COURT FILE NO.: CV-16-11532-00CL
DATE: 20190110
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
SERGUEI FEDOTOV
Plaintiff
– and –
ALEXEY PROKHOROV, IRINA STALEVSKAYA, TATIANA SIMONOVA, NATALYA PESIN, STAN CAPITAL LIMITED, SYRION CORPORATION and CYRION GROUP INC., a.k.a. CYRION CORPORATION
Defendants
Leon Melconian, for the Plaintiff
Eli Karp, for the Non-Parties Giorgio Argentini and Giussepina Howe
Irina Stalevskaya, acted in person
Touran Raguimov and Nargiz Atakishieva, acted in person.
HEARD: December 21, 2018
REASONS FOR DECISION
MCEWEN J.
[1] The plaintiff, Serguei Fedotov, brings this motion seeking an order compelling the law firm DJD Law Professional Corporation (“DJD”) to disburse funds in the amount of $338,627.56 held by DJD, in trust, pursuant to the order of Conway J. dated January 30, 2017 and the order of Archibald J. dated November 14, 2017 in the related action bearing Court File No. CV-17-579052 (the “BLK Action”).
[2] The defendant Irina Stalevskaya takes no position on the motion. The non-parties Touran Raguimov and Nargiz Atakishieva also take no position. The non-parties Giorgio Argentini and Giussepina Howe oppose the motion.
Overview
[3] In this action Mr. Fedotov brought a claim against the defendants for fraud and misrepresentation arising out of an alleged real estate equity partnership that was entered into between the parties. While there was a dispute about the nature of the relationship, the defendant Irina Stalevskaya has admitted in this proceeding that she owed $1,620,565.00 to Mr. Fedotov and that the purpose of those funds was to purchase certain properties. Ms. Stalevskaya, however, characterizes the relationship she had with Mr. Fedotov as being one where a loan was made to her, as opposed to an equity partnership.
[4] After this action was commenced, BLK Builders Corp. (“BLK”) commenced the BLK Action in respect in of the properties. It performed certain work and claimed a construction lien. Both Mr. Fedotov and Ms. Stalevskaya (and the company in which she is the sole director, Syrion Corporation) were defendants in the BLK action.
[5] Mr. Eli Karp, of DJD, acted as the solicitor for Ms. Stalevskaya and Syrion until February 2018.
[6] In January 2017, Conway J. ordered that sale proceeds from the sale of certain properties be held in trust by DJD “to the credit of this action and that those funds shall not be disbursed except with the written consent of the plaintiff or pursuant to further order of this court.” As a result of the sale of two properties $885,648.59 was paid into the trust account of DJD.
[7] Subsequent attempts by the defendants in this action, including Ms. Stalevskaya and Syrion, to delete Conway J.’s order from title were dismissed by Myers J. on April 26, 2017. Myers J. raised concerns about the bona fidies of the motion. In dismissing the motion, he pointed to suspicious activities of the defendants with respect to their failure to keep the plaintiff apprised of the sale of properties. Myers J.’s criticisms also involved the legitimacy of a sale to potential purchasers Touran Raguimov and his wife, Nargiz Atakishieva (they will be referred to further in the body of this decision). Ms. Stalevskaya and Syrion continued to bring motions to this court in September and November 2017 seeking to have expenses paid. Both Myers and Conway JJ. dismissed these attempts. Mr. Karp, in November 2017, also sought to have money released to pay DJD’s legal bills. Conway J. also refused this request.
[8] After DJD removed itself as solicitors of record in February 2018, the parties in this action and the BLK action attended at a private mediation and both actions were resolved.
[9] The Minutes of Settlement, executed in August 2018, contained an irrevocable direction to DJD to distribute the funds as follows:
• $165,000 to Landy Marr Kats LLP, in trust (solicitors for BLK); and
• $720,684.59 to Melconian Law Office, in trust (solicitors for Mr. Fedotov).
[10] Contained in the Minutes of Settlement, in addition to the aforementioned direction, is an acknowledgment by Ms. Stalevskaya that she relinquished any claim to the funds held by DJD in trust. In Ms. Stalevskaya’s affidavit, prepared in response to this motion, she expressly conceded this by deposing, “By signing the Minutes of Settlement, I forfeited my rights to all the remaining money held by DJD Professional Corporation”.
[11] Notwithstanding the Minutes of Settlement and direction as well as the order of Conway J. directing that the sale proceeds be paid to DJD “to the credit of this action” DJD initially refused to release the settlement funds for two reasons.
[12] First, DJD took the position that its own fees should be paid from the funds it held in trust in priority to Mr. Fedotov.
[13] Second, Mr. Karp of DJD later accepted a retainer from Giorgio Argentini and Giussepina Howe (collectively “the Garnishment Creditors”) against his previous clients, Ms. Stalevskaya and Syrion. Apparently, judgments were obtained by the Garnishment Creditors against Ms. Stalevskaya and Syrion. Subsequent to the settlement, in November 2018, DJD had Notices of Garnishment issued on behalf of the Garnishment Creditors Mr. Argentini and Ms. Howe against Ms. Stalevskaya and Syrion in the amounts of $333,729.91 and $265,277.43, respectively. DJD is noted as the Garnishee. DJD, on behalf of the Garnishment Creditors, now takes the position that the Garnishment Creditors should recover their amount in priority to any amount recovered by Mr. Fedotov against DJD’s former clients Ms. Stalevskaya and Syrion.
[14] After the settlement, in addition to the Notices of Garnishment that Mr. Karp issued on behalf of the Garnishment Creditors, Mr. Karp revealed that his firm had registered a security under the Personal Property Security Act, R.S.O. 1990, c. P.10 and a General Security Agreement against the assets of Ms. Stalevskaya and Syrion to secure DJD’s legal fees. Mr. Karp also provided Mr. Fedotov’s counsel with a number of other Garnishments including those of Mr. Raguimov and Ms. Atakishieva who were potential purchasers of one of the properties in dispute whose bona fides, as noted above, were questioned by Myers J.
[15] It also bears noting that, according to the uncontested affidavit evidence of Melissa Aguiar, a law clerk with Mr. Fedotov’s solicitors, Mr. Argentini is a long-time friend and real estate broker for Ms. Stalevskaya.
[16] The motion was originally returnable in late October 2018. It did not proceed at that time. Ultimately, Mr. Karp paid out the money owing to BLK in full and also resolved his dispute with respect to DJD’s legal fees with Mr. Fedotov on the basis that DJD be paid $40,000.
[17] There remains in dispute the $338,627.56 that DJD is still holding in trust.
[18] For the reasons below I am ordering that the funds be paid to Melconian Law Office, in trust, as per the Minutes of Settlement. As will be seen, I am also troubled by the relationship between DJD, its ex-clients Ms. Stalevskaya and Syrion, and the Garnishment Creditors.
Analysis
[19] As noted above, Mr. Fedotov obtained the order from Conway J. in January 2017 expressly ordering that the proceeds of any sale of the properties be paid to the trust account of DJD to the credit of this action and that the funds were not to be disbursed except with the written consent of Mr. Fedotov or further order of the court. At the time, DJD acted for Ms. Stalevskaya and Syrion. In that capacity DJD obtained the trust funds in question.
[20] Thereafter, Archibald J. in the BLK action, in November 2017, ordered that DJD release to BLK any amount ultimately determined by this court, or agreed by BLK and Mr. Fedotov, to be paid to BLK.
[21] The obvious intent of the orders of Conway and Archibald JJ. was to ensure that the funds DJD held in trust be available to be paid to BLK and/or Mr. Fedotov by way of agreement or court order.
[22] Notwithstanding this arrangement that was solidified by the aforementioned orders, Mr. Karp ultimately took the position, after he ceased acting for Ms. Stalevskaya and Syrion, that a portion of the funds belonged to his firm and that a significant portion of the remainder belonged to his new clients, the Garnishment Creditors.
[23] I find, for the reasons below, that Mr. Fedotov has priority over the Garnishment Creditors with respect to the funds held by DJD.
[24] First, it is important to note that the Garnishment Creditors did not file any responding motion record. The court, therefore, has no evidence from the Garnishment Creditors as to how they obtained judgments against Ms. Stalevskaya and Syrion, the validity of the judgments or the garnishments, or how they came to know that DJD was holding funds in trust in this action.
[25] In this regard, DJD only filed a factum on behalf of the Garnishment Creditors. The factum included Notices of Garnishment and Garnishee’s Statements improperly attached as a schedule to the factum. This is in violation of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194. There is no provision in the Rules that allow for evidence to be filed in a factum. These documents ought to have been contained in a responding motion record attached to an affidavit, providing both Mr. Fedotov and this court with a proper evidentiary basis for the claims being advanced by the Garnishment Creditors.
[26] By design, or inadvertence, this shielded the Garnishment Creditors from cross-examination. I am left to wonder whether this was perhaps due to Mr. Argentini’s previous personal and professional relationship with Ms. Stalevskaya, which the Garnishment Creditors wished to keep confidential.
[27] Although copies of Notices of Garnishment have been filed, as noted there is no evidence of any underlying judgments, the validity of those judgments, or the circumstances in which they were obtained. Nor is there any affidavit evidence to establish the bona fides of the Notices of Garnishment filed in the factum, which were issued subsequent to the Minutes of Settlement being entered into involving DJD’s former clients, Ms. Stalevskaya and Syrion.
[28] The circumstances in which the garnishments were obtained are murky and fall below the level of proof required by this court. I therefore do not accept that the Garnishment Creditors have established, in the absence of any filed record, that they hold valid garnishments against Ms. Stalevskaya and Syrion that could rank in priority to Mr. Fedotov.
[29] Second, if I am incorrect in this regard I am still of the view that Mr. Fedotov has a proprietary claim to the remaining funds held in trust over any claim of the Garnishment Creditors.
[30] Prior to the Notices of Garnishment being issued, a settlement had been reached, wherein Ms. Stalevskaya and Syrion gave up any entitlement to the money held by DJD and directed that DJD pay the money to the Melconian Law Office in trust. There is nothing to suggest that the settlement was anything other than the result of a legitimate arm’s length negotiation between the parties in both this action and the BLK action. As a result, Ms. Stalevskaya and Syrion gave up any right to the money and, pursuant to the order of Conway J., sought to have the money paid to the Melconian Law Office. Notwithstanding this, DJD refused to do so, issuing Notices of Garnishment on behalf of the Garnishment Creditors that noted DJD as the Garnishee.
[31] The Garnishment Creditors rely on a number of cases in support of their position, all of which are distinguishable.
[32] The Garnishment Creditors primarily rely upon the decision in Transtrue Vehicle Safety Inc. v. Werenka, 2015 ABQB 197, 614 A.R. 202. In that case the defendant, in settlement of litigation, paid certain money into court and a lawyer’s trust account, pending settlement. A settlement was entered into and later the defendant declared bankruptcy.
[33] It was held that, pursuant to the provisions of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the “BIA”), a trust had not been created when the money were paid to the defendant’s lawyer. Transtrue, however, is distinguishable from this case. In Transtrue, the court relied upon the specific provisions of the BIA in dealing with property of a bankrupt defendant. No such statutory provisions apply in the different facts of this case. This is true of other similar cases relied upon by the Garnishment Creditors.
[34] The Garnishment Creditors also rely upon a number of other cases involving distinguishable circumstances - for example, Trade Capital Finance Corp. v. Cook, 2017 ONSC 1857, 137 O.R. (3d) 685, affirmed, 2018 ONCA 27, 56 C.B.R. (6th) 1, in which the analysis involved the application of a Mareva injunction.
[35] In my view, none of these cases are of assistance to the Garnishment Creditors. A review of the orders made by the court establishes that the money was to be paid on an interim and without prejudice basis to DJD in trust to the credit of this action and the related BLK Action. It was clear that the money was paid on a without prejudice basis so that the parties in the two actions could fully dispute the issues in question, which would ultimately be resolved by way of settlement or court order. Ultimately, it was by way of settlement.
[36] In these circumstances, I am satisfied that a trust existed to provide protection to the parties and in particularly to Mr. Fedotov. Conway J. explained in her endorsement that the arrangements “were put into place to provide some protection to the plaintiff, who admittedly advanced at least $1.6 million dollars to Ms. Stalevskaya”. Conway J. further noted that the order was crafted, in part, to protect “the plaintiff’s claim as an equity partner in these projects”. I accept Mr. Fedotov’s argument that the funds were held by DJD in trust pending the determination of the litigation. Once the settlement was reached the money was thereafter held in trust for Mr. Fedotov. None of the aforementioned case law assists the Garnishment Creditors in these circumstances.
[37] The funds satisfy all of the ingredients of a trust which were held by DJD pending the resolution of the two related actions. The intention was clear – to place the funds into DJD’s trust account to the credit of the action pending the success or failure of Mr. Fedotov’s claim. The payments into court were the subject matter. The object was the determination of the litigation, which was resolved via settlement. By the time Notices of Garnishment were issued, Ms. Stalevskaya and Syrion had renounced any right to the money and had no interest, beneficial or otherwise, in the funds held in trust.
[38] Also, the funds did not constitute a debt owed to DJD by Ms. Stalevskaya or Syrion.
[39] Rule 60.08(1) of the Rules of Civil Procedure states as follows:
A creditor under an order for the payment or recovery of money may enforce it by garnishment of debts payable to the debtor by other persons. [Emphasis added]
[40] Based on this wording, the Garnishment Creditors are not entitled to the funds held by DJD. It cannot be said that those funds constitute a debt payable by DJD to Ms. Stalevskaya or Syrion. In fact, the funds constitute a debt owed Ms. Stalevskaya and Syrion to Mr. Fedotov. The money was simply held by DJD, in trust.
[41] In any event, at the time of the settlement, at best, the Garnishment Creditors were only persons to whom a debt was owed. The Notices of Garnishment had not yet been issued. In these circumstances I can see no entitlement to the settlement funds in question, which were held in trust pending the outcome of the litigation.
[42] I also find the entire relationship between DJD, its ex-clients Ms. Stalevskaya and Syrion, and the Garnishment Creditors to be concerning.
[43] DJD first agreed to hold the money in trust to the credit of the action when it acted for Ms. Stalevskaya and Syrion. DJD later asserted a claim for its fees against the trust. Mr. Karp, thereafter, after ceasing to act for these defendants accepted a retainer to act against them on behalf of the Garnishment Creditors. The uncontradicted evidence filed by Mr. Fedotov with respect to the relationship between these defendants and Mr. Argentini suggests a personal and professional relationship which could go to the bona fides of the alleged debt. DJD, thereafter, issued DJD’s Notices of Garnishment in which DJD itself was listed as the Garnishee.
[44] In addition to DJD’s potential conflict of interest, and the relationship between Ms. Stalevskaya/Syrion and the Garnishment Creditors, I also have concerns that the implied undertaking rule was breached. The Garnishment Creditors somehow became aware of the fact that money was being held in trust by DJD and sought to obtain an order accessing those funds. I have concerns that this information could only have come from DJD or Ms. Stalevskaya and Syrion and violated the implied undertaking rule.
[45] As noted above, the Garnishment Creditors filed no motion record with this court that could explain the genesis and nature of the debt owed by Ms. Stalevskaya and Syrion to them, its legitimacy, or how they came to know of the money being held in trust.
[46] Although these concerns do not factor into the analysis concerning the dispute between the Garnishment Creditors and Mr. Fedotov, they cannot be ignored insofar as integrity of the court process is concerned.
Disposition
[47] For the reasons above, Mr. Fedotov is entitled to the remaining $338,627.56 held by DJD in trust. DJD is to immediately release these funds to the Melconian Law Office in trust.
[48] Further, Mr. Fedotov is entitled to his costs against the Garnishment Creditors in the amount sought of $5,000, inclusive, which is fair and reasonable in these circumstances.
McEwen J.
Released: January 10, 2019.
COURT FILE NO.: CV-16-11532-00CL
DATE: 20190110
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
SERGUEI FEDOTOV
Plaintiff
– and –
ALEXEY PROKHOROV, IRINA STALEVSKAYA, TATIANA SIMONOVA, NATALYA PESIN, STAN CAPITAL LIMITED, SYRION CORPORATION and CYRION GROUP INC., a.k.a. CYRION CORPORATION
Defendants
REASONS FOR DECISION
McEwen J.
Released: January 10, 2019.