2018 ONSC 1365

COURT FILE NO.: 02-CV-239811-00 & 00-CV-198836

DATE: 20180406

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

Marvelous Mario’s Inc., Snack Crafters International Inc. 788986 Ontario Inc., 601552 Ontario Ltd. and Mario Parravano

Plaintiffs

– and –

St. Paul Fire and Marine Insurance Co.

Defendant

– and –

Sweet-East Inc., Bakemates International Inc. formerly 1317613 Ontario Ltd., Confectionately Yours Bakeries Inc., Marmac Holdings Inc., formerly 1039411 Ontario Ltd., 788986 Ontario Ltd., Mario Parravano and Marvelous Mario’s Inc.

Plaintiffs

– and –

St. Paul Fire and Marine Insurance Co.

Defendant

COUNSEL:

Maurice J. Neirinck for the Plaintiffs

David A. Tompkins, Trevor J. Buckley, for the Defendant

HEARD: November 27, 28, 29 and 30, 2017

REASONS FOR JUDGMENT

Akbarali, J.

Introduction

[1] No one wants to eat a cereal bar contaminated by Indian meal moths. The plaintiffs in these actions state that an Indian meal moth contamination was the beginning of the end of their successful baked goods business enterprise.

[2] These actions, which were tried together before me, seek damages for losses that the plaintiffs state they suffered as a result of an Indian meal moth infestation and its sequelae, including the bankruptcy of certain companies and the alleged wrongful disposition of assets by the receiver. They state that the losses they claim were insured by the defendant, St. Paul Fire & Marine Insurance Company.

[3] The issues before me are threshold coverage issues. If the losses are found to be covered losses, another trial will be held to determine quantum.

The Plaintiffs and their Claims

[4] To understand the issues raised in these actions, it is necessary to understand the plaintiffs, their interrelationship, and the claims made in the two actions.

[5] Fundamentally, the corporate plaintiffs were engaged in different aspects of a baked goods business enterprise that supplied baked goods and cereal bars to supermarkets and coffee shops in North America. The corporations were owned, directly or indirectly, by the individual plaintiff Mario Parravano and his wife, a non-party to the actions, Barbara Parravano.

[6] The first action was commenced in 2000 by eight plaintiffs: Sweet-Ease Inc., Bakemates International Inc. (formerly 1317613 Ontario Ltd.), Confectionately Yours Inc., Confectionately Yours Bakeries Inc., Marmac Holdings Inc. (formerly 1309411 Ontario Ltd.), 788986 Ontario Ltd., Mario Parravano, and Marvelous Mario’s Inc.

[7] Although this action was referred to before me as “the first action”, that is a misnomer. There was an action that predated it. An identical action was commenced by five of the same plaintiffs in the first action: Sweet-Ease Inc., Bakemates International Inc., Confectionately Yours Inc., Confectionately Yours Bakeries Inc., and Marmac Holdings. These five plaintiffs make up the Bakemates group of companies. Bakemates International was a holding company. It owned the shares of the other four companies. Confectionately Yours Bakeries manufactured and sold baked goods. Confectionately Yours Inc. owned the property in which Confectionately Yours Bakeries operated. Marmac Holdings owned another property. Sweet-Ease was an operating company through which some baked goods were sold.

[8] After commencing their original action, the Bakemates group went into receivership. After the receivership commenced, the first action was issued, although without the involvement of the receiver and with the addition of the three new plaintiffs.

[9] The first action alleges that an Indian meal moth infestation in cereal bars resulted in losses, including business interruption losses, which are covered under a policy of insurance. There is no question that infestation was a covered peril under the policy. Proofs of loss were filed by Confectionately Yours Inc., and included back up documentation relating to Confectionately Yours Inc. and Sweet-Ease. No proofs of loss were filed by any other plaintiff.

[10] Eventually, the receiver and St. Paul settled the Bakemates companies’ claims under the policy and the action was discontinued by those plaintiffs.

[11] The remaining plaintiffs, Mario Parravano, Marvelous Mario’s and 788986 Ontario Limited, argue that they have valid claims under the policy that were never settled. The corporate plaintiffs’ claims relate primarily to lost lease income for space and equipment they state they provided to the Bakemates group of companies and for which the Bakemates group of companies could not pay because they were suffering losses arising out of the Indian meal moth infestation. Mr. Parravano’s claim relates to a $950,000 bonus he states he was paid by, and loaned back to, one of the Bakemates companies and for which he never received repayment.

[12] The second action was brought two years later by Marvelous Mario’s Inc., Snack Crafters International Inc., 788896 Ontario Inc., 601552 Ontario Ltd., and Mario Parravano. This action relates to equipment the plaintiffs state they owned but which was wrongfully handled by the receiver of the Bakemates group of companies. These plaintiffs state that, in completing an asset sale of the Bakemates companies’ businesses as a going concern, certain assets the plaintiffs owned were passed by the receiver into the hands of the purchaser, Amore Sweets. They claim they suffered covered property losses and covered business interruption losses due to the theft of their assets.

[13] St. Paul argues that the claims advanced in the first action are not covered losses because the policy covers only direct losses, and the plaintiffs’ losses are not direct. To the extent the plaintiffs claim the peril is not the moth infestation, but the receivership of the Bakemates companies, St. Paul argues that the receivership is not a covered peril.

[14] In the second action, St. Paul argues that the claims were brought outside the relevant contractual limitation period and that the claims are vitiated due to false representations made in invoices in support of the claims. The vitiation defence is the subject of a motion to amend the defence. The plaintiffs dispute whether vitiation can properly be raised at this phase of the trial.

[15] In both actions, St. Paul argues that the proofs of loss are deficient, the plaintiffs are not entitled to relief from forfeiture for the deficient proofs of loss due to the conduct of Mr. Parravano, and that the claims are an abuse of process because key elements of them were decided by other courts in the context of the receivership of the Bakemates companies.

[16] In addition, the plaintiffs seek to amend their claim in the second action to plead discoverability as it relates to the theft of the assets.

Issues

[17] The issues raised by the parties before me were the subject of written discussion prior to the trial. This was important, given the trial’s bifurcated nature. Each party offered their own articulation of the issues, but despite differences in the wording, the issues raised were the same. I set out below my articulation of the issues the parties identified in advance and which they argued at trial[^1]:

a. Are the losses alleged by the plaintiffs in the first action “direct losses” insured pursuant to the policy?

b. To the extent the losses alleged by the plaintiffs in the first action arise from the receivership of the Bakemates group of companies, is the receivership an insured peril under the policy?

c. Are the claims in the second action barred for having been commenced outside of the one year limitation period specified in the policy?

d. Are the plaintiffs’ claims in both actions barred because of failure to provide adequate proofs of loss? If so, should the plaintiffs be granted relief from forfeiture?

[18] In addition, the two new issues raised by St. Paul on the trial before me are as follows:

a. Are the plaintiffs’ actions an abuse of process of the court by reason of earlier court decisions in the Bakemates’ receivership proceedings?

b. Are the plaintiffs’ claims in the second action vitiated due to allegedly fraudulent invoices produced in these proceedings?

The First Action: The Scope of the Policy

[19] The insurance policy at issue provides a broad scope of insurance.[^2]

[20] On its “Summary of Coverages – Declarations” page the policy sets out applicable riders, deductibles and premiums for: (i) real property, including a 24 month indemnity period for rental income; (ii) contents, including consequential loss, valuable papers, and personal effects; (iii) money, notes etc.; (iv) property at any unnamed location; (v) property in transit; (vi) gross profits for a 24 month indemnity period; (vii) professional fees; (viii) employee dishonesty; (ix) money and securities; (x) liability; (xi) non-owned automobiles; (xii) hired automobiles; (xiii) medical payments; and (xiv) employee benefits program. Most of these are not relevant to this action but I set them out here to assist in understanding the scope of the contemplated coverages in the policy. I review the relevant coverage provisions below.

[21] The policy states “…WHILE THIS POLICY PROVIDES COVERAGE AGAINST MOST PERILS, IT DOES NOT COVER EVERYTHING” [emphasis in original].

[22] Two of the riders (Nos. 2 and 4) upon which the plaintiffs rely insure “against Direct Loss resulting from any Peril [except for certain exclusions, none of which apply here].” Despite the capitalization of the terms, they are not defined in the policy.

[23] A marketing document delivered by the plaintiffs’ insurance broker explains a key feature of this insurance policy is that it insures against “direct loss”, not the more common “direct physical loss”. It notes that an insured’s property need not suffer physical damage to trigger insurance coverage. The document gives an example: “leasehold improvements not physically damaged but left behind after a lease was cancelled because of substantial damage in some other section of a multi-unit complex due to the occurrence of an insurance peril would be covered by our policy” [emphasis in original].

[24] The plaintiffs also rely on Rider 5A to the policy which insures business interruption loss. That rider provides that ”if the business carried on by the Insured shall be interrupted or interfered with by a Peril Insured against, the Insurer will pay the Insured the amount of loss resulting”.

The First Action: Are the losses claimed “direct losses” under the policy?

[25] The plaintiffs argue that the peril insured against is the Indian meal moth infestation. They argue that they have suffered a direct loss because of it. The Indian meal moth infestation caused lost sales to the Bakemates group of companies. The plaintiffs allege that those companies owed lease payments to the plaintiffs, and in the case of Mr. Parravano, a $950,000 loan. As a direct loss of sales because of the infestation, those companies could not make the payments owing to the plaintiffs. As a result, the plaintiffs state they directly suffered those losses as a result of the Indian meal moth infestation.

[26] The evidence discloses that after the Indian meal moth infestation, the companies continued to operate for a period of time. Other accounts receivables owed by the Bakemates companies were paid, but the amounts owing to the plaintiffs were not.

[27] As I have noted, St. Paul argues that the plaintiffs did not suffer direct loss and, in the case of the receivership, that it is not an insured peril. No other argument was made as to the inapplicability of the riders invoked by the plaintiffs.

[28] The first question identified by the parties is whether the loss alleged by the plaintiffs is direct.

[29] In interpreting the insurance policy to answer this question, I must bear in mind that coverage provisions are construed broadly, and exclusions are construed narrowly: 942325 Ontario Inc. v. Commonwealth Insurance Co. (2005), 2005 CanLII 22135 (ON SC), 75 O.R. (3d) 653, [2005] O.J. No. 2607 (Ont. S.C.J.), at para. 14, citing Reid Crowther & Partners Ltd. v. Simcoe & Erie General Insurance Co., 1993 CanLII 150 (SCC), [1993] 1 S.C.R. 252, at para. 33.

[30] The words “direct loss” are intended to limit the scope of coverage available under the policy. The Ontario Court of Appeal has held that the words “emphasize that the cause of the loss or damage covered by the contracts must be a “proximate cause.””: Ford Motor Company of Canada Ltd. v. Prudential Assurance Co. Ltd. (1958), 1958 CanLII 342 (ON CA), 14 D.L.R. (2d) 7, [1958] O.J. No. 657 (Ont. C.A.), at para. 16.

[31] The Supreme Court of Canada explained proximate cause in Sherwin-William Co. v. Boiler Inspection and Insurance Co., 1949 CanLII 60 (SCC), [1950] S.C.R. 187, at para. 59. Proximate cause may not be the last cause, but is the effective or dominant cause of the loss. The proximate cause is the direct and immediate cause. In substance, the proximate cause causes the damage.

[32] When determining whether the claimed losses are direct losses, I must also bear in mind the Supreme Court of Canada’s holding in Consolidated Bathurst Export Ltd. v. Mutual Boiler & Machinery Insurance Co., 1979 CanLII 10 (SCC), [1980] 1 S.C.R. 888, at para. 26 (cited with approval in Non-Marine Underwriters, Lloyd’s of London v. Scalera, [2000] 1 S.C.R. 551 at para. 71, 2000 SCC 24): the normal rules of construction lead a court to “search for an interpretation which, from the whole of the contract, would appear to promote or advance the true intent of the parties at the time of entry into the contract.” Unrealistic results or results which would not be contemplated in the commercial atmosphere in which the insurance was contracted should be avoided. “[A]n interpretation which defeats the intentions of the parties and their objectives in entering into the commercial transaction in the first place should be discarded in favour of an interpretation of the policy which promotes a sensible commercial result”. “Said another way, the courts should be loath to support a construction which would either enable the insurer to pocket the premium without risk or the insured to achieve a recovery which could neither be sensibly sought nor anticipated at the time of the contract.”

[33] In my view, the losses claimed by the plaintiffs in the first action are not direct losses. I reach this conclusion for the following reasons:

a. The infestation is the covered peril. The policy only insures direct loss. The direct losses that resulted from the infestation were the loss of stock that had to be destroyed due to the infestation, and the lost sales that resulted from the infestation. Neither the stock nor the sales contracts were owned by the plaintiffs.

b. In my view, the loss the plaintiffs suffered was an indirect loss. The infestation was the proximate cause of the lost stock and the lost sales. The Bakemates companies suffered these direct losses. In contrast, the proximate cause of the loss of payments due to the plaintiffs (assuming they were due) was the failure of the Bakemates group of companies to make the payments that were due. The damage suffered by the plaintiffs was caused by the failure to make the payments, not the infestation.

c. The plaintiffs’ argument, in effect, tries to make the direct loss of the Bakemates group of companies the direct loss of the plaintiffs. But the plaintiffs have a separate legal identity from the Bakemates group of companies. They cannot be treated as one and the same.

d. To find that the plaintiffs suffered a direct loss, in effect, I would be concluding that the policy insured their accounts receivable. Nothing in the summary of declarations suggests that accounts receivable are insured by the policy.

e. Moreover, the Bakemates companies that owned the stock and the sales contracts were insured on the same policy of insurance as the plaintiffs. One premium was paid in respect of all of them.

f. The Bakemates companies’ claims were settled by the receiver and St. Paul. The settlement was approved by the court. It included an amount for business interruption losses. This amount would cover lost revenue from which operating expenses were funded. That lost revenue would have, in theory, paid the amounts the plaintiffs claim were owing to them. If the plaintiffs can separately recover for those losses, the policy would provide for double recovery. Double recovery is not a sensible commercial result and would not have been in the contemplation of the parties in the commercial atmosphere in which the insurance was contracted. It would result in a windfall to the insureds. It would also lead to a situation whereby an insured would be incentivized to fail to make payments to a related co-insured when it suffers an insured loss in the hopes of maximizing the group’s total insurance recovery.

g. The windfall is relevant notwithstanding the receivership of the Bakemates group of companies. The insurance contract cannot be construed as if there were two policies of insurance: one for the Bakemates group and one for the plaintiffs. That the Bakemates companies later went into receivership is not relevant to determining how the contract should be construed. The contract of insurance had to make commercial sense when it was entered into, at which time the receivership of the Bakemates group of companies was not contemplated.

[34] As a result, I conclude that the plaintiffs’ claimed losses are not direct losses and therefore are not covered under the policy.

The First Action: Is the receivership of the Bakemates group of companies an insured peril?

[35] The next question is whether the receivership of the Bakemates group of companies is a peril insured by the policy, such that the amounts owing to the plaintiffs that went unpaid as a result of the receivership are covered losses.

[36] It is the plaintiffs’ burden to prove that the claimed peril is insured under the policy: Diamond Auto Collision Inc. v. Economical Insurance Group, [2005] I.L.R. I-4427, 2005 CarswellOnt 2906 (Ont. S.C.J.), at para. 9, citing Shakur v. Pilot Insurance Co (1990), 1990 CanLII 6671 (ON CA), 74 O.R. 2d 673, 1990 CarswellOnt 623 (Ont. CA), at para. 30.

[37] The plaintiffs argue that a policy like this one that insures against “any peril” (except those excluded by exclusions that do not here apply) should be construed like an “all risks” policy. They argue that central to the concept of “risk” is the concept of fortuity: British and Foreign Marine Insurance Co. v. Gaunt, [1921] All E.R. Rep 447 (H.L.), at p. 450. I accept that the concept of fortuity is relevant to determining whether the receivership of the Bakemates companies is a covered peril.

[38] The importance of the concept of fortuity is highlighted by the decision of the Supreme Court of Canada in Scalera, at paras. 68-69. There, Iacobucci J., writing for the court on this point, held that insurance only makes economic sense when the losses covered are unforeseen or accidental. Losses that are not fortuitous or contingent cannot economically be transferred because the premium would have to be greater than the value of the subject matter in order to provide for the insurer’s costs and profit.

[39] Iacobucci J. went on to say that insurance is meant to cover risk of loss, and loss caused intentionally is “hardly the result of a risk”: Scalera, para. 135.

[40] In addition, the interpretive principles I have reviewed above with respect to the commercial sensibility of the construction of the insurance contract continue to apply.

[41] I conclude that the receivership of the related debtor companies is not an insured peril.

[42] The evidence before me establishes that there were a number of issues in the banking relationship between the Bakemates’ group of companies and one of its lenders in particular, the Laurentian Bank. While Mr. Parravano testified that the relationship with the bank soured after the infestation, he also admitted that the Bakemates group of companies were offside their required debt ratios even before the meal moth infestation. Moreover, there was evidence before me that at some point during the relationship with the bank, contrary to the obligations set out in the agreements with the bank, Mr. Parravano caused income of the Bakemates group of companies to be placed in an account at another bank instead of in the Laurentian bank account. This, in effect, impeded Laurentian Bank’s security interests in the funds and eventually resulted in a court order directing that the funds be returned to the Laurentian Bank account, which order was complied with.

[43] In these circumstances, where the Bakemates group of companies was non-compliant with its obligations as borrower, including by deliberately depriving the bank of its security, and offside its debt ratios from the outset of its relationship with the bank, I conclude one cannot call the receivership of the Bakemates group of companies fortuitous. Fortuitous is not the same thing as undesired, or even unexpected. Here, the receivership was caused or at least materially contributed to by deliberate acts of the Bakemates group of companies that were contrary to the obligations they owed to the lender. The consequent loss is “hardly the result of a risk”.

[44] I thus conclude that the bankruptcy and insolvency of the Bakemates group of companies is not a covered peril.

[45] Had I found that the bankruptcy was fortuitous, I still would not have found it to be a covered peril. In my view, the policy at issue, read sensibly, cannot extend insurance coverage to the receivership of an insured. The risk of receivership is not a risk that can economically be transferred to an insurer. In my view, in the commercial atmosphere in which the insurance was contracted, to conclude that bankruptcy of one or more of the insureds was a covered peril is an unrealistic result.

[46] As a result, I conclude that the losses claimed by the plaintiffs in the first action are not covered by the policy, because they are not direct losses, or they do not flow from a covered peril. In view of these conclusions, it is not necessary to address St. Paul’s other defences to the first action.

The Second Action: Are the claims barred by operation of the contractual limitation period?

[47] There are two claims advanced in the second action: one for loss of property due to the alleged theft or wrongful handling of the property by the receiver, and a second for business losses arising from the alleged wrongful deprivation of the property. The first can be thought of as a claim for the lost capital and the second as a claim for the lost income the capital would have generated. St. Paul raises a limitation period defence in respect of each of these claims.

[48] The second action was commenced on November 16, 2002. The policy contains a one year contractual limitation period. The policy predates the current Limitations Act, 2002, S.O. 2002, c. 24, Sch. B. There is no dispute that the one year contractual limitation period is enforceable.

[49] With respect to the lost property claim, the sale by the receiver of the Bakemates companies’ businesses as a going concern closed on December 28, 2000 after the approval of the sale by Farley J. on December 21, 2000. By December 28, 2000 the assets the plaintiffs claim were theirs had fallen into the hands of Amore Sweets.[^3] If the claim accrued on closing, the property claim is out of time.[^4]

[50] However, the plaintiffs argue that the limitation period did not commence on the closing of the sale. They state that they only discovered that they had suffered a loss from the theft, wrongful handling or misappropriation of the property and in turn, that they had a claim to make against St. Paul under the policy, after it became clear that their attempts to recover the property from the receiver had failed.

[51] They point to communications between them (or their representatives), the receiver, and Amore Sweets in which the receiver made efforts to recover the plaintiffs’ assets. They point to evidence that they themselves took steps to recover their property, and that the receiver appeared to be trying to assist with those steps. Ultimately, the plaintiffs brought a motion to recover their assets from the receiver. On July 9, 2002 Cameron J. found the plaintiffs had no claim against the receiver in respect of the property they were seeking to recover. It was only at this time that the plaintiffs state they knew they had suffered a loss, and in turn, that they had a claim under the policy.

[52] The plaintiffs’ pleading is silent as to discoverability. Recognizing the gap in their pleading, the plaintiffs have moved for an order allowing them to amend their pleading to plead discoverability. St. Paul takes no position on the motion. Rule 26.01 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 allows for an amendment to be made at any time, even after the conclusion of trial: Hardy v. Herr, 1965 CanLII 225 (ON CA), [1965] 2 O.R. 801 (Ont. C.A.), at para. 2. Discoverability was an issue thoroughly canvassed at trial. I see no prejudice to St. Paul in granting the amendment. Accordingly, the plaintiffs’ motion to amend their statement of claim to plead discoverability is granted.

[53] While I accept that the discoverability principle may apply to the plaintiffs’ claim, I do not accept the plaintiffs’ discoverability argument.

[54] A plaintiff’s claim begins to run when the plaintiff has the knowledge, or the means of acquiring the knowledge, of the existence of the facts that support a claim for relief: Nasr Hospitality Services Inc. v. Intact Insurance, 2017 ONSC 4136, at paras. 20-22.

[55] In this case, the plaintiffs either knew or had the means of acquiring the knowledge that they may have a claim under the policy on the closing of the sale to Amore Sweets. They knew at that time that they had been deprived of their assets. They knew they had an insurance policy in place that insured against direct loss. Mr. Parravano had, in the context of the first action, dealt with the insurance adjuster and lawyers about his and his companies’ rights under the policy. The plaintiffs had the information, or the access to the information, that they may have a covered loss as of the day the sale to Amore Sweets closed.

[56] Nothing about Cameron J.’s reasons changes the information that was either in the plaintiffs’ possession or available to the plaintiffs at the time of closing. Rather, Cameron J.’s reasons made clear that the plaintiffs could not recover their property through a motion against the receiver. But nothing obligated the plaintiffs to attempt to recover against the receiver before making a claim under the policy. The plaintiffs could have made their claim and left St. Paul to enforce its subrogated rights against the receiver or Amore Sweets, as it chose.

[57] That they could have done so is clear from their own actions. The proof of loss they filed in connection with the claims advanced in the second action refers to their pending motion against the receiver.

[58] The plaintiffs’ discoverability argument amounts to an argument that they acted reasonably in going some ways towards pursuing the receiver before making a claim. That is not, however, a basis to suspend the operation of the contractual limitation period.

[59] Accordingly, I conclude that the property claim advanced in the second action is out of time.

[60] For the reasons set out above, the second claim, being the claim for business interruption losses, commenced latest on the day the sale to Amore Sweets closed. It was at that time that the plaintiffs knew or had the means of acquiring the knowledge that they had a claim for business interruption losses arising out of the loss of their property.

[61] However, a claim for business interruption losses is, by its nature, an ongoing claim. As the Saskatchewan Court of Appeal stated in Treeland Motor Inn Ltd. v. Western Assurance Co., 1985 CarswellSask 165 (Sask C.A.) at para. 4, the alleged interruption of the plaintiffs’ business might have commenced with a particular event (in that case, a fire; in this case, the closing of the sale to Amore Sweets) “but continued to accrue from day to day thereafter, and cannot therefore be said to have “occurred” on the day of the event which triggered it”.

[62] In effect, the plaintiffs’ business interruption claim is subject to a rolling limitation period. A new claim accrues each day for the business losses sustained that day. I thus conclude that the plaintiffs’ claim for business interruption (to the extent it can be proven in the next phase of this trial) beginning one year before the commencement of the second action is not out of time - that is, the business interruption losses suffered commencing November 16, 2001 are not barred by reason of the contractual limitation period. To the extent the plaintiffs seek recovery for business interruption losses they suffered before November 16, 2001, those claims were not advanced within the contractual limitation period and are therefore barred.

[63] In conclusion on this issue, the claims for business interruption losses beginning one year before the commencement of the second action are not barred by the contractual limitation period. The other claims advanced in the second action are barred.

The Second Action: Are the plaintiffs’ remaining claims barred because of failure to provide appropriate proofs of loss? If so, are the plaintiffs entitled to relief from forfeiture?

[64] The parties agree that the proof of loss is deficient. The plaintiffs argue that, because St. Paul denied coverage for a ground other than failure to file a proof of loss, the insureds are relieved from complying with the policy’s conditions. They cite a body of law in support of this argument which St. Paul argues is not applicable. St. Paul also notes that it specifically pleaded failure to give a sworn proof of loss providing loss details as required by the policy in its statement of defence.

[65] It is not necessary to deal with this argument. In my view, assuming that the plaintiffs were not relieved of their obligation to file an adequate proof of loss, they are entitled to relief from forfeiture.

[66] The plaintiffs seek relief from forfeiture in reliance on s. 129 of the Insurance Act, R.S.O. 1990, c. I.8, which provides for relief from forfeiture “where there has been imperfect compliance with a statutory condition as to the proof of loss”. They also rely on the relief from forfeiture provision in s. 98 of the Courts of Justice Act, R.S.O. 1990, c. C.43. St. Paul states that s. 98 of the Courts of Justice Act is the appropriate section to consider in this case. See also Kozel v. The Personal Insurance Company, 2014 ONCA 130, at paras. 52-58, where the Court of Appeal concluded that the relief from forfeiture provision in the Courts of Justice Act applies to contracts regulated by the Insurance Act.

[67] In Elance Steel Fabricating Co. v. Falk Brothers Industries Ltd., 1989 CanLII 38 (SCC), [1989] 2 S.C.R. 778, at para. 15, the Supreme Court of Canada described the purpose of relief from forfeiture provisions as “prevent[ing] hardship to beneficiaries where there has been a failure to comply with a condition for receipt of insurance proceeds, and where leniency in respect of strict compliance with the condition will not result in prejudice to the insurer”.

[68] In Kozel, the Court of Appeal identified three factors that inform the relief from forfeiture analysis: (i) the conduct of the applicant; (ii) the gravity of the breach; and (iii) the disparity between the value of the property forfeited and the damage caused by the breach.

[69] The plaintiffs argue that the considerations under the Courts of Justice Act are basically the same; they focus on the conduct of the insured and the whether the insurer has been prejudiced.

[70] In this case, it matters not which test I consider. In the exercise of equitable jurisdiction to grant relief from forfeiture under either Act the conduct of the applicant is a relevant matter. The only argument that St. Paul has advanced to deny relief from forfeiture in the second action is that the plaintiffs did not come to court with clean hands, and so are not entitled to equitable relief. Insofar as the second action goes, St. Paul makes no allegation that it has been prejudiced, and I see no evidence of prejudice. Nor does St. Paul argue that the gravity of the plaintiffs’ failure to file an adequate proof of loss as compared to the value of the property forfeited suggest that relief from forfeiture should not obtain. The failure to provide adequate proofs of loss is, in these circumstances, minor in comparison to the losses for which the plaintiffs claim coverage.

[71] The sole issue is thus whether relief from forfeiture should be denied in view of the plaintiffs’ conduct. St. Paul argues that the plaintiffs have created fraudulent invoices to support their claim to ownership of certain equipment, and this fraudulent conduct justifies denying relief from forfeiture.

[72] The proof of loss itself was delivered under cover of letter dated November 26, 2001. The letter is signed by Mr. Parravano but states that it is written on behalf of Marvelous Mario’s Inc., 601552 Ontario Inc., and 788986 Ontario Inc. It attaches a proof of loss form signed by Mario and Barbara Parravano. The proof of loss form is a statutory declaration. Attached to the proof of loss is a listing of equipment that the plaintiffs in the second action (including SnackCrafters which was not part of the proof of loss process in any respect) claim had been wrongfully handled by the receiver. No invoices are attached to the proof of loss.

[73] During the receivership of the Bakemates companies, and in response to the receiver’s request for proof of ownership, the receiver received three invoices purporting to be from Associated Bakery & Restaurant Equipment, dating from 1997 and 1998, and showing the purchase of various equipment. Mr. Parravano directed the creation of these invoices in 2000, after the equipment in question came into the possession of the plaintiffs. These invoices were provided to St. Paul in answers to undertakings delivered in the second action.

[74] In the receivership proceedings, Mrs. Parravano deposed as to the origins of the Associated Bakery invoices. At trial before me, Mr. Parravano admitted that the invoices were not original. He explained that he did not always get invoices if he participated in a cash deal. He stated he had no original invoices to prove ownership of the items on the backdated Associated Bakery invoices. When he needed proof of ownership for the receiver, he approached the owner of Associated Bakery to obtain invoices on which he could recreate the transactions by which he purchased some equipment from it in a cash deal. St. Paul argues that Mr. Parravano’s conduct in creating and backdating the invoices was fraudulent.

[75] St. Paul also points to inaccuracies in one invoice for six vending machines. It reads “C.O.D.” although Mr. Parravano testified that he paid for the vending machines through an equipment trade. The invoice also reflects G.S.T. being paid on the sale when none was paid. Finally, Mr. Parravano admits that the vending machines he bought were actually owned by a third party, but states that Associated Bakery’s principal brokered the sale and took a commission.

[76] In my view, notwithstanding the irregularities with the invoices, the plaintiffs are entitled to relief from forfeiture. Mr. Parravano’s evidence was that the transactions were documented after the fact on the invoices. He acknowledges some errors in the documentation, but the evidence before me does not suggest that fundamentally the information he provided is wrong. I have no basis on which to conclude that the assets shown on the Associated Bakery invoices were not acquired in or about the time the invoices are dated, for the value described on the invoices. I note that, to the extent the plaintiffs had any documentation that could support their ownership of the equipment, Mr. Parravano had been shut out of the facilities where his records were kept. It is not surprising that he would turn to the source through which he acquired the equipment, whether directly or through a brokered sale, to prove his ownership.

[77] I recognize that Mr. Parravano’s evidence at trial is at odds with the sworn evidence of Associated Bakery’s principal, given in another proceeding. That evidence was not admissible for proof of the truth of its contents before me, and the principal himself did not testify at trial.

[78] I thus conclude that it is consistent with the purposes of relief from forfeiture to grant it in these circumstances.

[79] I also note briefly St. Paul’s argument that relief from forfeiture should not be available to the plaintiffs because Mr. Parravano has been criminally convicted for fraud. In my view, that conviction is irrelevant. Mr. Parravano’s penalty for that offence was dealt with in the criminal proceeding. I see no reason to punish him and the plaintiff corporations in this proceeding for a fraud conviction in a past criminal proceeding.

The Second Action: Are the plaintiffs’ claims an abuse of process?

[80] St. Paul argues that the plaintiffs’ claims in the second action are an abuse of process. It relies on the decision of Cameron J. dated July 9, 2002. That decision resulted from the Parravanos’ attempt to recover the property they alleged was owned by them and their non-bankrupt companies from the receiver. Cameron J. found that there was no evidence to support the claim that the receiver transferred to the purchaser possession of assets after knowing or acknowledging that the assets belonged to the Parravanos or their non-bankrupt companies. Cameron J. found there was no conduct giving rise to a claim against the receiver for wrongful detention. However, he stated that, with respect to some assets over which the receiver later acknowledged “Caravan’s title”[^5] the Parravanos were free to pursue their claim against the purchaser.

[81] St. Paul relies on Toronto (City) v. C.U.P.E., Local 79, 2003 SCC 63. There, the Supreme Court of Canada held that the doctrine of abuse of process can preclude relitigation in circumstances where the strict requirements of issue estoppel are not met, for the purpose of preserving the integrity of the court’s process: see paras. 37 and 42.

[82] In my view, the second action is not an abuse of process. Cameron J.’s decision spoke to the receiver’s liability to the Parravanos and their non-bankrupt companies for the alleged wrongful handling of their assets. Cameron J. focused on whether the receiver knew that the plaintiffs had title to the property that they state was theirs and which they allege was wrongfully passed into the hands of Amore Sweets. Whether the receiver knew they owned the property and whether they actually owned the property are different questions.

[83] Correspondence between Mrs. Parravano and the receiver after the closing of the sale makes clear that the receiver was satisfied by then that at least some of the property that had been passed to Amore Sweets belonged to the Parravanos or their non-bankrupt companies. There is no danger to the integrity of the court’s process to allow the claim for insured business losses arising out of the loss of that property to proceed. Whether the plaintiffs owned the property that was passed into the hands of Amore Sweets and suffered business interruption losses on being deprived of this property is a matter for proof in the second action.

Vitiation

[84] During trial, St. Paul advised of its intention to move to amend its statement of defence to plead the defence of vitiation. It argues that an amendment can be made at any time, and that the evidence given by Mr. Parravano at trial about the Associated Bakery invoices prove that the insureds made fraudulent or willfully false statements in relation to something material to the proof of the existence or the extent of their loss. St. Paul delivered its motion materials to amend its pleadings after the trial, while these reasons were under reserve. In its closing argument, it argued that the plaintiffs’ claim must be denied on the basis of vitiation.

[85] The plaintiffs argue that vitiation is not properly within the scope of this phase of the trial. They argue that the evidentiary record is not sufficient to fully address the issue and that they are prejudiced as a result.

[86] They argue that the amendment is improper because the alleged fraudulent conduct is in fact that of 601552 Ontario Ltd. but the amendment refers to all plaintiffs. They argue that, even if 601552 Ontario Ltd.’s conduct vitiates its claim, it should not vitiate the claims of all the other plaintiffs.

[87] The plaintiffs ask that (i) the motion be denied or reserved for a later decision, (ii) if the motion is allowed, the amendment be restricted to 601552 Ontario Ltd., (iii) should the motion be allowed, Mr. Parravano’s affidavit filed in response to the motion be considered part of the trial evidence or the trial be reopened to allow the plaintiffs to respond to the proposed amendment; and (iv) should the motion be allowed and the defence dealt with on the merits, that the vitiation defence be dismissed.

[88] In my view, the amendment ought to be allowed. I agree that in the interests of fairness, Mr. Parravano’s affidavit filed on the motion should be considered part of the trial evidence on this issue. St. Paul did not object to the plaintiffs’ request that the affidavit form part of the trial evidence nor did it seek to file reply materials in which it might have objected. St. Paul raised vitiation at trial without proper notice to the plaintiffs. They are entitled to respond.

[89] It is settled law that a fraudulent claim by an insured results in no recovery by the insured under the applicable insurance policy. A fraudulent claim is inconsistent with an insured’s duty of utmost good faith to an insurer: Alavie v. Chubb Insurance Co. of Canada, 2005 CarswellOnt 867 (Ont. C.A.), at para. 5; Harris v. Home Trust Co., 2009 CarswellOnt 6249 (Ont. S.C.J.), at para. 20.

[90] Wilfully false statements on material matters in a proof of loss will vitiate the right to any recovery under the policy: Royal Insurance Co. of Canada v. Dimario, 1987 CarswellOnt 744 (Div. Ct.), at para. 7. To vitiate a policy for fraud, the insured must have made a wilfully false statement in relation to something material to either the existence or extent of the loss, or something material to the insurer’s decision whether to reject the claim or pay it: Dimario, at para. 8; Sagl v. Cosburn, Griffiths & Brandham Insurance Brokers Ltd., 2009 ONCA 388, at para. 107.

[91] In preparing a proof of loss, an insured owes a duty to the insurer of honesty and accuracy. Fraud in connection with any part of the claim will void the entire policy: Sagl, at paras. 76 and 80.

[92] In this case, the policy specifically contemplates vitiation for fraud. In a section entitled “Requirements After Loss”, the policy sets out the information required of the insured that must be “verified by a statutory declaration”, including, among other things, an inventory of the property at issue. It then provides that “if required and if practicable” the insured shall provide “invoices” among other back up documentation but it does not require the invoices to be attached to a statutory declaration. The policy then provides that “[a]ny Fraud or willfully false statement in a statutory declaration in relation to any of the above particulars vitiates the claim of the person making the declaration”.

[93] The question is thus whether the Associated Bakery Invoices, prepared after the fact and with errors, amounts to a fraudulent claim or wilfully false statement in material matters relating to the insurance claim such that the plaintiffs’ claims are vitiated.

[94] In my view, the evidence does not establish that the invoices amount to fraudulent claims or wilfully false statements in connection with the insurance claim. I reach this conclusion for the following reasons:

a. The Associated Bakery invoices were delivered to the receiver to establish the plaintiffs’ claims to ownership of the equipment, not St. Paul.

b. Mr. Parravano’s evidence was that the invoices reflected the transactions that occurred to the best of his memory and are accurate in that they reflect the approximate date and value of the transactions;

c. The Associated Bakery invoices were mentioned in answers to undertakings that were delivered in August 2011 in response to an undertaking given on Mr. Parravano’s discovery to produce the “acquisition documents” relating to the equipment that formed part of the property loss claims in the second action. The invoices themselves were not delivered to St. Paul until shortly before trial.

d. I am not satisfied that the invoices were misleading when they were disclosed or delivered. The genesis of the invoices, including that they were prepared after the fact and contained errors, was described in an affidavit of Barbara Parravano, filed in the receivership proceedings, and disclosed in the plaintiffs’ affidavit of documents sworn in the second action in 2009. Before St. Paul received the invoices or details about them, it had already been advised through the plaintiffs’ productions that the invoices were not original and contained errors.

e. Nor am I satisfied that the invoices are material. They were disclosed and produced long after St. Paul made its decision to deny coverage and long after the commencement of the second action. They were not material to St. Paul’s decision to deny coverage. They may have been material to the existence or the extent of the loss; however, Mr. Parravano’s evidence is that the invoices are correct in those material respects. Moreover, to the extent the invoices on their face are misleading, the fact that the plaintiffs had already disclosed the evidence of the invoices’ shortcomings through the disclosure of Mrs. Parravano’s affidavit suggests that the invoices did not actually mislead St. Paul.

[95] Accordingly, I find that the defence of vitiation due to fraud or wilfully false statements is not made out.

Other Issues

[96] In the course of the trial, St. Paul raised the question of whether the plaintiffs had proven any loss, and argued that proof of some loss is part of establishing entitlement to coverage. St. Paul argued that the plaintiffs had not adduced any evidence of any loss, and so failed to establish coverage in this coverage trial.

[97] In my view, whether there was an actual loss, and its quantum, forms part of the second phase of the trial. The issues the parties identified in writing to be addressed at this phase of the trial did not include whether any loss had been established. That made sense. To ask the plaintiffs to prove “any loss” would have tempted them to prove all their losses, in case there were problems with proving any individual loss. The trial would not then have been bifurcated, and would have taken substantially more time.

[98] To require the plaintiffs to establish some loss as part of this phase of the trial would, in my view, be manifestly unfair and have taken the plaintiffs by surprise.

[99] I thus make no determination about whether any loss has been suffered, and if so in what amount. That question is for the second phase of the trial.

Conclusion

[100] The parties are each given leave to make the amendments they seek to make to their pleadings.

[101] The first action is dismissed. The losses claimed are not direct losses and are not covered by the policy. To the extent the peril alleged is the receivership of the Bakemates group of companies, it is not a covered peril.

[102] The claims for loss of property and business interruption losses predating one year before the commencement of the second action are barred due to the contractual limitation period.

[103] The remaining claim in the second action – for business interruption losses beginning one year before the commencement of the action – may proceed. The plaintiffs are entitled to relief from forfeiture with respect to the inadequate proof of loss. The claim is not an abuse of process. St. Paul’s has not made out its vitiation defence.

Costs

[104] If the parties cannot agree on costs, they may exchange written submissions, not to exceed three pages plus relevant attachments three weeks from the date of these reasons. They may then exchange responding materials not to exceed two pages within one week thereafter. Materials should be delivered to my attention at Judges’ Administration, 361 University Avenue.

Akbarali J.

Released: April 06, 2018.

[^1]: These differ from the parties’ written articulations to reflect some refocusing of the issues that occurred at trial. For example, one issue was abandoned at trial. Other issues proceeded on a reduced scope. [^2]: In these reasons I refer to the policy of insurance. In fact, there were two, as the policy was renewed, and the renewed policy is the one that was in effect during the period of time in respect of which the losses alleged in the second action were incurred. However, there is no material difference in the wording of the policies, so for ease of reference, I refer only to the policy of insurance. [^3]: The Agreement of Purchase and Sale provided that the receiver would transfer the rights, if any, in the disputed assets, a list of which formed a Schedule to the Agreement, and warned that title to those assets may be in dispute. However, the disputed assets, or many of them, physically came into the possession of Amore Sweets on closing. [^4]: The claim could have commenced as early as the day the plaintiffs were excluded from the business premises, at which time their assets were in the hands of the receiver. This occurred prior to the sale to Amore Sweets, but the distinction is immaterial for the purposes of this analysis. [^5]: I do not know who “Caravan” is, but the decision suggests that assets to which Caravan had title were assets the Parravanos could claim from the purchaser.