Court File and Parties

COURT FILE NR. CV-17-73750

SUPERIOR COURT OF JUSTICE – ONTARIO

RE: Salvatore Falsetto, Plaintiff

AND:

SALVATORE FILLIPO FALSETTO a.k.a. SAM FALSETTO and FALSETTO HOMES INC., 99 CARTIER ST. APARTMENTS INC., CLARENCE STREET APARTMENTS INC., BRONSON RIDGE APARTMENTS INC. and CANADIAN IMPERIAL BANK OF COMMERCE, Defendants

BEFORE: Master Kaufman

COUNSEL: Raymond A. Murray, for the Plaintiff Chris Trivisonno, for the Defendants

HEARD: March 23, 2021

REASONS FOR DECISION

[1] The plaintiff and the defendants bring separate motions for orders to compel answers refused on discovery and to challenge each other’s claims of litigation and solicitor-client privilege.

[2] On June 19, 2020, the plaintiff served an amended statement of claim and the defendants consented to its filing. The claim was never formally amended. On February 26, 2021, the plaintiff served a further amended statement of claim, but this time the defendants took the position that they would oppose the amendments because they raised statute-barred allegations and the evidence required to defend against these new allegations was no longer available. Because the defendants consented to the June 2020 amendments, I will base this decision on that proposed amended pleading even though it has not been formally amended.

Background

[3] The defendant Sam Falsetto (“Sam”) is the youngest of the plaintiff Salvatore Falsetto’s (“Salvatore”) five children. Salvatore immigrated from Italy in the 1970’s, built a successful construction company and amassed substantial wealth. Salvatore became estranged from his children after divorcing from their mother in 1989. Sam was the first of his children to reconcile with him, and he began working with him in 1998.

[4] In 2011, Sam was granted access to two of Salvatore’s CIBC bank accounts, and on April 30, 2012, he was appointed as Salvatore’s Power of Attorney for the Management of Property.

[5] In this action, Salvatore alleges that Sam abused his power of attorney privileges to appropriate between 8 and $14 million from himself. He seeks a declaration of beneficial ownership in the assets that Sam allegedly misappropriated. In addition, he seeks several restitutionary remedies, including an order for equitable tracing. Salvatore also alleges that the corporate defendants colluded to misappropriate these assets from him.

[6] Sam is the corporate defendants’ sole shareholder and director. He alleges that he began working for his father without remuneration when he was 17 years old. According to Sam, Salvatore was effectively retiring in 2012 and asked him to take control of his bank accounts and lines of credit. Sam alleges that his father made it clear that he had no need for his assets or his money, and that everything he owned was for Sam’s benefit to use as he determined. He acknowledges that he used his father’s funds to buy properties, pay taxes, and cover his businesses expenses.

[7] Sam believes that his sister Luisa Falsetto (“Luisa”) has initiated this litigation in her father’s name in order obtain the return of the money Salvatore gave him so as to increase her inheritance. Luisa allegedly reconciled with Salvatore in 2013, had him move in with her in the apartment she shares with her sister Sandra, and has blocked Sam from visiting his father.

Salvatore’s motion

[8] Salvatore’s motion raises three issues. The first issue is whether the corporate defendant’s financial records must be produced at this stage in the litigation. Sam argues that the records requested relate to Salvatore’s relief for a tracing order, and should only be produced if Salvatore establishes that he is entitled to that relief at trial. The second issue is whether the defendants’ assertion of litigation privilege over their communications with Peter Crowe are well founded. The third issue is whether the defendants should answer questions regarding the terms used to search for relevant documents.

Issue 1 – Is the plaintiff entitled to a tracing order before trial?

[9] Salvatore requests production of the corporate defendants’ financial records to determine which assets were taken by which corporation, how and when the assets were received, and what the corporate defendants did with the allegedly misappropriated funds. Salvatore alleges that these records are pertinent to attributing each corporate defendant’s liability. In oral submissions, Mr. Murray added that the corporate records could establish how the funds received from Salvatore were recorded in the corporate defendants’ books.

[10] Tracing is the process by which funds that have been impressed with a trust and which have been mixed with other funds are identified. If the plaintiff establishes that he is a beneficiary of misappropriated trust funds, he may request an order tracing these funds in the hands of third parties, unless these parties acquired them bona fide for value and without notice:

Tracing flows out of breach of a trust or other fiduciary relationship. On breach of a fiduciary duty, the defaulting party may not attain any personal gain from the relationship not anticipated by the arrangement itself. The defaulting party is considered a trustee of the wrongful appropriation for the benefit of the wronged claimant. The court has the discretion to require that the defaulting party must account to the beneficiary for the product of the breach.

Tracing is based on the retention by the claimant of a beneficial interest in property. It is a process by which a beneficial owner of property traces what has happened to that property, identifies the persons who have handled or received it, and justifies his claim that the property, or the property into which it has been converted, can be regarded as belonging to him. The process also permits a valuation of the property into which the value of the original property was converted and is now found.[^1]

[11] Salvatore argues that where tracing and liability are intertwined, a defendant is not shielded from its discovery obligations merely because the evidence sought amounts to a tracing order.[^2] He also argues that the records sought are relevant to his allegation that the defendants conspired with each other to remove his assets and to redirect them to Sam and the corporate defendants’ use. Salvatore argues that he should be given wide latitude to obtain evidence on allegations of conspiracy.[^3]

[12] In Waxman v. Waxman,[^4] this Court held that a plaintiff seeking a tracing order did not have to call evidence at trial about the transfer of the trust funds into the hands of others. If Courts required parties to call such evidence at trial, the cost and length of litigation would be greatly increased.[^5] The defendants were ordered to submit to cross-examination and discovery to permit the plaintiffs to recover the misappropriated trust funds after liability had been proved at trial. Lane J. came to the same conclusion in Cohen v. Debbie Gail Zagdanski Trust.[^6] Tracing occurs after the plaintiff has established a proprietary interest at trial and not before: “Until the constructive trust is proved, disclosure for the purposes of tracing is inappropriate”.[^7] The Court emphasized that the broad exploration of a defendant’s financial records would be costly, time consuming, highly intrusive, and unnecessary before entitlement was determined.

[13] I accept that disclosure may be appropriate where documents relevant to a tracing order also relate to liability. However, I am not persuaded that the financial records requested here are relevant to liability. Sam admits that he received monies from Salvatore and used them for his own personal benefit and to cover businesses expenses. Sam is the corporate defendants’ sole shareholder and director. As such, there can be no question that Sam and the corporate defendants “agreed” that the Salvatore’s assets would be used for their benefit. What would be at issue in the conspiracy claim is whether 1) the defendant conspired to cause Salvatore injury, whether by lawful or unlawful means, or 2) whether the defendants’ unlawful conduct was directed towards the plaintiff in circumstances where they should have known that injury to the plaintiff was likely.[^8] The answer turns on whether Salvatore gave his assets to Sam or whether he misappropriated them. Enabling Salvatore to find out which defendants used which funds for which purposes is not relevant to this inquiry.

[14] At the hearing, Salvatore identified a journal entry from Falsetto Homes where the words “Per Loan S…” were written next to a $650,000 transaction Falsetto Homes made from Salvatore’s assets. I agree with the plaintiff that any records that describe how Salvatore’s funds were recorded in the corporate defendants’ books are relevant. At trial, the Court will be required to determine if Sam was asked to manage Salvatore’s assets or if the assets were unconditionally gifted. This will likely turn on the parties’ credibility. Any contemporaneous documents that can shed light on the terms attaching to these assets’ transfers, such as descriptions or characterizations as gifts or loans are highly relevant and must be produced.

Issue 2 – Are the e-mails between the defendants’ and Peter Crowe privileged?

[15] The defendants assert privilege over e-mails between Sam or their counsel and Peter Crowe. Mr. Crowe is the defendants’ bookkeeper. The defendants say that these emails were created for the dominant purpose of litigation and are accordingly privileged. The defendants provided a copy of these e-mails to the Court.

[16] I have reviewed the e-mails at issue, and I am satisfied that they fall into three categories: emails from Sam or his counsel providing information to Peter Crowe about the litigation, e-mails from Sam or his counsel requesting information, comments or documents from Peter Crowe in relation to the allegations made in this litigation, and e-mails from Peter Crowe providing information and documents in response to Sam or his counsel’s requests.

[17] I am satisfied that the dominant purpose for which the documents were created was preparation for litigation. The defendants’ assertion of litigation privilege is upheld.

Issue 3 – Are the defendant’s search terms producible?

[18] At his examination for discovery, Sam was asked to disclose the search terms used to identify documents relevant to this litigation. Sam refused to provide this undertaking. Salvatore argues that Rule 29.1.04[^9] imposes certain e-discovery obligations including the preparation of a discovery plan. Rule 29.1.03(4) requires parties to have regard to the Sedona Canada Principles Addressing Electronic Discovery.

[19] Sam responds that the search terms used are not relevant and are subject to litigation privilege. He concedes that search terms shared between parties in the context of discovery planning are not subject to privilege, but argues that search terms are created for the dominant purpose of litigation and should not be ordered produced.

[20] Neither party referred me to Liquor Barn Income Fund v. Mather[^10] a decision of the British Columbia Supreme Court which addresses this issue directly. The Court held that where the parties cannot agree on search terms, they must fulfill their discovery obligations by selecting their own search terms. The Court accepted that a party’s selection of search terms may disclose something about counsel’s approach or theory of the case, which has traditionally been subject to litigation privilege. It concluded that search terms may be producible if the requesting party establishes that document disclosure has been inadequate.[^11]

[21] I agree with this reasoning. The only purpose of requiring a party to disclose its search terms would be to establish that the party has not made a diligent search of its records, and to order a more fulsome search. But before requiring a party to undertake another search, it must be demonstrated that relevant documents may have been omitted. Rule 30.06 provides that a party must satisfy the Court “by any evidence” that documents in a party’s possession, power or control may have been omitted before ordering the production of a further and better affidavit of documents. A party seeking disclosure of an opposing party’s search terms should, at a minimum, raise a doubt as to the diligence of the other party’s search, and establish that relevant documents may have been omitted. It is a low threshold, but there should be some indication that the disclosure was inadequate.

[22] Salvatore has not met this evidentiary burden and accordingly his request for an Order that Sam disclose his search terms is denied.

Sam’s motion

[23] Sam seeks production orders for Salvatore’s entire and unredacted social worker file as well as the latest version of his will. Sam alleges that these documents are relevant to key issues in this litigation, one of which is his sister Luisa’s alleged control of this litigation. Salvatore denies that the documents requested are relevant but has produced the social worker’s file subject to minimal redactions over which he asserts litigation privilege. Sam’s motion raises two issues: 1) Should Salvatore’s social worker file be produced in its entirety and 2) Should Salvatore produce the latest version of his will.

Issue 1 - Should the entire social worker file be produced?

[24] Sam’s sister Luisa introduced Salvatore to a social worker at the Elder Abuse Response & Referral Service in April 2017. Luisa provided information about Salvatore to the social worker, including her account of the events raised in this litigation. Salvatore has met the social worker, with and without Luisa. The social worker has been providing support and guidance to him on a number of issues, including this litigation. At his examination for discovery, Salvatore took Sam’s request to produce the entire social worker file under advisement. Salvatore has since produced the file, subject to minimal redactions.

Relevance of the social worker file

[25] Sam argues that the social worker file is highly relevant because it contains information supporting his argument that Luisa is the driving force behind this litigation. Sam relies on the fact that Luisa has been involved in the litigation from the beginning and assisted Salvatore with retaining and communicating with counsel. Sam also argues that the portions of the file produced to date support his theory that Luisa is controlling Salvatore to secure a greater inheritance for herself and her sister. Salvatore denies that the social worker file supports Sam’s theory, and argues that the evidence produced to date, including Salvatore’s answers on discovery, demonstrate that Salvatore is acting independently.

[26] It is not my role to weigh the evidence and determine whether the social worker’s file supports the parties’ respective positions on whether Luisa controls or influences the litigation. Both parties’ arguments seem to have some evidentiary support. I am satisfied however that the social worker file is relevant insofar as it contains Luisa and Salvatore’s accounts of the events underpinning this litigation, which could be used to challenge credibility. The social worker file also provides evidence of Luisa’s involvement in the litigation. Whether Luisa is controlling the litigation, or simply assisting Salvatore with it, will be determined at trial. But given the importance of this litigation for both parties, fairness requires that Sam have access to these records.

Correspondence between Luisa and the social worker

[27] Sam argues that the social worker file that has been produced is incomplete. First, correspondence between Luisa and the social worker is quoted in the social worker file but has not been produced. In addition, there are e-mails between Luisa and the social worker in the file that are incomplete.

[28] Sam recognizes that the Court cannot order third-party productions without notice to the third party.[^12] Salvatore consents to an order requiring him to make best efforts to obtain the correspondence between Luisa and the social worker, as well as the social worker entire file, and produce these documents subject to privilege claims. An order shall issue accordingly.

Salvatore’s assertions of privilege

[29] The parties agree that a party may waive privilege voluntarily, or implicitly when fairness and consistency require it.[^13] Salvatore has produced an unredacted copy of the social worker file for the Court’s inspection and determination. There are 7 redactions. In a letter dated January 13, 2021, Salvatore’s counsel explains that 6 of the redactions are on account of litigation privilege and 1 portion was redacted for lack of relevance.

[30] The social worker’s file contains communications between Luisa and Salvatore’s former counsel regarding a potential retainer, a retainer agreement, a draft statement of claim (partially redacted). It also contains correspondence between Luisa and Salvatore’s current counsel about this action. Salvatore says that he disclosed these records because their scope “did not have the dominant purpose of litigation”.

Solicitor-Client privilege

[31] There are two classes of privilege at issue here. Solicitor-client privilege applies to confidential communications between a client and a solicitor in connection with the provision of legal advice. Luisa is not a party to the litigation, but privilege would extend to her as a third party acting as a channel of communication between the solicitor and the client.[^14] However, when confidential solicitor-client communications are forwarded to a third party whose function is not “essential to the existence or operation of the solicitor-client relationship” then these records are not privileged.[^15] The social worker does not have that essential function and accordingly, the solicitor-client communications she received are not privileged.

[32] The only redacted document that would be subject to solicitor-client privilege is the draft statement of claim that was forwarded to the social worker. I agree with Sam that any privilege that attaches to this document has been waived for reasons of fairness and consistency. It is not possible to fully appreciate the content of that document where a substantial portion of the claim has been redacted. Accordingly, the entire draft pleading should be disclosed.

Litigation privilege

[33] Sam disputes Salvatore’s entitlement to redact portions of the social worker file for litigation privilege. He argues that the records at issue were not created for the dominant purpose of privilege or, in the alternative, that any privilege has been waived by producing numerous documents that discuss litigation strategy in depth.

[34] Litigation privilege attaches to documents created for the dominant purpose of litigation and creates a zone of privacy in relation to pending or apprehended litigation.[^16] I have reviewed the portions of the redacted social worker file over which litigation privilege is claimed. I am satisfied that these excerpts were created for the dominant purpose of requesting information from the social worker in relation to this litigation. They are otherwise irrelevant and would not be helpful to Sam. I am also satisfied that fairness and consistency does not require their disclosure as these excerpts do not relate to information that has already been disclosed. Accordingly, Salvatore’s assertion of litigation privilege in relation to these excerpts is also upheld.

Issue 2 - Should Salvatore’s 2018 will be produced?

[35] Sam asks for an order compelling Salvatore to produce his 2018 will. The wills from 2009, 2012 and 2016 have all been produced. Salvatore was questioned about his 2018 will at discovery but he responded that he did not recall who the will’s beneficiaries were.

[36] Sam argues that the 2018 will is highly relevant. He pleads Salvatore always intended to give him the assets that are at issue in this action. In his 2012 will, Salvatore left his entire estate to him without any provision for his siblings.

[37] Salvatore revoked his 2012 will in 2016, appointed Luisa as his Estate Trustee and bequeathed the residue of his estate to his five children in equal parts. Sam alleges that this testamentary change occurred days before Salvatore’s lawyers first contacted him, and after Luisa had taken control of Salvatore’s life.

[38] Salvatore responds that the 2018 will is irrelevant and should not be produced. It does not relate to Salvatore’s intentions with respect to the transfer of his assets between 2010 and 2016. Salvatore adds that the defendants do not challenge to 2018 will or assert that Luisa unduly influenced Salvatore. Furthermore, he alleges that the beneficiaries of his 2018 will are immaterial. I am not persuaded by these submissions.

[39] A central pillar of Sam’s defence is that Luisa influenced Salvatore to commence this litigation in an effort to increase her inheritance. Luisa will undoubtedly be called to testify at trial, whether for the plaintiff or by the defendants. Her credibility will be an issue at trial, and she may be cross-examined about any interest she may have in this action’s outcome. Salvatore’s 2018 will is relevant to her credibility and must be produced.

Costs

[40] The parties’ submitted similar costs outlines. The plaintiff claims $34.353.10 and the defendants $29,121.00 on partial indemnity basis, including disbursements and HST.

[41] Costs are in the discretion of the Court[^17] and normally follow the event. The Court’s discretion must be based on the specific facts and circumstances of the case and the factors set-out in Rule 57.01(1).[^18] Costs awards must be fair and reasonable and the parties’ expectation concerning the amount of a costs award is a relevant factor to be considered.[^19]

[42] Here, the result was mixed, insofar as both parties’ privilege claims were upheld. However, the defendants were overall more successful. The principle of indemnity therefore militates in favour of a costs award in the defendants’ favour.

[43] The motions were procedural and of medium complexity. The action raises important matters for the parties and these motions reflected the parties’ views of the disclosure they required to be ready for trial. While the fees incurred were substantial, they were proportional to the amounts at stake in this action. Having incurred similar fees and disbursements on these motions, I infer that the plaintiff reasonably expected to be potentially liable for a costs award approximating the fees he incurred in the event he was unsuccessful.

[44] The defendants argue that the plaintiff unduly complicated matters by serving a motion record that exceeded 1900 pages and which contained many documents that were unnecessary and irrelevant to the motion. I agree that the motion record was of excessive length and that the plaintiff should have been more selective in the materials placed before the Court. This contributed to unnecessarily increase the defendants’ costs.

[45] I conclude that a fair, reasonable and proportionate award for both motions is in the amount of $22,500 all-inclusive, payable by the plaintiff to the defendants within 30 days. This amount reflects that the plaintiff achieved a certain measure of success in these motions.

Disposition

[46] Based on the foregoing, the Court orders that:

1. Within the next 20 days or such additional time as the parties may agree:

a. The defendants shall produce all corporate documents that address how the assets transferred to them from Salvatore (directly or through Sam) were recorded in their books.

b. Salvatore shall make best efforts to obtain the correspondence between Luisa and the social worker, as well as the social worker’s entire file, and produce these documents subject to privilege claims.

c. Salvatore shall produce an unredacted copy of the draft statement of claim that was forwarded to the social worker.

d. Salvatore shall produce a copy of his 2018 will.

2. The parties may conduct further examinations, limited to questions on any newly produced documents resulting from this order, which shall be limited to 90 minutes per party or such other time limit as the parties may agree.

3. The defendants are entitled to their costs for both motions, which are fixed in the amount of $22,500 all-inclusive, payable within 30 days.

Master Kaufman

Date: June 8, 2021

[^1]: Reichmann v. Vered, 2003 49295, [2003] O.J. No. 1029 (Ont. S.C.), at paras 286-287. [^2]: 2013 ONSC 2790 at para 31 (Ont. S.C.). [^3]: See Salt River First Nation #195 v 5721 NT Ltd, 2015 NWTSC 17, para 14-16 (N.T.S.C.). [^4]: 2002 20932 (Ont. S.C.). [^5]: Ibid, at paras 26-28. [^6]: 2006 32067 (Ont. S.C.). [^7]: Ibid at para 27. [^8]: Cement LaFarge v. B.C. Lightweight Aggregate, 1983 23 (SCC), [1983] 1 SCR 452, at p. 471. [^9]: Rules of Civil Procedure, R.R.O. 1990, Reg. 194. [^10]: 2011 BCSC 618 (B.C. Sup. Ct.). [^11]: Ibid, at para 82-87. [^12]: Rules of Civil Procedure, R.R.O. 1990 Reg 194, R. 30.10. [^13]: S. & K. Processors Ltd. v. Campbell Ave. Herring Producers Ltd., 1983 407, at para 6 (B.C. Sup. Ct.). [^14]: General Accident Assurance Co. v. Chrusz, 45 O.R. (3d) (Ont. C.A.) at para 120. [^15]: Ibid. [^16]: Blank v. Canada, 2006 SCC 39, at paras 34 and 59-60. [^17]: Courts of Justice Act, R.S.O. 1990, c. C.43, s. 131, and Rules of Civil Procedure, R.R.O. 1990 Reg. 194., R. 57.01. [^18]: Andersen v. St. Jude Medical Inc., 2006 85158, (Ont. Div. Ct.). [^19]: Boucher v. Public Accountants’ Council for the Province of Ontario, 2004 14579 (Ont. C.A.).