COURT FILE NO.: CV-18-00606547-00CL DATE: 20200423
ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
JOHN CITTI and LESTER YAMASHITA Plaintiffs (Moving Parties) – and – ERIC A. KLEIN, EVAN L. KLEIN, KLEIN PROPERTY GROUP INC., KLEIN CAPITAL GROUP and KPG CAPITAL LP Defendants/Plaintiffs by Third Party Claim – and – CADMAN CAPITAL INC. and GILES CADMAN Third Parties
Counsel: R. Bevan Brooksbank and Sara A. McGregor, for the Plaintiffs (Moving Parties) Eric A. Klein and Evan L. Klein, appeared in person, and on behalf of the corporations Michael Meredith, for the Third Parties
HEARD: March 30, 2020
Reasons for Decision
McEwen J.
Introduction
[1] This motion was conducted via video conference in accordance with the Notice to Profession circulated by Chief Justice Morawetz, dated March 15, 2020, and the “Changes to the Commercial List operations in light of COVID-19”, dated March 16, 2020. Materials were sent to me by e-mail prior to the hearing.
[2] This e-mail constitutes my Reasons for Decision of today’s date and is to be placed in court file.
[3] The Plaintiffs seek the following orders against the Defendants:
a) an Order of contempt with respect to the Mareva Order of Justice Penny, dated October 10, 2018, and the Continuation Order of Justice Dunphy, dated December 17, 2018;
b) an Order for an accounting and tracing of funds allegedly used in contravention of the above orders; and
c) an Order directing a hearing on the appropriate remedies and sanctions for the alleged contempt.
[4] A motion for contempt is a serious matter. It is quasi-criminal in nature. As noted, the motion was conducted via video conference. A court reporting agency was used to record the hearing.
[5] The Notice of Motion properly particularized the alleged acts of contempt. The Motion Record was properly served upon the Defendants. The parties agreed to proceed by way of the filed record. There was no request for viva voce evidence, nor do I believe that there was such a need, given the facts of the case and the positions of the parties.
[6] There were no preliminary issues raised prior to the motion proceeding.
[7] I should also note that this matter previously appeared before me on February 18, 2020. At that time, the Defendants Eric and Evan Klein sought an adjournment of the motion. The Plaintiffs objected. I granted the adjournment request even though, as noted in my endorsement, it was my opinion that the Defendants had sufficient time to prepare for the motion when the date was initially set by Justice Hainey. Given the seriousness of this matter, however, I did allow the Defendants an adjournment. I also urged the Defendants to retain counsel.
[8] Although Messrs. Klein have not been able to retain counsel, they have been assisted by counsel in preparation for this motion.
[9] I should also note that Eric Klein swore an affidavit dated February 26, 2020 in response to the motion. An affidavit Eric Klein swore on October 31, 2018 was also placed before me, although it was prepared prior to the motion for contempt being brought. Evan Klein did not provide an affidavit in response to the motion.
[10] The Plaintiffs cross-examined Eric Klein. The Defendants did not cross-examine the Plaintiffs’ affiant.
[11] Shortly before the motion, on March 25, 2020, however, Evan Klein sent a letter to this court setting out a number of issues including the fact that, in his opinion, the action should be dismissed pursuant to rule 2.1 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194.
[12] Over the objection of the Plaintiffs, I agreed to review Evan Klein’s correspondence. I have given the correspondence little weight, however, since it was not in affidavit form. Further, the contents of this letter (and the contents of the affidavits sworn by Eric Klein) primarily deal with the Defendants’ complaint that, the Third Party Mr. Giles Cadman, is the driving force behind the Plaintiffs’ claims against the Defendants. These are essentially bald statements. No documents were attached to support the claims (I note additionally that Eric Klein’s October 31, 2018 affidavit refers to exhibits that were not attached to the affidavit). The day before the motion Evan Klein also delivered a number of documents unattached to any affidavit. I reviewed these as well. As I will note further below, the Defendants’ complaints against Mr. Cadman have little or no bearing with respect to the main issue before the court, that being the allegation of contempt.
Background Facts
[13] The background facts of this case are not complex.
[14] Messrs. Klein are brothers. They are the directing minds behind the corporate Defendants. The Plaintiffs purchased promissory notes and units in purported limited partnerships created by the Defendants. The partnerships were to develop various real estate projects in and around Montréal, Québec.
[15] Previously, the Plaintiffs had been clients of Eric Klein when he worked for the Third Party Cadman Capital Inc. (“CCI”), which is owned by Mr. Cadman.
[16] As will be explored further below, Eric Klein and Mr. Cadman had a significant falling out when Eric Klein left CCI. The Defendants submit that the Plaintiffs’ claim against them is a thinly disguised attack on them by the Third Parties.
[17] In any event, the Plaintiffs commenced this action against the Defendants as a result of a number of alleged misrepresentations and other wrongdoings committed by the Defendants. The Defendants thereafter added Mr. Cadman and CCI as Third Parties. As noted, on October 10, 2018, the Plaintiffs obtained the ex parte, interim and interlocutory Mareva Order against the Defendants.
[18] Amongst other things, the Mareva Order (in paragraph 1) prevents the Defendants from “… dissipating … assigning, encumbering, or dealing with any assets …”.
[19] Subsequent to the granting of the Mareva Order, while the Defendants were represented by counsel, Messrs. Klein swore affidavits outlining their assets, which included ownership of property germane to this motion – a duplex located at 579-581 Rue Niverville, Trois-Rivières (the “Property”). The Property generated rental income.
[20] The Continuation Order of December 17, 2018 was obtained on consent and reviewed by counsel for the Plaintiffs and Defendants. This Order stated that the Mareva Order was to be continued until trial or further order of the court. The Continuation Order specifically referenced the Property as one of the assets subsumed in the Mareva Order.
[21] Notwithstanding the Mareva Order and the Continuation Order (the “Court Orders”), and an agreement between counsel for the Plaintiffs and the Defendants that all rental income would be held in trust by the Defendants’ solicitors, the Defendants placed a mortgage in the amount of $25,000 on the Property in favour of Financiére Victoria Inc. (“FVI”) in February 2019.
[22] Due to non-payment of the mortgage, FVI took possession of the Property in September 2019. Messrs. Klein thereafter voluntarily surrendered the Property to FVI, which then sold it.
[23] It is undisputed that the Plaintiffs were never advised of the above dealings concerning the Property. Further, notwithstanding the agreement to hold the rental income in trust, only one month’s rent was ultimately held in trust by the Defendants’ counsel, who removed themselves as solicitors of record in late 2019, after the transactions with respect to the Property came to light.
[24] The Defendants do not dispute the above facts.
[25] As a result of the mortgage and sale of the Property, and the failure to preserve rent, the Plaintiffs seek a contempt order and the related relief.
The Position of the Defendants
[26] The Defendants, through Messrs. Klein, make a number of submissions in response to the motion.
[27] First, the Defendants submit that Messrs. Klein lost all of their personal wealth as a result of the Court Orders and out of desperation took out a small mortgage, innocently, on the Property. Messrs. Klein assert that they did not understand that the mortgage would breach the Court Orders because it would not affect “the municipal or market value” of the Property. The Defendants further claim that they attempted to stop FVI from selling the Property, to no avail.
[28] Second, the Defendants submit that there are many deficiencies in the Statement of Claim and that the Plaintiffs obtained the Court Orders with “unclean hands”. Again, the Defendants primarily point to the relationship between the Plaintiffs and CCI/Mr. Cadman, as well as Mr. Cadman’s alleged ill feelings towards Eric Klein.
[29] Third, as noted, they submit that the Third Parties are really the driving force behind the Plaintiffs’ claims. They submit, essentially, that Mr. Cadman is pursuing a vendetta against Eric Klein as a result of their falling out when Eric Klein resigned from CCI.
The Law
[30] The test for civil contempt is set out in Carey v. Laiken, 2015 SCC 17, [2015] 2 S.C.R. 79, at paras. 32-35:
i. First, the order alleged to have been breached must state clearly and unequivocally what should and should not be done;
ii. Second, the party alleged to have breached the order must have had actual knowledge of it; and it is possible to infer knowledge in the circumstances, or find liability on the basis of the willful blindness doctrine; and
iii. Third, the party allegedly in breach must have intentionally done the act that the order prohibits, or intentionally failed to do the act that the order compels.
[31] A motion for contempt for breach of an order of the court also brings into play the fundamental principles of the presumption of innocence and the consequential burden on the Plaintiffs to prove all elements of a contempt allegation beyond a reasonable doubt. The evidence in the motion must be assessed in light of those fundamental principles. Consequently, where an alleged contemnor testifies in a contempt hearing, a court should assess the evidence in accordance with the principles laid down by the Supreme Court of Canada in R. v. W.(D.), 1991 SCC 93, [1991] 1 SCR 742, Cellupica v. Di Giulio, 2010 ONSC 5839, 5 C.P.C. (7th) 371, at paras. 60-61. As a result:
i) If the court accepts the respondent’s evidence that he/she did not deliberately and willfully breach the court’s orders, the court must conclude that the respondent did not commit a contempt of court;
ii) Even if the court does not believe the respondent’s evidence, if it leaves the court with a reasonable doubt about his/her liability for contempt, the court must find that he/she did not commit a contempt of court order; and
iii) Finally, even if the respondent’s evidence does not leave the court with a reasonable doubt of his/her culpability, the court may find the respondent in contempt only if the rest of the evidence, that the court accepts, proves the respondent’s culpability beyond a reasonable doubt.
[32] Given that Eric Klein prepared two affidavits that were filed at the hearing, and I reviewed Evan Klein’s letter, it is my view that the test in R. v. W.(D.) is engaged.
[33] For the reasons below, I accept that the Plaintiffs have established beyond a reasonable doubt that the Defendants have committed civil contempt.
[34] Employing the principles in Carey, I first accept that the Court Orders were clear and unequivocal. Although the Mareva Order did not specifically reference the Property, Eric Klein’s October 31, 2018 affidavit acknowledged that the Property was jointly owned by Messrs. Klein and was purchased with the Plaintiffs’ funds. Further, the Continuation Order clearly confirmed the application of the Mareva Order to the Property, including the rental income. The Court Orders, therefore, clearly stated that the Property was not to be encumbered, and that rental income received by the Defendants from its lease remained subject to the terms of the Mareva Order as well. As noted, these were to be held in trust by the Defendants’ counsel.
[35] Second, there is no dispute that the Defendants, in particular Messrs. Klein, had actual knowledge of the Court Orders. They do not deny this. In his January 26, 2020 affidavit, Eric Klein concedes he was aware of the Mareva Order. His affidavits are silent with respect to the Continuation Order, but it was obtained on the consent of the parties, including Messrs. Klein, when the Defendants were represented by counsel.
[36] The single, real issue in this motion, therefore, is whether the Defendants acted deliberately and willfully in violation of the Court Orders with respect to placing a mortgage on the Property and dissipating the rental income.
[37] As noted, Evan Klein has filed no affidavit evidence on this issue, but from reviewing Eric Klein’s affidavits and what they have outlined in their factum and submissions, Messrs. Klein allege that the mortgage was innocently placed.
[38] I do not accept their submissions.
[39] Messrs. Klein, particularly Eric Klein, are well-experienced in the real estate industry. They were both enrolled, at some point, in the Ontario Real Estate Association’s real estate licensing course. They also both worked at a number of well-known real estate firms including Sotheby’s International Realty (Eric) and Royal LePage (Evan). Their entire business model revolved around buying and selling residential real estate. It defies belief that they did not understand that by placing a mortgage on the Property, they were encumbering the Property in violation of the Court Orders. It also defies belief that the dissipation of their rental income could not be understood by them as, once again, defying the Court Orders. Eric Klein’s affidavits are silent on the issue of the rental income.
[40] In my view, this conclusion is supported by the fact that Messrs. Klein never advised the Plaintiffs, nor their own counsel, of the fact that a mortgage had been placed on the Property. In Eric Klein’s January 26, 2020 affidavit, he deposes that Messrs. Klein came to the conclusion that they could obtain a small loan on the Property without breaching the Mareva Order based on “online research”. At the hearing, although not contained in any affidavits, they submitted that a lawyer friend also gave them bad advice. They now claim in hindsight that they were misinformed.
[41] It is simply not credible that they could have come to this conclusion based on what I have outlined above and, further, when they were engaged in conversations with their own counsel. Surely, if Messrs. Klein had a bona fide intention not to breach the Mareva Order by placing a mortgage on the Property, this would have been discussed with counsel. Instead they kept their own counsel in the dark, did their own online research and talked to a friend. Once again, I do not find this evidence to be credible.
[42] My conclusion is further supported by the December 11, 2018 letter that Eric Klein sent to one of the Plaintiffs, Dr. John Citti, wherein Eric Klein conceded that the Defendants could not “touch the property”. I put this to Messrs. Klein at the motion. I do not accept their explanation that they understood this only to mean that they could not “sell or renovate” the Property but that they honestly believed they could place a mortgage on the Property. Once again, given their business background and the business model they were pursuing, such evidence is simply not credible.
[43] Last, Eric Klein conceded at his cross-examination that the Defendants spent the rental income, with the exception of the one month that was forwarded to their then counsel, when they knew the Continuation Order prohibited them from doing so.
[44] In all of these circumstances I accept that the Plaintiffs have established beyond a reasonable doubt that the Defendants committed acts of civil contempt when they placed a mortgage on the Property and failed to retain the rental income in violation of the Court Orders.
[45] I have considered the test set out in R. v. W.(D.), in finding the Defendants’ evidence, that they did not deliberately and willfully breach the Court Orders, not to be credible or reliable. In this regard I concur with the comments made by Justice Gray in Business Development Bank of Canada v. Cavalon Inc., 2016 ONSC 4084 at paras. 51-52, aff’d 2017 ONCA 663. He stated where “the affidavit evidence filed by the alleged contemnor defies common sense, the judge can safely have confidence that findings can be made based on the criminal standard of proof.” Having not accepted their evidence, for the reasons above, I am not left with any reasonable doubt about the Defendants’ contempt. I have also considered the rest of the evidence filed at the motion. I accept that this evidence proves the Defendants’ contempt beyond a reasonable doubt. In my view, therefore, the Defendants committed a contempt of the Court Orders beyond a reasonable doubt. In this regard, I have considered each of the three steps set out in R. v. W.(D.).
[46] I also reject the Defendants’ submission, on this motion, that the Mareva Order was obtained with “unclean hands” and that the action is really being pursued by the Third Parties who the Defendants allege directed and financed the litigation. The Plaintiffs have always conceded that there was a joint retainer with the Third Parties who are now represented by separate counsel. In any event, the Defendants have not provided any cogent evidence to support this contention. Instead, they rely primarily upon the bald allegations contained in Eric Klein’s affidavits and in Evan Klein’s March 25, 2000 letter to the court. Of note is the fact that the Defendants, in part, also rely on the decision of Arbitrator John Campion. The Arbitrator dismissed a claim for damages brought by CCI against Eric Klein in 2017. CCI alleged that Eric Klein breached his employment agreement with CCI when he left the company. In my view, this decision does not assist the Defendants. While the Arbitrator found that CCI failed to establish a claim for damages, he further found that Eric Klein misused confidential CCI information and failed to act in good faith when he left CCI. The result, therefore, does not assist the Defendants.
[47] Further, the Defendants, when represented, took no steps to set aside the Mareva Order and consented to its continuation, through the Continuation Order, up until trial or further order of the court. Even if there is some truth to these largely unsupported allegations, the allegations could have and should have been raised when the Continuation Order was sought. These allegations, in and of themselves, are largely irrelevant to the issues on this motion, which relate to the Defendants’ violation of the Court Orders.
[48] Similarly, I am disregarding the Defendants’ request, as set out in the aforementioned March 25, 2020 letter of Evan Klein to dismiss this motion pursuant to rule 2.1 of the Rules of Civil Procedure. In my view, this is a rather desperate attempt to collaterally attack the Court Orders that have been made, with the Continuation Order being made on the consent of these Defendants. Also, the various complaints that the Defendants make about alleged inaccuracies or exaggerations in the Statement of Claim fall flat. To the extent that any issues exist they will be dealt with in the conduct of the action. They are not germane to this motion.
[49] Overall, it is my view that Messrs. Klein knew, at all times, that placing a mortgage on the Property and not preserving the rental income violated the Court Orders. They apparently found themselves in circumstances where they were impecunious. As a result, they improperly obtained the mortgage and spent most of the rental income.
Disposition
[50] The Plaintiffs are entitled to a declaration that the Defendants are in contempt of the Court Orders.
[51] Accordingly, I further order an accounting and tracing of funds received and put to the use of the Defendants, with respect to the placing of the mortgage and the ultimate funds obtained as a result of the sale of the Property, as well as the dissipation of the rental income. The Defendants shall also answer the outstanding undertakings given at Eric Klein’s cross-examination, since they are relevant to issues surrounding the sale of the Property.
[52] Last, the parties can appear before me once again to schedule a hearing to address submissions concerning any attempts that the Defendants wish to purge their contempt, prior to the commencement of the penalty phase of the contempt proceedings.
[53] I remain seized.
McEwen J.
Released: April 23, 2020