funds flow through to the Zies Defendants from the Zies Family Trust on January 31, 2014 is not answered by the Zies Defendant's materials. Given that the amount which flowed through the Zies Family Trust in the prior year was almost $500,000, this omission is of serious concern.

Refusal to produce tax information for Louise Zies and Zies Foods

[41] This information was refused to be produced.

996844 Ontario Inc.

[42] This corporation is shown as being controlled by Scott Zies' mother. It provides money to Scott Zies. This corporation was not disclosed by the Zies Defendants. How this corporation got its money is unknown. Given that it provides "loans" or "advances" to Scott Zies and claims outstanding loans from the Zies Defendants, there is a great deal of suspicion regarding this corporation and its activities.

1966 Corvette Sold

[43] Scott Zies had a vintage corvette. After the confrontation in August 2013 Scott Zies listed it anonymously. Then he sold it. He says the monies were deposited into Zies Foods and were spent on expenses. Given the redaction to Zies Foods' ledger and bank statement, this raises further suspicions.

Other Vehicles sold

[44] Scott Zies had two older Mercedes and a Porsche. After the confrontation in August 2013 Scott Zies sold them with the closing to be just before the December 12, 2013 hearing. Again, he says the monies were spent on expenses.

Camp Property

[45] Scott Zies owns a hunt camp property, the equity in it is unclear. In October 2013, Scott Zies listed for sale a part of the hunt camp property.

No liquid assets remain

[46] Scott Zies and Louise Zies own a home valued at $1,400,000 but have a significant line of credit against the home in the amount of $935,000 - surprisingly not registered against the home. They own a cottage in Hunstville value at approximately $300,000. They own a condominium on Charles St in Toronto which has little equity given the amount of the mortgage. Scott owns a share in a lake lodge up north.

[47] Despite the number of vehicles and extensive properties owned by the Scott and Louise Zies and the substantial amount of monies they received (almost $500,000 from the Zies Family Trust alone), their bank accounts have no significant balances. They have other RRSP, RESP and TFSA accounts but the balance in total is approximately $25,000.

Paragraph 146 of Cardinal Meat's Factum

[48] Cardinal Meats Factum at para. 146 raises a number of additional facts which raise the suspicion that there is an attempt to conceal the assets of the Zies Defendants.

THE ANALYSIS

Requirements of a Mareva Injunction

[49] As stated above, I am satisfied that Cardinal Meats has established an overwhelming case of fraud and breach of fiduciary duty against the Zies Defendants.

[50] There are five requirements for a Mareva injunction:

(a) the plaintiff must make full and frank disclosure of all material matters within his or her knowledge;

(b) the plaintiff must give particulars of the claim against the defendant, stating the grounds of the claim and the amount thereof, and the points that could be fairly made against it by the defendant;

(c) the plaintiff must give grounds for believing that the defendant has assets in the jurisdiction;

(d) the plaintiff must give grounds for believing that there is a real risk of the assets being removed out of the jurisdiction, or disposed of within the jurisdiction or otherwise dealt with so that the plaintiff will be unable to satisfy a judgment awarded to him or her; and

(e) the plaintiff must give an undertaking as to damages.

[51] A Mareva injunction grants the plaintiff a far reaching remedy and causes financial upheaval to the defendant(s) by tying up assets indefinitely, before the plaintiff's claim has been determined on its merits. I recognize that a Mareva injunction should only be granted in exceptional and limited circumstances. See: Aetna Financial Services v. Feigelman, 1985 CanLII 55 (SCC), [1985] 1 SCR 2.

[52] There is no issue that Cardinal Meats has made full and frank disclosure. In an unusual twist, it is the respondents, the Zies Defendants which have failed to produce relevant documents within their control and possession.

[53] As for (b), (c) and (e), there is no issue that Cardinal Meats has met these requirements.

[54] The issue raised by the Zies Defendants is that there is no "grounds for believing that there is a real risk of the assets being removed from the jurisdiction." The Zies Defendants submit that there is no evidence to support this element of the test for a Mareva injunction. I disagree. The evidence is very clear that there has been some dissipation of assets to date and there is a very serious risk that such dissipation of assets, outside the ordinary course of business or payment or living expenses, will continue unless a Mareva injunction is granted. This coupled with the lack of disclosure by the Zies Defendants, makes this a clear case that a Mareva injunction is necessary to ensure that Zies Defendants do not dissipate whatever assets they have remaining.

[55] The Zies Defendants suggest that the Zies Defendants’ assets have been sold and the monies used for living expenses. I have difficulty accepting this bald statement particularly where the Zies Defendants have not made full disclosure of all their assets and all financial transactions in Zies Foods.

[56] In these circumstances, it is necessary that the Zies Defendants are required to give a statement under oath of all assets that they are legally or beneficially entitled to directly or indirectly.

[57] As for the Zies Defendant's submission with respect to the Apology Act, 2009, S.O. 2009, c 3, this court is not making a determination of liability. That is left to the trial judge. This court is simply making a determination as to whether the Mareva injunction should be issued at this time based on the record before it. In any event, the statement by Scott Zies that he wanted to continue to work for Cardinal Meats and use that to work off the amount lost through Scott Zies' action was not "an expression of sympathy or regret, a statement that a person is sorry or any other words or actions indicating contrition or commiseration."

CONCLUSION

[58] The order has issued in the form signed by me.

COSTS

[59] Any party seeking costs shall serve and file written submission on entitlement and quantum within two weeks of the release of these reasons. Written submissions shall be limited to 3 pages, with attached Costs Outline and any authorities.

[60] Any responding party shall have one week thereafter to serve and file responding submissions. Written submissions shall be limited to 3 pages with any authorities relied on attached.

[61] There shall be no reply submissions without leave.

Ricchetti, J.

Date: February 19, 2014