Court File and Parties

COURT FILE NO.: 17-72985 DATE: 20180904 ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

Noreast Electronics Co. Ltd. Plaintiff/Moving Party

– and –

Eric Danis, EAJ Technical Corporation, Anya Watson and 8339724 Canada Inc. Defendants/Respondents

Counsel: Ira Nishisato and Maureen Doherty for Plaintiff/Moving Party Laurent Kanemy and Alexander H. Duggan for Defendants/Respondents

HEARD: May 29, 2018

JUSTICE SALLY GOMERY

Overview

[1] The plaintiff Noreast Electronics Co. Ltd. (“Noreast”) seeks summary judgment against the defendants for damages arising from a false invoicing scheme.

[2] Noreast is an electronics manufacturer in Hawkesbury, Ontario. The defendant Eric Danis (“Eric”) worked for Noreast from 1985 to June 21, 2017, when he was fired.[^1] The defendant Anya Watson (“Watson”) is married to Eric. The defendants EAJ Technical Corporation (“EAJ”) and 8339724 Canada Inc. (“833 Inc.”) are two companies he owns.

[3] Noreast alleges that, between April 2010 and March 2017, Eric deceived Noreast into thinking it was purchasing components directly from Chinese suppliers, when in fact it was purchasing them through Eric’s company EAJ. Eric submitted invoices to Noreast that looked as though they had been issued by the suppliers, but in fact had been created by Watson at Eric’s direction (the “EAJ invoices”). These invoices directed Noreast to make payments for the components delivered by the Chinese suppliers to a bank account held by EAJ in Wyoming, USA (the “EAJ bank account”). The prices on the EAJ invoices were 20% to 200% higher than the prices actually charged by the suppliers.

[4] Over the seven years before the scheme was discovered, Noreast paid a total of $1,882,886 USD into EAJ’s bank account. According to Deloitte Forensic Inc., the firm hired by Noreast to investigate the EAJ invoices in early 2017, the company paid at least $864,238.75 USD more to EAJ than was invoiced by the Chinese suppliers for the shipments. Most of the excess amount was paid as salary from EAJ to Watson from 2011 to 2017.

[5] Noreast argues that the existence of the false invoicing scheme is essentially uncontested and that, as a result, it is entitled to summary judgment for $894,065.75 USD against each defendant for fraudulent misrepresentation and other causes of action. It also seeks punitive damages of $250,000, investigative and legal costs, and interest.

[6] The defendants take the position that this is not an appropriate situation for summary judgment. They argue that Noreast has not disclosed certain information that would assist them, and that a summary judgment on Noreast’s claim would unfairly impact Eric’s counter-claim for unjust dismissal. In the alternative, they allege that there is an innocent explanation for the defendants’ actions and that Noreast has not proved its claim.

[7] The issues I must address are as follows:

(1) Can I reach a fair and just determination on the merits of Noreast’s claim on this motion for summary judgment? In particular:

(a) Has Noreast satisfied its disclosure obligations?

(b) On the evidence, is there a genuine issue for trial?

(c) If so, can I fairly determine Noreast’s claim on the merits without a full trial and is it in the interest of justice that I do so?

(2) If this is an appropriate case for summary judgment, has Noreast proved its case against each defendant?

(3) What remedies is Noreast entitled to?

Facts

[8] Before turning to the issues I have just identified, I will review the events giving rise to the action. The parties produced extensive records, including many affidavits and transcripts of cross-examinations. Despite the size of the record, the evidence is remarkably consistent. For the most part, the parties disagree on the inferences I should draw based on the evidence as opposed to the material facts.

[9] The principal founder, president and majority shareholder of Noreast is Nick Steiner (“Steiner”). Steiner holds shares in Noreast directly and through another company, Prescott Module Inc. (“PMC”). PMC provides back-office support to Noreast with respect to payroll, accounting and banking. PMC’s general manager is Irma Maxwell (“Maxwell”). She is also a Noreast director and swore several affidavits for Noreast on this motion.

[10] Eric worked over 30 years for Noreast, first as a student, then on a full-time basis. He became Director of Sales in 2006.[^2] Eric’s father, Raymond Danis (“Raymond”), co-founded the company with Steiner and, until 2013, was Noreast’s director general. Eric’s sister, Marie-Ève Danis (“Marie-Ève”) also works at Noreast as its assistant general manager. Noreast is for all intents and purposes the Danis family business.

[11] Raymond originally held just over 40% of Noreast’s shares. When he left the company in 2013, he sold half of the shares to Eric’s holding company 833 Inc. and the other half to Marie-Ève.[^3] Beginning in 2013, Eric began receiving annual dividends through 833 Inc.’s shareholding in amounts ranging from $120,000 to $313,000.

[12] From 2009 on, Eric was earning a base salary of $46,820 plus a commission of 1.5% on all Noreast sales. This amounted to total compensation of between $105,075 and $157,335 per year between 2008 and 2016. Eric stopped receiving any overtime compensation in October 2007. Unlike some other Noreast employees, over the last eight years he worked for the company he was not paid any performance bonuses.

[13] As the Director of Sales, Eric was not formally involved in procurement or manufacturing at Noreast. In 2008 or 2009, however, he became convinced that some parts could be purchased more cheaply from companies in China, and persuaded Noreast to try sourcing some components from Chinese suppliers. The first few purchases were successful, and Noreast began sourcing regularly from Chinese suppliers in 2009.

[14] Eric had identified these suppliers and handled communications with them. In late 2009, Eric asked Steiner for additional compensation for these tasks. Steiner refused, telling Eric that he could not charge overtime for this work and should not be doing any procurement work on company time.

[15] In March 2010, Eric incorporated EAJ in Wyoming. He did not tell anyone at Noreast that he was doing so. In fact, the evidence shows that he and Watson went to some lengths to conceal Eric’s role in EAJ. They arranged to incorporate the company through Wyoming Corporate Services (“WCS”), a firm that helps start-ups wanting to avoid any public disclosure of officers, directors and shareholders. They purchased “privacy packages” from WCS so that Eric’s name and address did not appear on the public record for EAJ. WCS’ address in Wyoming and the name of its president were listed instead. In a March 1^st, 2010 email to WCS, Eric wrote that: “My ID must be hidden.” Eric and Watson continued to pay an extra annual fee to WCS from 2010 to 2017 to ensure Eric’s continued public anonymity as the president of EAJ.

[16] On April 1^st, 2010, Eric sent Maxwell an email saying that one of the Chinese suppliers was changing its banking information. He attached an email purportedly from the supplier and an invoice. This invoice looked as though it had been issued by the supplier, but in fact had been prepared by Watson.[^4] On the invoice, the supplier’s payment facility (identified on the invoice as “Our Bank”) was identified as a Wells Fargo branch in Cheyenne, Wyoming. The supplier’s account (identified on the invoice as “Our Account”) was in fact the EAJ bank account.

[17] Noreast paid the full amount of the invoice to EAJ’s bank account on receipt of the shipment of components from the supplier. Eric or Watson arranged for payment to the Chinese supplier, leaving the excess amount in EAJ’s bank account.

[18] From this point forward, Eric systematically replaced invoices he received from Chinese suppliers with EAJ invoices prepared by Watson at Eric’s direction. The suppliers’ invoices directed Noreast to make payments to banking facilities in China, while the EAJ invoices directed Noreast to make payments to EAJ’s bank account in Wyoming. The unit prices on the EAJ invoices were 20% to 200% above the prices on the suppliers’ invoices.

[19] Aside from the prices and payment instruction, the EAJ invoices looked similar to the suppliers’ invoices. Each invoice appeared to be on the letterhead of a supplier. Each was entitled “Proforma Invoice” and was addressed to Eric Danis, usually at his office at Noreast. Each listed the parts being shipped, unit price, quantity and total price.

[20] The EAJ invoices were delivered by Eric to Noreast for payment. Half of the amount was generally payable prior to shipment and the balance on delivery of the components. Payment of the invoices was handled by Maxwell.

[21] Between April 2010 and March 2017, Noreast paid a total of $1,882,886 USD to EAJ’s bank account in Wyoming. Watson transferred $847,156.34 USD, almost all of the money that was not used to pay the Chinese suppliers for the components, from this account to various bank accounts that she and/or Eric controlled in the U.S. and then to Canada. Eric did not tell Maxwell or anyone else at Noreast that EAJ was his company, or that payment on the EAJ invoices was directed to a bank account that he and Watson controlled. He did not tell anyone that the unit prices actually charged by the supplier had been marked up on the substituted invoices. He did not otherwise indicate to anyone at Noreast that EAJ was acting as a middleman or reseller.

[22] Emails from Eric to Chinese suppliers during this period reminded them that they should not discuss pricing with anyone at Noreast except him, and that they should not send invoices with their shipments. When Maxwell observed in 2013 that EAJ’s bank account was the payment facility for a new supplier, as well as all of the existing Chinese suppliers, Eric told her that there was common elderly owner of suppliers in China who wanted all payments made in the U.S.

[23] On March 22, 2017, Maxwell was approached by a colleague, Janice McKiddle (“McKiddle”), with concerns about an invoice found in a shipment from a Chinese supplier. McKiddle noticed that the invoice looked different than invoices that Eric had been delivering over the past seven years. On comparing an EAJ invoice ostensibly from the same supplier to the invoice she had just discovered, McKiddle noticed the different payment directions. She also noticed a difference in the price charged per unit. She did an internet search on EAJ and discovered that its president was Eric Danis. Although Eric had paid WCS for complete anonymity, in 2015 it had mistakenly identified him in a publicly filed annual report for the company. [^5]

[24] Maxwell approached Noreast’s senior management the next day with the invoice and information discovered by McKiddle. Noreast chose not to confront Eric with its suspicions but instead hired Deloitte Forensic Inc. to investigate the EAJ invoices it had paid since 2010. On June 15, 2017, Noreast began this action and obtained Anton Piller and Mareva orders. The action and the orders were served on the defendants and executed on June 21, 2017, and Eric was given a letter terminating his employment.

(1) Is this an appropriate case for summary judgment?

General principles

[25] Further to Rule 20.01, a plaintiff may move for summary judgment after the defendant has delivered a statement of defence. Rule 20.04(2)(a) states that the court shall grant summary judgment if it is satisfied that there is no genuine issue requiring a trial with respect to the claim.

[26] As a result of amendments to Rule 20 that came into force in 2010, judges hearing summary judgment motions gained new fact-finding powers. Where they find that there is a genuine issue for trial, they may resolve it by weighing evidence, evaluating the credibility of a deponent, and drawing any reasonable inference from the evidence, “unless it is in the interest of justice for such powers to be exercised only at trial”.[^6] A judge hearing a summary judgment motion may also order that oral evidence be presented by one or more parties.[^7]

[27] In Hryniak v. Mauldin, the Supreme Court of Canada held that the introduction of these amendments to Rule 20 signalled a fundamental change in the way courts must view the civil litigation process.[^8] Under the amended rules, the determination of whether a case ought to go to trial involves a two-stage analysis:

On a motion for summary judgment under Rule 20.04, the judge should first determine if there is a genuine issue requiring trial based only on the evidence before her, without using the new fact-finding powers. There will be no genuine issue requiring a trial if the summary judgment process provides her with the evidence required to fairly and justly adjudicate the dispute and is a timely, affordable and proportionate procedure, under Rule 20.04(2)(a). If there appears to be a genuine issue requiring a trial, she should then determine if the need for a trial can be avoided by using the new powers under Rules 20.04(2.1) and (2.2).[^9]

[28] In effect, on a summary judgment motion the judge’s first question ought to be: “How much more (if anything) would I need to resolve this case?” [^10] Commenting on Hryniak, Justice Corbett wrote that:

The Supreme Court is clear in rejecting the traditional trial as the measure of when a judge may obtain a “full appreciation” of a case necessary to grant judgment. … [T]he test is now whether the court’s appreciation of the case is sufficient to rule on the merits fairly and justly without a trial, rather than the formal trial being the yardstick by which the requirements of fairness and justice are measured.[^11]

Has Noreast satisfied its disclosure obligation?

[29] In Combined Air Mechanical Services Inc. v. Flesch, the Court of Appeal emphasized that parties to a summary judgment motion must advance their best case:

Each party must ‘put its best foot forward’ in respect to the existence of material issues to be tried. This obligation continues to apply under amended Rule 20. On a motion for summary judgment, a party is not “entitled to sit back and rely on the possibility that more favorable facts may develop at trial”.[^12]

[30] In Landrie, Justice Perell observed that:

Hryniak v. Mauldin does not alter the principle that the court will assume that the parties have placed before it, in some form, all of the evidence that will be available for trial. The court is entitled to assume that the parties have respectively advanced their best case and that the record contains all the evidence that the parties will respectively present at trial. The onus is on the moving party to show that there is no genuine issue requiring a trial, but the responding party must present its best case or risk losing. [^13]

[31] I would agree and go slightly farther. The shift in litigation culture endorsed in Hryniak makes it more important than ever that parties to summary judgment motions present the best and most complete evidence possible.

[32] The corollary to this obligation to lead the best evidence is the obligation by each party to disclose all relevant evidence. The defendants in this case argue that Noreast has failed to do so, thereby depriving them of the ability to put their best foot forward.

[33] As a starting point, the defendants contend that a party responding to a summary judgment motion is entitled to receive an affidavit of documents from the moving party before the motion can be heard.[^14] Since Noreast has not yet done so, the defendants say that they have not had access to all of the records that may be helpful to their defense.

[34] Cole v. City of Hamilton is often cited as the leading authority on the disclosure obligation of a party seeking summary judgment. In that case, Justice Cumming upheld a master’s order requiring the defendants to serve an affidavit of documents before presenting their motion. Although he noted that he had the discretion to waive compliance with Rule 30.03, he declined to do so, because this would “mean that the plaintiffs could not put their best foot forward in defending the motion for they would be uncertain as to what evidence might have been gained through production. This approach would defeat the purpose of rule 30.03 and compromise the rights of a responding party to defend a summary judgment motion brought under Rule 20.” [^15]

[35] As other judges have noted, the decision in Cole should be read carefully in the context of the amended rules.

[36] The rules no longer require, as they once did, that affidavits of documents be exchanged within 10 days of the close of pleadings. Moreover, the current version of Rule 20 explicitly contemplates the possibility that a motion for summary judgment may be brought before affidavits of documents are exchanged. Further to Rule 20.01(1), a plaintiff may move for summary judgment any time after the defendant has delivered a statement of defense. Where a judge concludes that the action should proceed to trial, subrule 20.05(2) provides that the judge may, among other things, impose a deadline for the exchange of affidavits of documents. The rule therefore assumes that a motion for summary judgment may be presented before this exchange has taken place.

[37] In Fehr v. Sun Life Assurance Company of Canada, Justice Perell considered a disclosure argument raised in response to a summary judgment motion brought by defendants in a class action.[^16] He held that the production principles regarding production prior to such a motion set out in Cole and similar pre-2014 cases must reassessed in light of Hryniak, writing:

At the outset of the Hryniak judgment, Justice Karakatsanis stated that a culture shift is required in the legal community in order to create an environment promoting timely and affordable access to the civil justice system. She said that the legal culture shift entails simplifying pre-trial procedures and moving the emphasis away from the conventional trial in favour of proportional procedures tailored to the needs of the particular case. The directions above, including the direction that the parties are not obliged to exchange affidavits of documents, are designed to be proportionate and to tailor the procedures to the needs of this particular case.

Under Hryniak the trial is no longer the center of the procedural universe and other proportionate procedures may provide fair access to justice. Applying these principles in the immediate case, in my opinion, a further and better affidavit of documents is not required for a fair hearing of the Defendant’s summary judgment motion.[^17]

[38] In Business Development Insurance Ltd. v. Caledon Mayfield Estates Inc, Justice Emery adopted the reasoning in Fehr, concluding that:

[T]here is no entitlement under the Rules of Civil Procedure for one party to seek an affidavit of documents from another in the face of a pending motion for summary judgment and in the absence of a discovery plan. [^18]

[39] I share this view. A party responding to a motion for summary judgment is no longer automatically entitled (if they ever were) to an adjournment or dismissal of the motion if the moving party has failed to produce an affidavit of documents. The question I must ask is whether, in the circumstances of the case, the defendants have identified specific evidence or a category of evidence, the absence of which prevents the court from reaching a fair and just result on the motion.

[40] The defendants compare this case to the situation in Bogatyreva v. Ricky3 Holdings Ltd.[^19] Bogatyreva involved a motion for summary judgment in the context of an action commenced under the simplified rules. Pleadings had been exchanged but no other procedural steps had been taken. The defendant argued that it would be unfair to allow the motion at this stage of the action because it was unable to put its best foot forward. It asserted that the plaintiff had documents relevant to its knowledge of the terms of the transaction giving rise to the litigation but that it had no way to access them prior to documentary and oral discovery.

[41] Justice Gray accepted this argument. He concluded that: “There may be documents in the plaintiff’s possession that are relevant to the defendant’s case, and it would be unfair to require the defendant to submit to a motion for summary judgment until it has had the opportunity to secure relevant evidence and put its best foot forward.”[^20]

[42] The differences between the discovery available in Bogatyreva and in this case are significant.

[43] Bogatyreva was an action brought under the simplified rules. In his decision, Justice Gray acknowledged that in cases governed by the regular procedure, the shortcomings in the record “might be overcome by cross-examination on affidavits and the use of Rule 39.03”.[^21]

[44] In this case, the defendants were able to cross-examine Noreast’s affiants and did so, at length. They also examined witnesses pursuant to Rule 39.03. Through these procedures, they had the ability, unlike the defendants in Bogatyreva, to obtain documents, information and admissions from the plaintiff.

[45] The defendants argue that they nonetheless did not obtain all of the information relevant to their defense. They say that laptops seized by Noreast as a result of the Anton Piller order contained a long history of Skype conversations between Eric and other Noreast employees. The defendants also say that Eric’s cell phone contained “numerous voice recordings of both a personal and business nature”.

[46] In her cross-examination, Maxwell acknowledged frequent Skype communications with Eric. She also said that she deleted them. Noreast denies any non-disclosure of seized records.

[47] I am not convinced, on the evidence filed, that Noreast has prevented the defendants from gaining access to records seized as a result of the ex parte orders. There is however a more fundamental problem with the defendants’ argument regarding disclosure. They have been unable to identify any content in the alleged Skype or phone records that would be helpful to the defense.

[48] In Eric’s October 30, 2017 affidavit, he twice mentions Skype discussions with Maxwell. He says he complained about Steiner’s abusive behaviour towards him and they discussed Steiner’s intolerance of any criticism. In paragraph 2 of the affidavit, Eric mentions Steiner’s alleged harassment of him and says that:

Nous avons eu de nombreuses conversations à cet égard, principalement via le clavardage sur Skype et au téléphone. Maxwell me demandait toujours de supprimer les messages de nos conversations sur Skype quant au comportement inapproprié de Steiner et aux abus dont j’étais victime chez Noreast.[^22]

[49] In paragraph 8 of this same affidavit, Eric alleges that Steiner directed that some individuals be paid by Noreast even though they actually worked for PMC. He adds:

J’ai discuté mes inquiétudes quant à ceci avec [Maxwell] en novembre 2016 sur Skype et Maxwell m’a dit « He is the President. I wouldn’t want to be the one to tell him that. » Ceci voulait dire que je ne devais pas soulever cette information avec Steiner.[^23]

[50] For reasons I will explore further below, I conclude that Eric’s allegations about Steiner’s abusive conduct are irrelevant to Noreast’s claim against him. Since the conduct is irrelevant, any discussions that will establish the conduct are irrelevant.

[51] Eric does not mention any other topics of conversation in his Skype discussions with Maxwell. He does not, for example, suggest that he disclosed the existence of EAJ or his role in it. On the contrary, he says that he deliberately refrained from telling anyone at the company about EAJ because he feared how Steiner would react.

[52] In argument on the motion, the defendants suggest that, during discussions with Maxwell, Eric may have mentioned communications between the Chinese suppliers and other employees at Noreast. There is however no reference to any such discussions in his affidavits.

[53] The defendants also complain that Noreast has failed to produce affidavits from certain individuals who might have relevant information. They argue, for example, that Shirley He, one of Eric’s main contacts in China, would be a key witness on Eric’s role in procurement for the company and communications between the suppliers and other employees at Noreast. But Noreast’s disclosure obligation does not extend to submitting evidence from every party who might conceivably have some knowledge of the events giving rise to the action. There is furthermore no property in a witness. If the defendants believed there were third parties with relevant information, they could have asked them for affidavits or sought third party examinations.

[54] The defendants have used the rules, as they are entitled to do, to obtain additional evidence from Noreast employees who did not swear affidavits. They examined both Steiner and Ivan Houle (“Houle”), Noreast’s IT director. They could have sought further examinations. Having failed to do so, they cannot speculate about other testimony that might be material to Noreast’s claim.

[55] In Canada (Attorney General) v. Lameman, the Supreme Court noted that a party seeking to defeat a summary judgment motion must identify specific, relevant information that is not before the motion judge.[^24] If the party does not do so, the court must assume that the record is complete:

A summary judgment motion cannot be defeated by vague references to what may be adduced in the future, if the matter is allowed to proceed. To accept that proposition would be to undermine the rationale of the rule. A motion for summary judgment must be judged on the basis of the pleadings and materials actually before the judge, not on suppositions about what might be pleaded or proved in the future.[^25]

[56] Although they contend that Noreast has failed to disclose, the defendants have not been able to identify any specific information in Noreast’s sole possession or control that is relevant to their defense or to the broader issues on this motion. I accordingly have no basis to conclude that Noreast has failed to disclose relevant information or that such non-disclosure has deprived the defense of useful information.

Is there a genuine issue for trial?

[57] I must now consider whether, on the evidence before me, there is a genuine issue for trial and, if there is, whether I can and should use my fact-finding powers to resolve the issues rather than letting the case proceed to a full hearing.

[58] Noreast argues that the evidence of the defendants’ fraud is overwhelming and that there is accordingly no genuine issue for trial.

[59] As already noted, most of the facts relevant to Noreast’s claim are not disputed. Eric admits that he incorporated EAJ in Wyoming, without Noreast’s knowledge, and generated invoices that resembled suppliers’ invoices but directed Noreast to make payment to the EAJ bank account. He does not deny that the prices on the EAJ invoices were higher than the prices charged by the Chinese suppliers. In cross-examination, Watson has also admitted her role in creating the EAJ invoices. The invoicing and payments records are unchallenged, as is the evidence of Deloitte Forensic.

[60] There is however some conflicting evidence on this motion that would have to be addressed in order to reach a decision on the merits of Noreast’s claim. While the invoicing scheme itself is admitted, Eric, Watson and Raymond have sworn affidavits to the effect that EAJ was a wholesaler or reseller that provided legitimate services to Noreast. I would have to decide whether to give this evidence any weight. The defendants have also argued that the invoicing scheme was justified, or at least not a breach of Eric’s terms of employment, based on Steiner’s instruction to deal with the Chinese suppliers outside of company hours. Although this argument is largely legal as opposed to factual, in order to resolve Noreast’s claim on its merits, I would have to consider whether the evidence shows that Steiner authorized Eric to act as he did. I would have to consider whether Watson’s evidence on her lack of knowledge of any fraud is credible. Finally, the defendants have urged me to find that Maxwell is an unreliable witness. This again would require me to use my powers under Rule 20.04(2.1).

[61] I therefore conclude that there is a genuine issue for trial, and that I must consider whether I am able to make necessary determinations of fact and law and whether it is appropriate that I do so.

Can I resolve the issues using my fact-finding powers and is it in the interest of justice that I do so?

[62] Having considered the evidence on the motion, the parties’ arguments about what further information could be available at trial, and the goals of the amended summary judgment rule, I conclude that this is an appropriate case for summary judgment. I can decide this action on its merits fairly and justly on the evidence now before me, and it is in the interest of justice that I do so.

[63] As already mentioned, the parties have submitted many affidavits. Noreast has also filed two reports from Deloitte Forensic. The key players, with the exception of Eric, have been cross-examined. The defendants have also examined Steiner and Houle. This process, as well as the execution of the Anton Piller order, has resulted in an extensive record. The central facts of Noreast’s fraud claim are essentially unchallenged. Most of what is at issue are the inferences I should draw from these facts and arguments about whether Eric was justified in acting as he did. Although there is some contradictory evidence, the record allows me to make the necessary findings of fact and law, and is a proportionate, more expeditious and less expensive means to achieve a just result.[^26]

[64] I do not accept the defendants’ submission that the issues in dispute are too broad and contentious to be fairly determined on the motion. The defendants argue that, in its 2014 decision in Miller Group Inc. v. James, the Court of Appeal held that summary judgment motions should be confined to “narrow and discrete issues” requiring a limited evidentiary record.[^27] Miller Group does not, in my view, fetter my discretion as suggested by the defendants. The suitability of any given case for summary disposition remains governed by Rule 20.04 and the guiding principles set out in Hryniak. In any event, I find the issues that remain to be decided here fit within the language of Miller Group.

[65] Finally, the defendants argue that I should not grant summary judgment on Noreast’s claim given Eric’s counter-claim. They argue that I cannot decide whether he acted fraudulently without unfairly impacting his claim for wrongful termination.

[66] In cases predating Hryniak, the Court of Appeal had held that granting partial summary judgment might not be in the interests of justice due to the risk of duplicative proceedings or inconsistent facts when the balance of the action eventually went to trial.[^28] Recently, in Butera v. Chown, Cairns LLP, the Court of Appeal held that this is still good law. [^29] The Court added that partial summary judgments may give rise to “further problems that are anathema to the stated objectives underlying Hryniak”. [^30] These problems include potential delay in the resolution of the main action while the partial summary judgment motion is being litigated, especially if the outcome is appealed; increased fees for all parties; and use of scarce judicial resources in disposing of motions.

[67] The Court of Appeal concluded in Butera that:

When bringing a motion for partial summary judgment, the moving party should consider these factors in assessing whether the motion is advisable in the context of the litigation as a whole. A motion for partial summary judgment should be considered to be a rare procedure that is reserved for an issue or issues that may be readily bifurcated from those in the main action and that may be dealt with expeditiously and in a cost effective manner. Such an approach is consistent with the objectives described by the Supreme Court in Hryniak and with the direction that the Rules be liberally construed to secure the just, most expeditious, and least expensive determination of every civil proceeding on its merits. [^31]

[68] Having considered this cautionary language carefully, I have concluded that the situation in this case is distinguishable from that in Butera and other cases where courts have concluded that partial summary judgment is incompatible with the interests of justice.

[69] First, in Butera the defendant was asking for summary judgment on the plaintiff’s negligent misrepresentation claim, leaving the plaintiff’s solicitor’s negligence claim unresolved. Noreast is not asking me to adjudicate some of its causes of action but not others. It is asking me to deal with its entire claim. In this sense, this is not a motion for partial summary judgment.

[70] Second, I am not convinced that adjudication of Noreast’s claim predetermines the outcome of the counter-claim. I will not be required to make findings about the scope of Eric’s employment or the terms of his relationship with Noreast in order to determine whether he is liable for fraud. At most, I will have to decide if he was authorized to set up a company for the purpose of selling components to Noreast at a profit. If I find that he was not, this still leaves open the question of whether, in doing so, Eric breached his employment contract so fundamentally that it warranted his termination.

[71] This however gives rise to a further concern. As noted in Butera, the efficiency and cost-saving goals of summary judgment may be thwarted if the motion does not resolve all of the issues between the parties.[^32] If I grant summary judgment to Noreast, the parties may still have to go to trial on Eric’s counterclaim. Does it follow that I should not rule on Noreast’s claim now?

[72] In my view, it does not. As already noted, some of the findings that I have to make on Noreast’s claim may be material to the counter-claim, but they will not be determinative of it. In these circumstances, the parties’ interests will still be advanced by an efficient resolution of the main claim. The evidence permits me to make the necessary findings of fact and law to dispose of Noreast’s claim and this motion is a proportionate, more expeditious and less expensive means to achieve a just result on Noreast’s claim. In these circumstances, accepting the defendants’ argument would be tantamount to accepting that a summary judgment motion could never succeed in any case where the defendant had counterclaimed.

[73] For all of these reasons, I conclude that this is an appropriate case for summary judgment.

If this is an appropriate case for summary judgment, has Noreast proved its case against each defendant?

(1) The claim in fraud

[74] In addition to being the leading case on summary judgment in Ontario, Hryniak sets out the test for civil fraud. The tort has four elements which must be proven on a balance of probabilities:

(1) a false representation by the defendant;

(2) some level of knowledge of the falsehood of the representation on the part of the defendant (whether knowledge or recklessness);

(3) the false representation caused the plaintiff to act; and

(4) the plaintiff’s actions resulted in a loss.

[75] Noreast relies in particular on Justice Akbarali’s decision in MacNamara v. 2087850 Ontario Ltd..[^33] MacNamara paid a company called Strathcona over $6 million to conduct major renovation work on his property. Concerned about the ongoing cost, MacNamara hired a consultant to review Strathcona’s invoices. The consultant concluded that Strathcona had submitted false invoices that overstated amounts payable to sub-contractors and applicable taxes. MacNamara sued Strathcona for fraud. He also named the company’s sole shareholder, Koblinsky.

[76] On a motion for summary judgment, Justice Akbarali granted judgment against both Strathcona and Koblinsky. On the basis of the evidence on the motion, he concluded that the amounts billed were “not a case of isolated errors in the invoicing, but a persistent scheme to overcharge Mr. MacNamara and conceal the overcharging by failing to provide the back-up documentation to Strathcona’s invoices”.[^34] The invoices constituted false representations, because each invoice “was designed to look like each sub-trade had billed the amounts listed on the face of the invoice.”[^35] The defendants knew the representations were false because it knew what had actually been billed, and that the Strathcona invoices overstated these amounts.[^36] This caused the plaintiff to act to his detriment because he:

trusted Strathcona and in reliance on the invoices he received, he paid the invoices in full. As was the case in Ottawa Community Housing Corp. v. Foustanellas, 2013 ONSC 973 (Ont. S.C.J.) at para. 75, aff’d 2015 ONCA 276, 125 O.R. (3d) 539 (Ont. C.A.), the false invoicing scheme was intended to induce, and succeeded in inducing, Mr. MacNamara to pay more for Strathcona’s services than he owed under the contract.[^37]

As a result, the defendants liable to repay $1,387,902 that was not due.[^38]

[77] Applying the test set out in Hryniak and applied in MacNamara, I similarly find that Eric, Watson and EAJ are liable for fraud as a result of their false invoicing scheme.

Eric, Watson and EAJ made false representations to Noreast

[78] EAJ’s invoices, prepared by Watson at Eric’s direction, constituted false representations. Each invoice was designed to look as though it had been issued by a Chinese supplier and that the supplier had billed the amounts listed on the face of the invoice. There was nothing on the face of the invoices to suggest that the unit prices had been marked up or that EAJ was acting as a middle-man, wholesaler or reseller on the sale. There was in fact no reference to EAJ’s role in the sale. The only reference to EAJ was as the account holder for the supplier’s bank account at Wells Fargo in Wyoming. This was untrue.

[79] As admitted by Watson, the customs tax on some suppliers’ invoices was also marked up on EAJ invoices. This mark-up was used to pay a “consult fee” to Shirley He, one of Eric’s contacts in China. Neither He’s role nor the mark-up were mentioned on the EAJ invoices.

[80] Eric directed the preparation of the invoices and delivered them personally to Noreast. Each time he did so, he represented that they were invoices from the Chinese suppliers for the amounts charged by these suppliers, when it fact they were invoices from EAJ for prices that were marked-up to profit EAJ. EAJ made the same false representations, since the invoices were issued through and for the benefit of the company.

[81] In his affidavits, Eric argues that the invoices did not misrepresent EAJ’s role and that Noreast must have understood that EAJ was acting as a middleman since the company’s name was mentioned. I reject these arguments. A reasonable person receiving an invoice bearing a supplier’s letterhead would assume that the invoice had been issued by the supplier. They would not assume that the letterhead simply identified the manufacturer of the goods and that the invoices had been issued by some unknown reseller.

[82] Watson effectively denies knowing anything about the false invoicing scheme. In her testimony, Watson said she had no knowledge of what Eric was doing with the invoices she prepared and printed for him. She went so far as to say that she could not know whether he actually delivered them to Noreast. She later acknowledged that, if Noreast paid the EAJ invoices, this necessarily implied that Eric had submitted them to the company for payment.

[83] I will explain in greater detail below why I must reject Watson’s evidence regarding her knowledge of the false invoicing scheme. For now, I will simply say that, notwithstanding her equivocations during her testimony, I infer that she knew at the time that she was preparing invoices that contained material inaccuracies, and that these invoices would be submitted to Noreast.

[84] Watson admitted that Noreast was the only company purchasing from EAJ and its only source of revenue, and she knew the invoices were being paid. Aside from the fact that the EAJ invoices were addressed to Noreast, there would be no reason to continue to create them for any other purpose than delivering them to Noreast.

[85] Watson also participated directly in making false misrepresentations to Noreast. She cannot avoid this finding by saying that she simply did what Eric told her to do. Due to her involvement in calculating and making payments to the Chinese suppliers, she knew that the prices on the EAJ invoices overstated the prices actually payable to the suppliers. She also knew that the suppliers had directed that payment be made to their own banking facilities in China, and not to EAJ’s bank account in Wyoming. The template for the EAJ invoices used by Watson was calculated to give the impression that they were issued by the Chinese suppliers. In the circumstances, Watson is as much responsible as Eric for making the false misrepresentations in the EAJ invoices.

[86] EAJ was the third participant in these false misrepresentations to Noreast. As the company through which the EAJ invoices were issued, EAJ must also be held to have made the misrepresentations.

[87] Eric made other false misrepresentations to Noreast. He admits that he never told Noreast that EAJ was acting as a reseller or that he was the principal of EAJ. This omission, coupled with the misleading information and omissions on the invoices themselves, mislead Noreast into believing it was dealing directly with the Chinese suppliers and paying them no more than the cost they charged for their components. Eric has attempted to justify these omissions through evidence of Steiner’s abusive conduct and his fear that he would be fired if his role in the sales were disclosed. He does not however deny that he took no steps to advise Noreast of the mark-ups on the prices charged by the Chinese suppliers or EAJ’s role.

[88] Eric further misrepresented to Noreast that the Chinese suppliers had directed Noreast to make payment to the EAJ bank account in Wyoming. There is no evidence that any Chinese supplier ever authorized payment of their invoices to EAJ. On the contrary, the original invoices discovered during the investigation showed that the suppliers directed payment to their accounts in China.

[89] The first misrepresentation of this nature occurred on April 1^st, 2010, when Eric forwarded the first EAJ invoice to Maxwell and wrote: “see below changes to their banking changes (sic)”. He effectively repeated this misrepresentation every time he delivered a further EAJ invoice directing payment to the account in Wyoming.

[90] According to Maxwell, Eric made a further verbal misrepresentation about the payment instruction supposedly first received from a Chinese supplier in April 2010. He told her that the supplier had decided to set up a financial office in the U.S. and so their banking information would need to be updated. She recalls that he said: “They’ve now decided that they want to have the banking done in the States so just change it”. In her November 2017 affidavit, Maxwell says that she questioned him about an invoice purportedly from a new supplier, Hefei Shirui. This invoice, like all other EAJ invoices, directed payment to the EAJ bank account in the U.S. Eric told Maxwell that an “elderly owner” had several companies and he wanted to do his banking through EAJ. He said that payments would be transferred at their end, and “that’s the way they do things over there”. Maxwell was not cross-examined on this evidence, and I accept it as accurate.

Eric, Watson and EAJ knew the representations were false

Knowledge by Eric and EAJ

[91] Eric knew that the EAJ invoices misrepresented the prices charged by the Chinese suppliers. The invoices were designed to mimic the invoices actually received from suppliers, but significantly overstated the prices charged by them and directed payment to the EAJ bank account. As in MacNamara, these were not isolated billing errors, but rather a deliberate scheme to overcharge Noreast for the defendants’ benefit.

[92] Eric admits that he did not tell Noreast about EAJ or his role in it, saying that he feared how Steiner would react. In his October 30, 2017 affidavit, he states:

Mon choix de demeurer silencieux quant au fait que j’étais propriétaire d’EAJ n’avait qu’un seul motif : protéger mon emploi chez Noreast. … considérant ma relation difficile avec Steiner et ma faible sécurité d’emploi, je n’avais d’autre choix que de demeurer silencieux à cet égard.[^39]

[93] But Eric’s misrepresentations went well beyond passive deception. His contention that he never lied to his employer is at odds with an abundance of evidence of his active steps to conceal his involvement in EAJ and EAJ’s role in the purchases from Chinese suppliers. This evidence includes the invoices’ deceptive design, misleading or false statements to Maxwell and others at Noreast, instructions to the suppliers to deal only with him, the choice of EAJ’s name, incorporation in Wyoming, and fees paid to avoid any public disclosure of Eric’s role in the company.

[94] For example, on November 12, 2015, Eric wrote an email to a Chinese Supplier stating that “Any pricing must be given to me and no one else at Noreast … I know I specified this before, I just want to make sure this is understood.” On September 30, 2016, Eric sent a further email to the same supplier instructing: “Please no invoices.” On December 21, 2016, another supplier questioned whether a payment for a U.S. account was from Noreast. Eric replied that it was and then instructed “Please no invoice in box.” I infer that Eric took steps to conceal the suppliers’ actual pricing from Noreast because it had no idea it was paying mark-ups to EAJ.

[95] The decision to incorporate EAJ in Wyoming, and the choice of name for the company, are also telling. Watson admitted in cross-examination that neither she nor Eric have any family or property in Wyoming and have never even visited the state. She was unaware of any tax advantages in incorporating there. She could not explain how the name EAJ Technical Corporation was chosen.

[96] I infer that Wyoming was chosen as the place of incorporation because it permitted Eric to conceal his involvement with EAJ. This is in fact the only rational explanation for his decision to seek incorporation in a place with which he had no ties and in respect of which there is no stated tax benefit. The only apparent benefit of incorporation in Wyoming is that Wyoming law does not require public disclosure of officers and directors of companies incorporated there. The defendants paid a further annual fee to ensure Eric’s anonymity as an officer and director of EAJ. It was only due to an error by WCJ that Eric was identified as EAJ’s president on a state website in 2015. This was how Noreast learned of his connection to the company when they did an internet search for EAJ on March 22, 2017.

[97] I also infer that the name was chosen to mislead Noreast into thinking that the EAJ bank account was held by a company related to a Chinese supplier. In discarded drafts of the application to incorporate, Watson suggested two other potential names for Eric’s new company: “JQL Trading Holding Enterprise” or “JQL Enterprises”. Shenzhen Jingquanli Electronics Co. Ltd., also known as JQL Electronics Co., Ltd., was one of Noreast’s Chinese suppliers. I can only conclude that names incorporating the initials JQL were considered because a company with these initials would be assumed to be related to an actual supplier in China.

[98] The name ultimately chosen for EAJ was also familiar to Noreast. In January 2010, JQL Electronics Co., Ltd. had asked Noreast to make payment for a shipment to one of its related companies, EAJER Industrial Limited. I conclude that the name “EAJ Technical Corporation” was selected so that Noreast would not question the new banking direction that appeared consistent with a prior direction from JQL.

[99] Since Eric is EAJ’s sole owner and president, his knowledge of the falsity of the representations on the invoices may be imputed to the company.

Watson’s knowledge

[100] In her June 26, 2017 affidavit, Watson stated that Eric “became a wholesaler” by incorporating EAJ in 2010:

As I understand it, Eric ordered goods from various suppliers in China for resale. His main client was Noreast Electronics Co. Ltd. … At no point in the past have I considered his business to be illegitimate and I do not consider it to be as such at present.

[101] In this same affidavit, Watson denied any meaningful knowledge of or role in EAJ. She said that she “never had and do not have an interest in participating in Eric Danis’ business ventures” and that her knowledge of his business ventures was “limited”. She said that she was “not involved at all with [Eric’s] business operations” outside of her duties as an “administrator” of EAJ. She acknowledged doing invoicing and paying bills relating to EAJ, ensuring that records were sent to its accountant, and entering data into an accounting software to send to the accountant at year end. Watson said she received a salary for this administrative work. She denied any additional involvement with EAJ.

[102] In a further affidavit sworn on October 30, 2017, after Noreast had obtained records held by Eric and Watson as a result of the Anton Piller order, Watson admitted that she performed other duties for EAJ. This included communicating with its bank and incorporation services, and “occasionally” sending shipping information to commercial importers on Eric’s behalf. She maintained, however, that “EAJ was incorporated solely by Eric in March 2010 and it has nothing to do with me”. In her cross-examination on November 16, 2017, Watson steadfastly insisted that all actions she took with respect to EAJ were on Eric’s instructions.

[103] I nonetheless conclude, on the whole of the evidence, that Watson knew that the EAJ invoices amounted to false representations, or that she was at the very least reckless as the truth of the invoices. I reach this conclusion because:

• The information on the EAJ invoices was obviously inaccurate. The invoices were created with a template that mimicked each supplier’s letterhead. They stated that the EAJ bank account at Wells Fargo was “Our Account” when, to Watson’s knowledge, the account belonged to EAJ. She knew that the Chinese suppliers had directed payment of their invoices to their own accounts, but the EAJ invoices directed Noreast to make payments to EAJ. She also knew that the prices charged by the Chinese suppliers were not the prices set out in the EAJ invoices.
• Watson was extensively involved in EAJ. The evidence shows that, in addition to preparing the false invoices, she paid the Chinese suppliers, conducted EAJ’s banking, and prepared and provided information for its tax filings by its accountants. She corresponded with WCS, completing the forms for WCS’ incorporation of the company and signing the “Consent to Action” form filed with EAJ to authorize a WCS representative to act as the nominee for public record purposes and to continue this service annually. She kept track of shipments from China and dealt with discrepancies and problems as they arose. She maintained ledgers of payments, tracked accounts payable and receivable and the profits made by EAJ. This level of involvement is not consistent with her denial of any knowledge of the invoicing scheme.
• Watson either knew, or should have known, that the way the company was incorporated and named was inconsistent with an honest business enterprise. On cross-examination, she said she did not know how EAJ’s name was chosen. She could not explain why this name, and the other potential company names she wrote in the WCJ forms, were considered. This lack of any explanation is telling. I have already found it reasonable to infer that the name EAJ was chosen because it resembled the name of another company on a payment instruction by a Chinese supplier prior to April 2010. Likewise, Watson denied knowing why EAJ was incorporated in Wyoming, even though she and Eric have no other business, friends or family there, have never visited the state, and have no other connection to it. Again, it is reasonable to infer, in the absence of any other explanation, that the company was incorporated in Wyoming so that EAJ would not have to disclose its officers and directors on the public record. Watson’s failure to account for the incorporation strategy undermines the credibility of her denial of any dishonest intent.
• Watson paid herself $847,156.34 USD from EAJ’s bank account, transferring this amount to various bank accounts in the U.S. and then to Canada. This was almost all of the money in the EAJ bank account. This is significant for three reasons. First, although Watson referred to these payments as “salary”, she did not explain how her administrative contributions – the extent of which she consistently attempted to downplay – could possibly merit this level of compensation. Second, she did not explain why all profits would flow to her instead of her husband, who was supposedly responsible for all of the real decision-making and work for EAJ. Third, Watson is an educated and clearly intelligent individual. It beggars the imagination that she believed that Noreast knowingly would have authorized payments of over a million dollars Canadian to a company owned by an employee who was already earning annual compensation in the range of $105,00 to $157,000 as well as stock dividends of $120,000 to $313,000 annually.
• Watson initially denied any knowledge of Eric’s business. Confronted with marked-up invoices and other records during her cross-examinations, she made concessions about her involvement only when she had no choice. Her attempts to deny any insight into EAJ’s business despite overwhelming evidence of her involvement makes her an unreliable witness. I cannot give any weight to her assertions that she believed EAJ to be a wholesaler and that Eric’s dealings through EAJ were legitimate.

The misrepresentations caused Noreast to act

[104] On the third part of the test for fraud, I find that EAJ invoices, prepared by Watson and delivered by Eric, caused Noreast to make payments for marked-up prices to EAJ rather than payments directly to Chinese suppliers for the lesser amounts they actually invoiced.

[105] There is no evidence that Noreast ever realized it was dealing with a middleman or reseller. Noreast never identified EAJ as a supplier. It did not set up a supplier code for EAJ or at any point issue a purchase order to EAJ. It thought it was dealing directly with its Chinese suppliers as it had prior to April 1^st, 2010.

[106] Noreast took no steps to compare the prices on the EAJ invoices with prices previously charged by the suppliers. Maxwell stated both in her affidavits and in cross-examination that she did not take steps to verify the pricing on the EAJ invoices because she trusted Eric. Noreast paid the EAJ invoices because it assumed, based on Eric’s involvement in the supply arrangement, that there was no reason to suspect any overcharging or fraud.

[107] In her November 10, 2017 affidavit, Maxwell stated that Eric took steps to prevent other employees at Noreast from contacting any of the Chinese suppliers. Maxwell said that she was advised by Marie-Ève Danis and Susan Stewart, Purchasing Manager of Noreast, that they each asked Danis, on multiple occasions, if he needed or wanted assistance with paperwork for the Chinese suppliers. Eric declined these offers.

[108] Eric denies this. He says that no-one at Noreast ever offered to take over his role as the main contact for the Chinese supplier or offered to assist him with these efforts.

[109] I prefer Maxwell’s evidence on this point. It is consistent with an abundance of evidence, already referred to, on Eric’s attempts to conceal EAJ’s role.

[110] Maxwell also states that, on various occasions, Marie-Ève asked Eric for contact information for the Chinese suppliers so she could contact them about pending shipments. Maxwell said that Eric declined to provide this information and, when he forwarded emails to Marie-Ève from the Chinese suppliers, he deleted their originating email addresses. Maxwell produced two emails forwarded by Eric from suppliers which appear to bear this out.

[111] In cross-examination, Maxwell admitted that Noreast had contact information for the Chinese suppliers in its computerized database. She also admitted that, on some occasions, there were emails exchanged between representatives of Chinese suppliers and employees at Noreast other than Eric.

[112] Based on these admissions, the defendants argue that it was unreasonable for Noreast to rely on Eric’s representations about the arrangements with the suppliers rather than making their own inquiries. They also urge me to find that Maxwell is not a credible witness, because her assertions about Eric’s efforts to monopolize contact with the Chinese suppliers was contradicted by the evidence of the emails with other employees.

[113] I do not accept that Maxwell’s admissions on a few communications with Chinese suppliers make her a generally unreliable witness. Based on my review of Maxwell’s affidavits and the transcript of her two cross-examinations, she gave a consistent and credible account of Noreast’s purchases from the Chinese suppliers and the systems within the company. Maxwell’s failure to remember four email exchanges over eight years does not make her an unreliable witness. She displayed no animosity towards Eric, saying she likes him even now.

[114] On the whole of the evidence, I find that Eric took steps to discourage others at Noreast from communicating with the Chinese suppliers. I also find that he directed the suppliers not to include invoices in their shipments to Noreast and to deal only with him. The existence of four email exchanges between other employees at Noreast and a supplier’s representative does not undermine this conclusion. It simply shows that, on a very few occasions, Eric was not able to prevent others at Noreast from communicating directly with the suppliers. Maxwell testified that, generally speaking when she and others at Noreast attempted to contact the suppliers, they would not receive any response. This supports the finding that, save for four lapses over eight years, Eric succeeded in making himself the sole point of contact with the Chinese suppliers.

[115] I would add that the theoretical ability of Noreast’s other employees to contact the suppliers is not really relevant. Maxwell testified that she did not reach out to them because Eric said he would handle them. She trusted him.

[116] The defendants likewise argue that Noreast could have compared the unit prices for components set out in the EAJ invoices with prices from other suppliers. In his cross-examination, Houle, the IT director at Noreast, acknowledged that Noreast had software that permitted salespeople to get insight into the component costs of the products it manufactured and sold. Houle pointed out, however, that this comparative information was not produced automatically. Someone had to seek it out. Since others at Noreast trusted that Eric was getting good prices from the Chinese suppliers, I conclude that no-one had any reason to seek this information. The mere fact that they could have done so does not excuse Eric’s deception.

[117] More generally, I reject the defendants’ argument that, since Noreast had the means to verify the representations made by EAJ invoices or Eric, it was unreasonable for Noreast to rely on them. Neither Maxwell nor anyone else at Noreast had any reason to second guess the reliability of the information on the EAJ invoices delivered by Eric. He was a long-time employee and shareholder. Having taken active steps to mislead Noreast, Eric cannot try to blame the company for his success in having done so.

The misrepresentations resulted in a loss to Noreast

[118] Finally, I find that the EAJ invoices as well as Eric’s other misrepresentations induced Noreast to make payments of $1,882,886 USD to EAJ. A substantial portion of these payments were a loss to Noreast, because it was paying a mark-up over and above the suppliers’ actual prices.

[119] The defendants have argued that EAJ’s mark-ups were justified because of the work done by Eric and Watson to manage the supply chain. There is however no evidence to suggest that the pricing in the suppliers’ invoices would have been higher in EAJ’s absence. In fact, the evidence suggests the opposite. Noreast was buying directly from the suppliers, without any mark-up, prior to April 1^st, 2010. I infer that they could have continued to do so, had the defendants not replaced their invoices with EAJ invoices.

[120] I set out my conclusions on Noreast’s proven loss below in the section on damages.

Has Eric proved that the fraud was authorized by Noreast?

[121] In defence of Noreast’s fraud claim, the defendants argue that Eric was authorized by Noreast to act as a middleman for purchases from the Chinese suppliers. I reject this argument both because it is unsupported by the evidence and untenable in law.

[122] The evidence on the issue consists of Eric’s affidavit evidence, an affidavit by Raymond Danis, Eric’s father, and the cross-examination of Nick Steiner.

[123] In his affidavits, Eric characterizes EAJ as a wholesaler or reseller. In his June 26, 2017 affidavit, Eric states:

En 2009, j’ai discuté avec Steiner de mes efforts avec les producteurs chinois notant l’impossibilité de transiger avec eux à l’intérieur des heures ouvrables de Noreast en raison du décalage horaire. Steiner m’a répondu que j’étais défendu de facturer Noreast pour ce travail et des heures supplémentaires. J’ai compris que ceci ne faisait pas partie de mes taches d’emploi chez Noreast.[^40]

[124] Eric does not say that he was ever explicitly authorized by Steiner to resell to Noreast. He argues, however, that Steiner’s refusal to pay him overtime effectively constituted authorization to do so.

[125] In his affidavit, Raymond likewise says that, in December 2009, Steiner told Eric that any work he did with the Chinese suppliers was “on his own time”. According to Raymond, Steiner’s refusal to compensate Eric for his work on the Chinese supply chain permitted Eric to set up a commercial arrangement for the purchase and resale of components to Noreast. In his view, Eric did not act fraudulently because “Any other wholesaler would have taken markup.”

[126] Raymond’s evidence about the alleged discussion between Eric and Steiner carries no weight because it is hearsay. Raymond does not say that he attended this meeting or that he had any discussions with Steiner about Eric’s involvement with Chinese suppliers. He does not cite the source of his statements about the December 2009 discussion. I must assume that he is simply repeating what Eric told him.

[127] What remains is Raymond’s personal belief that Eric was justified in setting up a resale scheme through EAJ, because Steiner treated him unfairly and, otherwise, he would not have been paid for his many hours of work in connection with the Chinese suppliers. This is not evidence but argument.

[128] For these reasons, I cannot give Raymond’s evidence on these issues any weight.

[129] Steiner did not swear an affidavit but was cross-examined under Rule 39.03. He had no recollection of the discussion with Eric in December 2009 but said that he would not have permitted Eric to do any work with Chinese suppliers during normal work hours. The defendants argue that this supports their contention that Eric was authorized to set up EAJ as a middleman.

[130] Steiner’s evidence is problematic. He had trouble remembering relevant facts and events. Although he had been the president of Noreast for 40 years, he could not identify the financial year end for the company and denied meeting with Noreast’s auditors. He could not remember the names of various companies that Noreast dealt with or the name of Bill Simpson, a former employee. Steiner was unsure about the specific allegations against Eric. At one point he referred to Eric’s discussions with “the Japanese” and mentioned, unprompted, that Eric is “a wonderful fisherman”.

[131] I have no reason to think that Steiner was deliberately attempting to mislead the court or to avoid making damaging admissions. Given the gaps and inaccuracies in his testimony, however, I can place little weight on his evidence. Even if I could, his testimony does not show that he was aware of or gave the green light to a reselling arrangement by Eric. He does not in any way suggest that he ever authorized Eric to set up a company to resell Chinese components to Noreast.

[132] This leaves Eric’s affidavit evidence, which was not challenged through cross-examination. On the basis of this evidence, the defendants urge me to infer that Eric had authorization from Steiner to set up EAJ.

[133] I cannot make this inference. Steiner’s direction to Eric to not record overtime for his after-hours communications with Chinese suppliers cannot reasonably be interpreted as permission to surreptitiously establish a company, create a false invoicing scheme and charge Noreast mark-ups of up to 200% on components.

[134] There is no suggestion in Raymond’s affidavit that he, or anyone else at Noreast, ever approved the use of a middleman or wholesaler in the procurement of components from China. Raymond does not mention that he knew about the existence of EAJ until after June 2017. He expresses the view that it was reasonable for Eric to be compensated for his work outside normal business hours with the Chinese suppliers, and that Noreast profited from it. But the issue is not whether Eric was undercompensated at Noreast. An employee’s belief that he deserves higher pay, whether or not well-founded, does not justify fraudulent conduct.

[135] The defendants urge me to find that Steiner disliked Eric and deprived him of fair compensation for his work at Noreast. For example, Eric ceased to receive bonuses or overtime pay in 2009. He also alleges that Steiner delayed reimbursing him for legitimate expenses or paying him commissions.

[136] I decline to make any such findings on this issue as I do not need to do so for the purpose of adjudicating Noreast’s claim. Steiner’s allegedly poor treatment of Eric is again irrelevant to the fraud claim. There is simply no justification defense that is available here.

(2) Are the defendants liable for other causes of action?

[137] Noreast has advanced alternative claims against Eric for breach of contract and breach of loyalty. It has also claimed against all defendants for unjust enrichment, knowing receipt and knowing assistance.

[138] Given my conclusions on the fraud claim, I do not need to consider these alternative causes of action against Eric, Watson and EAJ.

[139] This leaves Noreast’s claim against Eric’s holding company 833 Inc.

[140] The first essential element of knowing receipt is receipt of property or funds. To establish unjust enrichment, a plaintiff must likewise show that the defendant received some sort of benefit. To prove knowing assistance, a plaintiff must show that the defendant has assisted in a fraudulent and dishonest breach of trust.

[141] During her cross-examination, Watson was unwilling or unable to advise the source of 833 Inc.’s investments of over $1 million CAD. Noreast urges me to infer, on this basis, that 833 Inc. participated in EAJ’s fraudulent invoicing scheme or that, at the very least, it received funds from EAJ as a result of it.

[142] On the evidence presented, I cannot make this inference. 833 Inc. owns 20.1% of the shares of Noreast, and so has a source of income outside of any funds from EAJ or the other defendants. Watson does not own or manage 833 Inc. Had Noreast wished to inquire into 833 Inc.’s finances, or to prove that it assisted in the fraudulent invoicing scheme, it should have sought to cross-examine Eric.

[143] I conclude that Noreast has not proved any claim against 833 Inc. and its action against it should be dismissed.

What remedies is Noreast entitled to?

[144] Noreast seeks $894,065.75 USD in compensatory damages as well as compound interest from the date each payment was made to EAJ. It also seeks punitive damages of $250,000 and special damages of $173,180.91, the cost of Deloitte’s investigation.

Compensatory damages

[145] With respect to the compensatory damages, Noreast relies on an affidavit and attached report by Gary Timm sworn on December 21, 2017 setting out Deloitte’s calculation of the amount that Noreast paid to EAJ over and above what EAJ paid to Noreast’s Chinese suppliers. The difference was either $864,238.75 USD or $894,065.75 USD, depending on the assumptions used.

[146] Deloitte relied on the invoices issued by the Chinese suppliers, the EAJ invoices submitted by Eric to Noreast, and information provided by Noreast about payments it made to the EAJ account. In his first affidavit, Timm said that Noreast provided Deloitte with a payment summary listing all of the payments made to EAJ from November 2009 to March 2017. Deloitte did not verify Noreast’s banking information to ascertain whether the payment information was accurate.

[147] Maxwell does not refer to the payment summary provided to Deloitte. She does not explain how it was generated or who prepared it. She simply says that Noreast paid $1.8 million USD into EAJ’s bank account between April 1^st, 2010 and March 2017.

[148] I have considered whether this evidence is sufficient to prove Noreast’s loss. The defendants did not challenge Maxwell’s affidavit evidence on the total paid. Timm says that he received a detailed payment schedule from Noreast, the total of which corresponds to loss amount provided by Maxwell. The defendants did not seek to cross-examine Timm nor did they produce a responding expert report.

[149] On the evidence, I find that the total paid by Noreast to EAJ has been proved. In the absence of any contradictory evidence, I also infer that the supporting payment schedule is accurate and that Noreast paid the amounts as shown.

[150] Deloitte identified nine EAJ invoices for which it could not locate a corresponding invoice from a Chinese supplier. Four of these invoices involved components that had been repeatedly shipped to Noreast. Deloitte assumed that EAJ paid the suppliers the same unit prices as it had previously paid. Deloitte could not however determine the price paid by EAJ for the components listed on the remaining five invoices, because no comparable items were shipped during the same time frame. The total value of these five invoices is about $30,000. Deloitte’s lower estimate excludes any compensation for the shipments covered by these invoices.

[151] Noreast has the burden of proving its damages. In the absence of any supporting invoice from a supplier or any other evidence of how much EAJ paid for the components on the five invoices at issue, I cannot assume that EAJ made any profit on these shipments. I am therefore limiting Noreast’s compensatory damages to $864,238.75 USD.

Constructive trust and equitable tracing

[152] Noreast seeks an order that all banks and financial institutions holding accounts in the defendants’ names that contain funds traceable to Noreast be authorized and directed to pay such funds to Noreast up to the total amount of the judgment awarded. This would impress the proceeds of the fraud with a trust in Noreast’s favour and allow it to trace and recover them.

[153] In Soulos v. Korkontzilas, the Supreme Court held that a judge may impose a constructive trust over funds “where good conscience so requires”.[^41] This includes situations where property has been obtained by a wrongful act by the defendant, such as a breach of a fiduciary relationship or breach of duty of loyalty.

[154] In this case, Noreast has proved that it paid money to EAJ as a result of the defendants’ fraud. It has shown that although some money remained in the EAJ bank account, most of it was transferred to other bank accounts in the U.S. and Canada, including Eric and Watson’s joint RBC U.S. chequing account. Noreast has not however been able to trace where all of the money ultimately ended up, or whether it was used to purchase assets such as retirement savings plans and the defendants’ new house. Although cross-examined on these issues, Watson evaded some questions and simply refused to provide answers to others.

[155] In my view, “good conscience” requires that Noreast have the means to recover money misappropriated by the defendants through fraud. I therefore conclude that Noreast is entitled to a declaration of constructive trust as requested and a tracing order in order to permit it to obtain further information about how the misappropriated funds were used and to assist in their recovery.

[156] For this same purpose, the Mareva injunction granted by Justice Ryan Bell on June 20, 2017, and the certificate of pending litigation registered against Eric and Watson’s residential property, should be remain in place until the defendants have fully satisfied this judgment.

Punitive damages

[157] Noreast acknowledges that punitive damages are an exceptional remedy that can be awarded only when a defendant has engaged in “high-handed, malicious, arbitrary, or highly reprehensible misconduct that departs to a marked degree from ordinary standards of decent behaviour.” [^42] It nonetheless says that punitive damages of $250,000 should be imposed on the defendants in this case, based on the evidence with respect to the fraud and the principles set out by Justice D.M. Brown in Elekta Ltd. v. Rodkin.[^43]

[158] In Elekta, the plaintiff employer obtained default judgment against its former controller for fraud of $12.4 million carried out over 13 years. The court also awarded the employer punitive damages of $200,000 based on the defendant’s gross abuse of his position of trust and authority over a prolonged period of time. Justice Brown concluded that:

Such conduct was egregious. It constituted “actionable wrongs”, being breaches of Rodkin’s fiduciary obligation and contractual duty of good faith to his employer. It deserves punishment. Although I have awarded partial default judgment in the amount of approximately $12.459 million, that judgment simply provides Elekta with the legal means to recover, by way of execution and tracing, its own money which was fraudulently taken from it by Rodkin. In my view, that judgment, by itself, would be insufficient in the circumstances to achieve the goal of punishment and deterrence.[^44]

[159] I agree with Noreast that Eric’s conduct merits a punitive damages award. He was an employee who worked for over 30 years for a small, closely held company. He used his position to defraud his employer and its shareholders, including his own father and sister. This was an active, deliberate deceit over a long period of time. Eric lied to his coworkers. He submitted falsified invoices. He tried to cover his tracks by incorporating EAJ in Wyoming and paying WCS to shield his identity. He has attempted to justify his conduct by complaining about Steiner’s unfair treatment of him. What emerges is a picture of someone who was unable to persuade his employer to pay him more and so found dishonest means to get the money that he thought he deserved. He was aware that he was doing something wrong and took active steps to conceal it. This is clearly unacceptable conduct that merits sanction.

[160] Although they participated in the fraud with Eric, EAJ and Watson did not have his relationship with Noreast or its other employees. Their actions were deceitful but not to the same degree. I am not persuaded that, in the circumstances, a punitive damages award against them is appropriate.

[161] The amount of punitive damages should be proportionate to the nature of the conduct at issue and the defendant’s means to pay it. In Elekta, Justice Brown set punitive damages at $200,000, a higher amount than had been previously awarded in similar cases. In doing so, he wrote that he wished to send a message “to those who are placed in positions of trust over corporate funds … that theft of those funds, which is what happened here, simply will not be tolerated by the courts of this country”.[^45]

[162] Noreast has not argued that Eric committed a breach of fiduciary duty. Although he used his position within the company to carry out the false invoicing scheme, he was not directly responsible for funds within Noreast. The amount misappropriated is large, but not on the same scale as Elekta.

[163] In all of the circumstances, I am ordering Eric to pay $25,000 in punitive damages to Noreast.

Special damages

[164] Noreast seeks recovery of the costs of the investigation by Deloitte Forensic.

[165] I agree with Justice Brown’s finding in Elekta that the cost of investigating and quantifying an employee fraud “flow naturally and directly from the employee’s breach of its duties to its employer” and should therefore be recoverable.[^46]

[166] In his December 21, 2017 affidavit, Timm states that Deloitte Forensic has invoiced Noreast $173,180.91 for its services in the investigation of the EAJ invoices, its participation in the execution of the Anton Piller order, and Timm’s review and completion of two affidavits. He has attached supporting invoices. Timm does not say that Noreast has paid the invoices, but they are each stamped “Paid”.

[167] I conclude that Noreast has incurred costs of $173,180.91 to investigate and quantify the defendants’ fraud, and award this amount to Noreast as special damages.

Pre- and post-judgment interest

[168] Noreast seeks pre- and post-judgment interest on damages.

[169] Further to section 128(1) of the Courts of Justice Act, a person who is entitled to an order for payment of money is also entitled to pre-judgment interest, “calculated from the date the cause of action arose to the date of the order”. Noreast argues that it is entitled to compound interest on the payments it made to EAJ between April 2010 and June 2017, starting from the dates the payments were made and running to the date of judgment.

[170] In Enbridge Gas Distribution Inc. v. Marinaccio, the Court of Appeal upheld a judge’s award of compound interest in a false invoicing scheme.[^47] It agreed with the judge’s statement about when such an award is appropriate:

Courts of equity have always exercised the power to award compound interest whenever a wrongdoer deprives a company of money which it uses in its business. On general principles it should be presumed that had the business not been deprived of the money, it would have made the most beneficial use of it available to it. Alternatively, it should be presumed that the wrongdoer made the most beneficial use of it.[^48]

[171] There is however a problem in awarding compound pre-judgment interest here. The payments made by Noreast to EAJ included funds used to pay Chinese suppliers for components purchased by and shipped to Noreast. Noreast has not sought, nor is it entitled to, all of the money it paid to EAJ. Its losses are the difference between what it ought to have paid (the amount of the suppliers’ invoices) and what it actually paid (this amount plus EAJ’s mark-up).

[172] Noreast is similarly not entitled to interest on amounts paid to EAJ that were used to pay suppliers. It has not however submitted evidence that would allow the court to determine which payments were used in whole or in part to pay suppliers, and which were simply profit to EAJ.

[173] In these circumstances, I decline to exercise my discretion to award compound interest to Noreast. I am instead granting Noreast pre-judgment interest on the compensatory damages and special damages from June 15, 2017 to the date of this judgment. Section 128(4)(a) prohibits an award of interest on punitive damages.

[174] Further to section 129(1) of the Courts of Justice Act, Noreast is also entitled to post-judgment interest on the entire award as of the date of this judgment.

Costs

[175] If the parties cannot agree on costs, Noreast may submit a bill of costs and submissions not exceeding three pages in length to me within 15 days of this decision. The defendants will have 15 days to submit their bill of costs and up to three pages of submissions.

[^1]: In this decision, I will refer to members of the Danis family by their first names to avoid any confusion. [^2]: Although Eric may have sometimes used another title, in his June 26, 2017 affidavit he states that his title from 2006 forward was Director of Sales. This is also the title Noreast gave him in his termination letter. [^3]: In his June 26, 2017 affidavit, Eric says that he acquired his Noreast shares from Raymond in 2011. In his October 30, 2017 affidavit, he produces the agreement whereby he purchased Raymond’s shares, which is dated March 18, 2013. Maxwell also testified that Raymond transferred his Noreast shares to his children in 2013. Based on Eric’s later affidavit and Maxwell’s evidence, I conclude that Eric’s reference to a share transfer in 2011 was an error. In any event, nothing turns on when exactly the transfer took place. [^4]: Although it is not clear whether Watson was asked about this specific EAJ invoice during her cross-examination, she testified that she prepared all EAJ invoices. [^5]: WCS subsequently apologized to Watson for this mistake and issued EAJ a credit against future fees. [^6]: Subrule 20.04(2.1). [^7]: Subrule 20.04(2.2). [^8]: Hryniak v. Mauldin, 2014 SCC 7 (“Hryniak”). [^9]: Hryniak, supra, at para. 66. See also Tchozewski v. Lamontagne, 2014 SKQB 71, at para. 30, where Justice Barrington-Foote details the analytic process developed in Hryniak. [^10]: This is a slight variation on the question proposed by Justice DM Brown in Optech Inc. v. Sharma, 2011 ONSC 680, at para. 42. [^11]: Sweda Farms v. Egg Farmers of Ontario, 2014 ONSC 1200, at para. 34 (“Sweda Farms”). [^12]: 2011 ONCA 764 at para. 56, citing from the reasons of Justice Sharpe in Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co. (1996), 1996 CanLII 7979 (ON SC), 28 O.R. (3d) 423 (Gen. Div.), at p. 434. [^13]: Landrie v. Congregation of the Most Holy Reedemer, 2014 ONSC 4008, at para. 47; Sweda Farms, supra, at paras. 32-33. [^14]: Cole v. Hamilton (City) (1999), 1999 CanLII 14820 (ON SC), 45 O.R. (3d) 235 (Gen. Div.) (“Cole”) and McLelland and Bethune v. Farquhar Plymouth Chrysler Ltd et al., 2013 ONSC 1216. [^15]: Cole, supra, at para. 6. [^16]: 2014 ONSC 2183 (“Fehr”). [^17]: Fehr, supra, at paras. 45 and 49. [^18]: 2015 ONSC 1978, at para. 61. [^19]: 2014 ONSC 3516 (“Bogatyreva”). [^20]: Bogatyreva, supra, at para. 32. [^21]: Bogatyreva, supra, at para. 37. [^22]: This translates as: “We had numerous discussions about this, mostly through Skype messaging and by telephone. Maxwell always asked me to delete the Skype messages setting out our discussions of Steiner’s inappropriate conduct and the abuse I suffered at Noreast”. Aside from identifying the subject matter of these discussions, this passage is consistent with Maxwell’s evidence that she deleted records of her Skype conversations with Eric. [^23]: This translates as: “I discussed my concerns about this with Maxwell in November 2016 on Skype and Maxwell told me: ‘He is the President. I wouldn’t want to be the one to tell him that.’ This implied that I should not raise this topic with Steiner.” [^24]: 2008 SCC 14, at para. 19. [^25]: Supra, at para. 19. [^26]: Hryniak, at para. 49. [^27]: Miller Group Inc. v. James, 2014 ONCA 335 (“Miller Group”). [^28]: See, notably, Corchis v. KPMG Peat Marwick Thorne, 2002 CanLII 41811 (ON CA), [2002] O.J. No. 1437 (C.A.), at para. 3. Post-Hryniak Court of Appeal decisions citing this same concern include Baywood Homes Partnership v. Haditaghi, 2014 ONCA 450, 120 O.R. (3d) 438 and in Canadian Imperial Bank of Commerce v. Deloitte & Touche, 2016 ONCA 922, 133 O.R. (3d) 561. [^29]: Butera v. Chown, Cairns LLP, 2017 ONCA 783 (“Butera”), at para. 34. [^30]: Butera, supra, at para. 29. [^31]: Butera, supra, at para. 34. [^32]: See, for example, SRF Indutex Belting Ltd. v. Pentupa Inc., 2018 ONSC 492. [^33]: 2017 ONSC 499 (“MacNamara”). [^34]: MacNamara, supra, at para. 50. [^35]: MacNamara, supra, at para. 44. [^36]: MacNamara, supra, at paras. 45-46. [^37]: MacNamara, supra, at para. 47. [^38]: MacNamara, supra, at para. 51. [^39]: This translates as: “My choice to remain silent with respect to my ownership of EAJ was motivated by only one thing: to protect my employment at Noreast. … Considering my difficult relationship with Steiner and my lack of job security, I had no other choice but to remain silent.” [^40]: This translates as: “In 2009, I discussed my efforts with the Chinese suppliers with Steiner, noting the impossibility of doing business with them during Noreast’s working hours due to the time difference. Steiner answered that I was prohibited from billing Noreast for this work and any overtime hours. I understood that these efforts fell outside of my job description at Noreast.” [^41]: 1997 CanLII 346 (SCC), [1997] 2 S.C.R. 217, at paras. 34-36. [^42]: Whiten v. Pilot, 2002 SCC 18, at para. 94; see also Vorvis v. Insurance Corp. of British Columbia, 1989 CanLII 93 (SCC), [1989] 1 S.C.R. 1085, at para. 27, and Keays v. Honda, 2008 SCC 39, at para. 62. [^43]: 2012 ONSC 2062 (“Elekta”). [^44]: Elekta, at para. 29. [^45]: Elekta, at para. 30. [^46]: Elekta, at para. 38. [^47]: 2012 ONCA 650 (“Enbridge Gas”), at paras. 55-58. [^48]: Enbridge Gas, at para. 56. See also the other decisions cited by the Court to the same effect: Kooner v. Kooner, 2006 CarswellOnt 5884 (C.A.), at para. 2; Waxman v. Waxman, 2008 ONCA 426, at para. 5; and Brock v. Cole (1983), 1983 CanLII 1952 (ON CA), 40 O.R. (2d) 97 (C.A.), at p. 103.