ONTARIO

SUPERIOR COURT OF JUSTICE

COURT FILE NO.: CV-13-114384

DATE: 20140414

BETWEEN:

Quality Haulage & Farming Ltd. and Quality Excavating Ltd.

Plaintiffs

– and –

Laura Lea Karda

Defendant

Phillip W. Sutherland, for the Plaintiffs

Nick A. Porco, for the Defendant

HEARD: March 11, 2014

REASONS FOR DECISION

EDWARDS j.:

Overview

[1] A boyfriend/girlfriend, or possibly a common law relationship, within the context of a closely held corporation of which the primary shareholder is the boyfriend, has now generated a claim by the corporation against the girlfriend for monies allegedly taken without the permission of the boyfriend.

[2] The plaintiffs, in this case, obtained a Mareva injunction on an ex parte basis on May 23, 2013 from McDermot J., the effect of which was to freeze the defendant’s bank accounts into which the plaintiffs alleges that the defendant had deposited money that she had wrongfully obtained by improperly accessing the plaintiffs’ bank account. The motion before this court is to vacate the Mareva injunction on a number of bases. The primary grounds upon which the defendant moves to vacate the Mareva injunction are as follows:

(a) The plaintiffs did not make full, fair, and frank disclosure to the court when they obtained the Mareva injunction;

(b) The plaintiffs have not made out a strong prima facie case; and

(c) There is no evidence that the defendant has or will dissipate her assets.

The Facts

[3] The plaintiff corporations are construction companies involved in hauling and excavating. The president of both corporate plaintiffs is William Talbot (“Talbot”). The evidence at this stage of the proceedings would seem to suggest that Talbot has a grade five education, with a limited ability to read or write. The defendant, Laura Karda (“Karda”), had separated from her husband in September 2007. As a result of a divorce settlement reached with her ex-husband, Karda received approximately $471,000.

[4] Karda and Talbot met sometime in May 2009. Karda rented a home owned by Talbot. There is a dispute between the parties as to whether or not the relationship between Talbot and Karda moved beyond a boyfriend/girlfriend relationship to something akin to a common law relationship. This is an issue that ultimately this court, at this stage, cannot resolve. The defendant argues as part of her case seeking an order setting aside the Mareva injunction that Talbot failed to disclose to the court in his ex parte application that there had been a relationship between themselves that had it been disclosed may have resulted in the Mareva injunction not being granted. In Talbot’s affidavit, sworn on May 3, 2013, and which formed part of the motion record before McDermot J., Talbot stated that he had met the defendant in the Fall of 2009 when the defendant began renting a house owned by him on Kennedy Road. He goes on to state:

The plaintiff and the defendant became boyfriend and girlfriend in 2010 to about 2012.

[5] There is no dispute between the parties that Karda lent money to the plaintiffs over the course of a three year period. The source of the monies lent by Karda to the plaintiffs would appear to have come from her divorce settlement. There is a dispute in the evidence as to the exact amount of monies lent by Karda. The plaintiffs maintain that Karda loaned Quality Haulage & Farming Ltd. (“Haulage”) a total of approximately $634,000, while Karda maintains that she lent in excess of $1 million to the plaintiffs.

[6] Talbot had given Karda access to the plaintiffs’ bank accounts to facilitate the repayment of monies that had been lent by Karda. Karda has admitted that she withdrew a total of approximately $1,489,000 from the plaintiffs’ bank accounts. As such, there is a difference between what Karda admits she lent to the plaintiffs and what she withdrew - a total of approximately $474,000.

[7] Once the relationship between Talbot and Karda had terminated, Talbot became suspicious with respect to the balances in the plaintiffs’ bank accounts and ultimately retained the plaintiffs’ accountant to review the plaintiffs’ bank statements. As a result of that investigation, the plaintiffs allege that Karda had taken, without Talbot’s consent or knowledge, monies belonging to the plaintiffs. In Talbot’s affidavit of May 3, 2013, the plaintiffs allege that Karda had stolen in excess of approximately $854,000 from Haulage and approximately $77,000 from Quality Excavating Ltd. As a result of an accounting that has now been done using the documentation provided by Karda and giving the benefit of the doubt to the position advanced by Karda, there may have been $495,000 taken by Karda in excess of what she was owed.

[8] Karda maintains that whether it is $474,000 or $495,000, these funds were taken from the plaintiffs’ bank accounts to provide for a “nest egg” that Talbot and Karda could shelter from Canada Revenue Agency. Talbot denies any oral agreement between himself and Karda, pursuant to which he gave any authority to Karda to remove funds for such a “nest egg”. It goes without saying that the so-called “nest egg” funds are funds belonging to the corporate plaintiffs and do not belong to either Talbot or Karda. It is admitted by Karda that assuming such a “nest egg” type agreement had been reached between herself and Talbot, that Talbot would be entitled to one-half of those funds. There has been no effort made by Karda to return the so-called half interest that she admits Talbot has in the “nest egg” funds that she continues to maintain in her bank account.

Material Non-Disclosure

[9] Karda maintains that Talbot did not disclose, in the affidavit filed in support of the plaintiffs’ Mareva injunction that he was in a common law relationship with Karda. It is suggested in the factum, prepared on behalf of Karda, that Talbot was “aware at the very least that Ms. Karda would raise the nature of their relationship to a court had notice been provided in anticipation of the Mareva injunction.”

[10] It is also alleged that Talbot was aware of all of the issues relating to Karda’s withdrawals from the plaintiffs’ bank accounts between 2009 and 2013, which information was not disclosed to the court.

[11] There is no dispute that because of the extraordinary nature of the remedy provided by a Mareva injunction, that a party seeking such ex parte relief must make full and frank disclosure of all matters within his or her knowledge which are material – see Chitel et al. v. Rothbart et al. (1983), 1982 1956 (ON CA), 39 O.R. (2d) 513 (C.A.).

[12] I am not satisfied that Karda has made out her claim that Talbot did not make full and frank disclosure of all matters material within his knowledge that would support an argument that the ex parte injunction should be set aside on that basis alone. I am satisfied from a review of Talbot’s affidavit of May 3, 2013 that he did disclose to the court that there was a relationship between him and Karda. I am not prepared to accede to the argument made on behalf of Karda that Talbot should have known that Karda would have raised a common law type relationship as something that should have placed before the court when he obtained the ex parte relief that he did. I am also not satisfied, from a review of Talbot’s affidavit, that he did not disclose to the court the fact that Karda had signing authority on both the plaintiffs’ bank accounts and that there had, in fact, been monies lent by the Karda to Haulage.

[13] There is certainly no dispute that Talbot did not reveal to the court when the Mareva injunction was granted, that there had been some kind of a “nest egg” type of arrangement between himself and Karda. This is frankly not overly surprising, given that Talbot denies that there was any such an arrangement. Karda must therefore fail with respect to this aspect of her argument as I am satisfied that, in fact, there had been appropriate disclosure made on behalf of the plaintiffs by Talbot when his affidavit evidence was placed before the court to obtain the Mareva injunctive relief.

Dissipation of Evidence

[14] Amongst the four principles laid down in Chitel, supra, for an applicant to obtain a Mareva injunction, it is well established that the plaintiff, in addition to giving grounds for believing that the defendant has assets in Ontario, must also give some grounds for believing that there is a risk that the assets might be removed before the judgment or award is satisfied. In that regard, the Court of Appeal noted, at page 26 of the Chitel decision:

It seems to me that the heart and core of the Mareva injunction is the risk of the defendant removing his assets from the jurisdiction and so stultifying any judgment given by the courts in the action. If there is no real risk of this, such an injunction should be refused; if there is a real risk, then if the other requirements are satisfied the injunction ought to be granted. If the assets are likely to remain in the jurisdiction, then the plaintiff, like all others with claims against the defendant, must run the risk common to all, that the defendant may dissipate his assets, or consume them in discharging liabilities and so leave nothing with which to satisfy any judgment.

And at page 30 states:

Turning finally to item (iv) of Lord Denning’s guidelines – the risk of removal of these assets before judgment – once again the material must be persuasive to the court. The applicant must persuade the court by his material that the defendant is removing or there is a real risk that he is about to remove his assets from the jurisdiction to avoid the possibility of a judgment, or that the defendant is otherwise dissipating or disposing of his assets, in a manner clearly distinct from his usual or ordinary course of business or living, so as to render the possibility of future tracing or the assets remote, if not impossible in fact or in law.

[15] The removal or dissipation of assets is at the core of why a court allows for such extraordinary relief in the nature of a Mareva injunction. Fundamentally, the rule has always been in civil cases that the plaintiff cannot execute before judgment. The Mareva type relief is the exception to this rule. In Aetna Financial Services v. Feigelman 1985 55 (SCC), [1985] 1 S.C.R. 2, the Supreme Court of Canada set aside the granting of a Mareva injunction, despite the fact Aetna was ceasing to carry on business within the Province of Manitoba. In this regard, the Supreme Court of Canada stated:

There is still, as in the days of Lister, a profound unfairness in a rule which sees one’s assets tied up indefinitely pending trial of an action which may not succeed, and even if it does succeed, which may result in an award of far less than the caged assets. The harshness of such an exception to the general rule is even less acceptable where the defendant is a resident within the jurisdiction of the court and the assets in question are not being disposed of or moved out of the country or put beyond the reach of the courts of the country. This sub-rule or exception can lead to serious abuse. A plaintiff with an apparent claim, without ultimate substance, may, by the Mareva exception to the Lister rule, tie up the assets of the defendant, not for the purpose of their preservation until judgment but to force, by litigious blackmail, a settlement on the defendant which, for any one of many reasons, cannot afford to await the ultimate vindication after trial. I would, with all respect to those who have held otherwise conclude that the order should not have been issued under the principles of interlocutory quia timet orders in Canadian courts functioning as they do in federal system.

[16] The evidence before the court, when the plaintiffs obtained the Mareva injunction, was in the form of Talbot’s affidavit sworn on May 3, 2013. In that affidavit, dealing with the question of the defendant dissipating her assets, Talbot swore as follows:

I am fearful that the defendant will remove the money she withdrew and all her assets out of the province or make it very difficult to find the monies and have the monies returned back to Quality Haulage and Quality Excavating. In effect, I am fearful that the defendant will dissipate all her assets out of the Province of Ontario and make it impossible to recover the monies that she improperly took from Quality Haulage and Quality Excavating.

[17] I have no hesitation in concluding that this type of evidence falls well short of the type of evidence contemplated by the Supreme Court of Canada in Aetna and in Chitel. There has to be more evidence other than a “fear” that the defendant will dissipate assets. There has to be some evidence to leave the court with no other alternative but to freeze the defendant’s assets. To do otherwise, would be to allow execution before judgment.

Fraud as an Exception and Strong Prima Facie Case

[18] In the plaintiffs’ statement of claim, the plaintiffs allege, amongst other things, that the “actions of the Defendant were dishonest, a misappropriation, fraudulent, and a defalcation. The Defendant has fraudulently removed monies from the bank accounts of Quality Haulage and Quality Excavating.”

[19] As previously noted, while there is a dispute between the parties as to the extent of the monies removed from the plaintiffs’ bank accounts, over and above those amounts that would be due and owing to Karda on account of monies lent by Karda to the plaintiffs, there is no dispute that, in fact, there is an overpayment to Karda in the amount of at least $474,000 (based on her own evidence. Karda maintains that these funds are being held by her as part of a “nest egg” agreement that she says was agreed to with Talbot in an effort to “shelter” funds from the eyes of the Canada Revenue Agency. The “nest egg” agreement is disputed by Talbot. Regardless of whether or not such a “nest egg” agreement was ever concluded between Talbot and Karda, the fact still remains that those funds are not funds that belong to either Karda or Talbot, but rather are funds that belong to the plaintiffs.

[20] There is a dispute in the authorities as to whether or not there is an exception to the rule which requires the moving party seeking Mareva type relief to put before the court evidence with respect to the dissipation of assets by the defendant. This so-called “fraud exception” is reviewed at length in a recent decision of Strathy J. in Sibley & Associates LP v. Ross et al., 2011 ONSC 2951, 106 O.R. (3d) 494. I do not propose to review this history, which is more than adequately set forth in the reasons of Strathy J. What is particularly important from a review of the decision of Strathy J. is his conclusion at paragraph 63 where he states:

Rather than carve out an “exception” for fraud, however, it seems to me that in cases of fraud, as in any case, the Mareva requirement that there be risk of removal or dissipation can be established by inference, as opposed to direct evidence, and that inference can arise from the circumstances of the fraud itself, taken in the context of all the surrounding circumstances. It is not necessary to show that the defendant has brought an air ticket to Switzerland, has sold his house, and has cleared out his bank accounts. It should be sufficient to show that all the circumstances, including the circumstances of the fraud itself, demonstrate a serious risk that the defendant will attempt to dissipate assets or put them beyond the reach of the plaintiff.

[21] I am satisfied from a review of all of the evidence that it is open to this court to draw an inference from the circumstances of the transactions involving the defendant, that there is a prima facie case of fraud made out as against Karda vis-à-vis the monies owned by the plaintiffs. The plaintiffs are corporate entities. The monies removed by Karda came from the plaintiffs’ bank accounts and not Talbot’s bank accounts. If there was such a “nest egg” arrangement between Karda and Talbot, an issue which this court cannot resolve on the evidence before it, the fact remains that such an arrangement is possibly fraudulent in of itself, given that the intent of the arrangement would have been to shelter monies owned by the plaintiffs from the Canada Revenue Agency.

[22] As such, I have come to the conclusion that this is one of those types of cases in which the evidence of the alleged fraud is so strong that together with all of the surrounding circumstances, this court is prepared to accept, by way of inference, that there is a real risk that Karda will attempt to dissipate or hide her assets or remove them from the jurisdiction. This is particularly so, given the fact that the monies at issue are liquid and easily transferrable at the flick of a switch on the internet.

[23] Karda’s motion to set aside the Mareva injunction is therefore dismissed. As to the question of costs, at the conclusion of the argument, both counsel agreed that in the event they were successful they were looking for $35,000 in costs and in the event they were unsuccessful both counsel agreed that they would expect to pay $20,000. The fundamental principle in fixing costs is determined by what the losing party could reasonably expect to pay in costs – see Boucher v. Public Accountants Council for the Province of Ontario, 2004 14579 (ON CA), 71 O.R. (3d) 291 (Ont. C.A.). Under the circumstances, given the submissions of counsel at the completion of argument, I am ordering that Kardo pay to the plaintiffs the sum of $20,000 in costs, payable within thirty days.

Justice M.L. Edwards

Released: April 14, 2014