Court File and Parties
Court File No.: CV-14-60661 Date: 2022/03/09 Superior Court of Justice - Ontario
Re: Robert Sirotek, Plaintiff And: Frank O’Dea, Nancy O’Dea and AF Global Asset Management Inc., Defendants
Before: Regional Senior Justice Calum MacLeod
Counsel: Katie Black and Sarah Lag, for the Plaintiff David Sischy and Trevor Fairlie, for the Defendants
Heard: October 12 & 13, 2021
Decision and Reasons
[1] This was a motion to compel documentary production from the defendants and to deal with refusals and undertakings arising from the discovery of Frank O’Dea and his cross examination on certain affidavits.
[2] There is a tortured history to this matter alluded to in my earlier decision when I adjourned the trial and permitted amendment of the pleadings. [1] For purposes of this motion, relevance must now be assessed through the lens of the amended pleadings. [2] The amended statement of claim is dated June 16, 2020, and the Fresh as Amended Statement of Defence is dated March 10, 2021. There was an amended Reply delivered on June 23, 2021.
[3] In addition to relevance, disputes over production and discovery involve considerations of proportionality, utility and whether or not the parties have negotiated a discovery plan. [3] These rules are intended to focus discovery and production and to limit endless sprawling and ongoing motion activity. They are not however designed to shield a recalcitrant defendant from honouring its obligation to make full production and to answer proper questions.
The Issues and the Scope of Relevance
[4] The claim itself relates to an investment of more than $500,000 made by the plaintiff in 2012. The investment involved an intended real estate development in Brazil to be carried out by a subsidiary of a Canadian corporation. The Canadian corporation was the defendant AF Global Asset Management Inc. (“AF Global”) and the subsidiary was Bauen Capital International Investmentos e Participacoes S.A. (“Bauen”). The plaintiff purchased shares in AF Global which is incorporated under the CBCA. [4]
[5] The plaintiff understood that Bauen was a fully owned subsidiary which controlled other subsidiaries or special purpose enterprises in Brazil. Bauen was to be responsible for construction of 220 Brazilian government funded housing units in the State of Espírito Santo. The construction was to have used a proprietary concrete forming system known as ARXX for which AF Global or Bauen held a licence.
[6] The building project did not proceed for a number of reasons, and it appears AF Global is now largely dormant. Mr. Sirotek appears to have lost his investment whereas he expected to receive the return of his investment plus a substantial profit.
[7] The key allegations in the litigation include the following:
a. The plaintiff was promised that his funds would be segregated and used only to fund actual construction costs in Brazil once all approvals were in place. Instead, his funds were used for other purposes.
b. That promise was one of several misrepresentations made to the plaintiff and on which he relied when deciding to invest. In addition to promising to segregate the funds, there were misrepresentations about the status of the project, the availability of approvals, the time frame for construction and the likelihood of successful sales.
c. Funds belonging to AF Global, including the plaintiff’s invested funds, were misappropriated by Mr. O’Dea for the benefit of himself and his wife, Nancy.
d. Improper payments were made to Frank and Nancy O’Dea or for their benefit in the guise of reimbursement for expenses and other payments incorrectly shown as business expenses.
e. AF Global did not maintain proper books and records or comply with the record keeping requirements of the Canada Business Corporations Act.
f. Mr. O’Dea preferred his own interests and those of his wife or his co-director over the interests of the corporation or Mr. Sirotek in breach of his fiduciary duties.
g. AF Global or Bauen improperly transferred its assets including intellectual property such as the licence to the ARXX system.
[8] The plaintiff seeks a basket of remedies including rescission of his contract, return of his investment with interest, damages, consequential damages for lost opportunity, an accounting and tracing remedies.
[9] The defendants deny any wrongdoing, rely on the specific terms of the subscription agreement and on independent due diligence allegedly conducted by Mr. Sirotek and his advisors before he committed his funds.
[10] In circumstances such as this, the scope of production and discovery is often problematic. The scope of relevance is broad since it involves the truth of any representations allegedly made to the plaintiff, the state of affairs regarding the building projects in Brazil and the use of both Mr. Sirotek’s invested funds and the general funds of the defendant corporation. The plaintiff requires scrutiny of the books and records of the corporation, examination of individual financial transactions and the same information for Bauen and other direct and indirect subsidiaries.
[11] It is apparent from the breadth of the allegations and the matters in issue that, at a minimum, the following documents will be relevant:
a. Documents relating to the actual state of construction, actual state of approvals and efforts to move the project forward between 2012 and 2014 which relate to the alleged misrepresentations. Documents pre or post 2014 which relate to what went wrong with the project and resulted in its termination. Much of that evidence will be in Portuguese.
b. Documents relating to the corporate structure, corporate ownership and control of AF Global, Bauen and the Brazilian subsidiaries.
c. Books and records of AF Global, Bauen and the subsidiaries for the years 2011 (the year before the investment) until the present. In the case of Bauen and its subsidiaries, an order may be obtained under Rule 30.02 (4) of the Rules of Civil Procedure.
d. Records relating to business expenses for which the O’Dea defendants were reimbursed.
e. Documents relating to sale of the ARXX licence or other assets by AF Global or Bauen from 2012 to the present.
f. Personal finances of the individual defendants.
[12] Relevance is the touchstone for discovery obligations and relevance is defined by the pleadings. But just because something is relevant and could be the subject of discovery or production does not mean that it necessary or that it is commercially reasonable to pursue it. The exercise of discovery planning is intended to focus the efforts of the parties on the evidence that matters in the litigation and has as its objective to restrict and restrain the costs of discovery that may otherwise drive up the costs and delay the resolution of the action. Ideally, it is a joint collaborative exercise with the mutual objective of efficiency in litigation. To reinforce this obligation, the court is empowered to deny relief to the parties or to withhold costs of a discovery motion if they have not complied. [5]
[13] Proportionality and common sense would ideally lead to a targeted or phased examination or to the use of outside auditors, but it is difficult for parties to collaborate on these issues when there are allegations of fraud and a high degree of mistrust. By the same token, when the remedies sought include an accounting and tracing, a balance must be struck. It will seldom be appropriate to turn the discovery process into the very remedy that the plaintiff is seeking, but the plaintiff is entitled to sufficient evidence to prove the wrongdoing (if wrongdoing exists).
[14] There are other questions when it comes to discovery of financial records. Besides relevance and proportionality, there is a question of practicality and utility. For example, it appears that AF Global used or uses QuickBooks as its accounting software. QuickBooks is a relatively simple accounting package, but like other electronic bookkeeping software it is in part a data base. Under our rules an electronic database is a “document” and is subject to production, but a QuickBooks datafile can only be read and manipulated with appropriate software and if the plaintiff manipulates the database or runs reports, the altered database or the new reports will be separate documents. [6]
[15] This gives rise to concerns about probative value and forensic continuity of electronic evidence. The plaintiff seeks production of the raw data (a legitimate request in this situation), but it is not clear how that data could be used or how it would get into evidence. If the plaintiff wishes to create reports with the software that have not already been produced, run audits on the software to look for changes to original entries or simply be able to consult the books and records without asking the defendant a question, who will perform those operations and how is forensic continuity to be ensured? It is usual for raw data to be delivered to an expert or a neutral investigator who can then be a witness at trial. I do not suggest that this is the only way to treat the data, but it is a point that is worthy of careful and purposeful thought.
[16] Unfortunately, the parties did not agree on a discovery plan and the litigation has instead proceeded with a fair degree of hostility and distrust. One might expect that between the parties themselves, given the nature of the allegations. Counsel, however, have an obligation to seek agreement on the procedural needs of the litigation and should attempt to approach the matter with a degree of professional detachment. [7]
[17] Reasons given by the defendant for resisting additional production and discovery include the amount of time that has passed, the positions previously taken in the litigation and steps taken or not taken by previous counsel. Those same concerns were raised in opposition to the pleading amendments, but now that the amendments have been made and new counsel has been retained, it is not reasonable to repeat the same arguments under the guise of proportionality. On the other hand, open ended discovery is no longer the norm in Ontario. The party seeking further discovery beyond the limited amount permitted by Rule 31.05. 1 must justify that request.
[18] It is worth summarizing the litigation history.
Background to the Litigation
[19] The action was commenced in 2014 but was partially stayed until October of 2016 due to the bankruptcy of Mr. O’Dea. The stay was lifted at that time by order of Kershman J. and discoveries proceeded the following year. I note that there was originally a co-plaintiff, but that portion of the action has settled. In January of 2017, Mr. O’Dea swore an affidavit of documents on his own behalf and another on behalf of AF Global.
[20] As outlined in my earlier decision, it appears that while Mr. O’Dea had been an officer and director of the corporate defendant at material times, he was neither in 2017. [8] Although it appears he swore an affidavit of documents on behalf of AF Global in addition to his own affidavit of documents, when he appeared for his discovery, his counsel announced that Mr. O’Dea’s answers would not bind the corporation. Consequently, the corporate defendant has not been discovered.
[21] Previous counsel for the plaintiff set the matter down for trial on April 18, 2019, without pursuing the matter of further production and discovery. The action was then listed for trial.
[22] After Ms. Black took over carriage of the action, shortly before the scheduled trial date, she sought to amend the pleadings, adjourn the trial and to seek further discoveries. I granted that relief due to the change in counsel, recent production of financial documents, the partial settlement and the proposed pleading amendment. I also directed that this motion proceed prior to the resumption of discoveries or a proposed summary judgment motion. The intervening delay was caused first by the appeal and a delay in re-closing the pleadings and then by the COVID-19 pandemic.
[23] The financial documents which were produced only after the action had been set down for trial include what purport to be unaudited financial statements and general ledgers for AF Global for the years ending 2012 and 2013. There was also what purports to be an audit of expenses incurred by Bauen in connection with the project in Brazil during 2012.
[24] Not surprisingly, counsel for the plaintiff is unsatisfied with the financial disclosure and there has been disagreement about access to further documents. It is not clear if Mr. O’Dea has access to further documents because he ceased to be an officer and director of the corporation at some time and as noted, he has gone through a personal bankruptcy.
[25] The plaintiff is entitled to examine a representative of the corporation and may cross examine on its affidavit of documents at that time. Evidently, however, it would be more efficient for the corporation to review its production obligations in light of this decision and to provide a supplementary affidavit of documents prior to the discovery taking place.
[26] I turn now to the specific questions that are in issue.
The Disputed Documentary Production
[27] Schedule A is a chart of requests for documentary production made to AF Global. Now that it is apparent AF Global has not been examined for discovery, some of these demands for production may have to be revisited after a representative of the corporation has been examined. There is also an undertaking which I am ordering answered and it overlaps with some of the more specific requests.
[28] The undertaking was to produce the general ledgers for both AF Global and Bauen for 2011 – 2017, along with all of the receipts, invoices, contracts and documentation supporting the GLS “when the documents become available”. There has been more than enough time to locate those documents. That undertaking is to be fulfilled and if any of those documents are not available, the defendant is to produce an affidavit explaining why the documents are not available and who, if anyone, has custody of the documents. Fulfillment of this undertaking would have reduced the need to address all of the other requests contained in the motion materials. Nothing in the following rulings restricts the breadth of this or any other undertaking.
[29] The plaintiff requests all financial statements for AF Global for the years 2011 and 2014 – 2021. It is evident that Mr. Sirotek is entitled to this information. Financial statements may or may not exist and despite the requirements of the CBCA, it does not appear that there are audited statements (although there is a promise of audited statements for certain years). The defendant is to produce its financial statements. If no financial statements exist, then it is to produce the Trial Balance and General Ledger for each of those years.
[30] The plaintiff requests all financial statements for Bauen for the years 2011 to the present. The relevance of this request is to assess whether any funds were transferred from AF Global to Bauen, but also to assess the status of the project in Brazil at the time the representations were made and throughout the time that Mr. Sirotek was an active investor in AF Global. Rule 30.02 (4) of the Rules of Civil Procedure permits the court to order AF Global to produce the documents in the possession of its subsidiary, but the documents must be relevant. Without limiting the ability of the plaintiff to seek further production if it proves to be relevant, I agree with the defendant that Bauen’s records after the project was discontinued in would be of limited relevance. The defendant is to produce Bauen’s financial statements for the fiscal years 2011 – 2017.
[31] The plaintiff requests all payroll records and a list of all employees, officers and directors of AF Global from 2011 – present. This is said to be aimed at the allegation that AF Global improperly used the invested funds to pay “soft costs” and at the allegation that Mr. O’Dea misappropriated funds. The request is far too broad and disproportionate. These documents need not be produced at this time. This does not preclude a further request being made at discovery in answer to appropriate questions. Nor does it relieve the representative of AF Global from the obligation of reviewing these records in order to inform his or herself and to answer proper discovery questions.
[32] The plaintiff requests the same information for Bauen including a breakdown of salary, wages, bonuses and overtime per employee/director or officer. The basis for this has not been established, but it may become relevant after the financial records have been produced. Currently it is the position of the defendants that no funds were transferred from AF Global to Bauen, but if that is not accurate then the manner in which funds were disbursed by Bauen would become relevant.
[33] Imbedded in the questions above is a request for information about the transfer of the ARXX licence from AF Global to Bauen. Those documents are relevant and relate to certain of the questions on the undertaking and refusals chart.
[34] The plaintiff seeks production of all contracts and agreements between AF Global and Bauen Capital. This is relevant to the question of how AF Global and Bauen funded the development in Brazil and to the transfer of technology, assets or funds. These documents are to be produced for the years 2011 – 2017.
[35] The plaintiff seeks production of the Bauen minute book. The defendant AF Global is the principal shareholder and is entitled to examine the minute book. The defendant is to obtain a copy of the minute book in order to answer proper questions on discovery. In addition, at no. 66 of the Refusals and Undertakings chart, Mr. O’Dea was asked what positions he held with Bauen during what time periods. The plaintiff is entitled to see what is recorded in the minute book in relation to Mr. O’Dea’s appointment as a director or officer of Bauen.
[36] The plaintiff seeks production of the books of original entry for AF Global from 2011 - present. This includes bank statements, cancelled cheques, deposit books, for any bank account operated by AF Global anywhere in the world. These documents are relevant to the claim as pleaded, but the production demand is overly broad, unfocused and disproportionate. The records are to be identified and preserved and specific transactions identified at discovery may require further production. What must be produced at this time, would be the source documents relating to expenses allegedly incurred by Mr. O’Dea and reimbursed by AF Global. The validity of those reimbursements is specifically put in issue by the pleadings. That time period would be 2010 to 2017.
[37] The plaintiff seeks all of Bauen’s bank statements and supporting documents from 2011 – present. The basis for that request has not been established. Bauen’s financial statements are to be produced and this may give rise to a request for further production as set out above.
[38] The plaintiff requests all of AF Global’s credit card statements from 2011 – present. The same is sought for Bauen. Credit cards used by Mr. O’Dea or Nancy O’Dea and paid by either AF Global or Bauen would be relevant if they existed. The representative of the defendant must inform himself or herself of what credit cards (if any) were maintained by either company and used for expenses of the O’Dea’s or the project in Brazil.
[39] All of AF Global’s accounting records for 2011 – 2015 are requested. Given the absence of financial statements, and the fact that the accounts were apparently maintained using QuickBooks, I agree that these are relevant. They may or may not exist in hard copy. The plaintiff also requests the QuickBooks raw data in native format.
[40] As discussed above, there is no point ordering the raw data to be produced unless the plaintiff is clear how it is to be translated into evidence and if the raw data is to be produced, I would not order the defendant to also print out reports. On the other hand, if hard copy reports were maintained by the defendant and decisions made on the basis of those documents, the printed reports are separate documents and must be produced. [9] There is no doubt the plaintiff is entitled to the information. Some further discussion between counsel will be required to determine how it may most efficiently be produced.
[41] The plaintiff makes a similar request for Bauen’s accounting records and its books of original entry. I consider this premature prior to the production of the Bauen financial statements and the contracts between the two corporations. On the other hand, there were specific questions asked about specific transactions. If funds were transferred from AF Global to Bauen then the plaintiff is entitled to ask AF Global to obtain documents from Bauen. [10]
[42] The plaintiff requests production of all “invoices paid by AF Global from 2011 to present” including invoices form Doris Law. I would in the first instance limit the time frame to 2011 – 2017, but in addition “all invoices” is too broad. AF Global has been ordered to produce its financial statements, General Ledgers and Trial Balances for those years. Specific transactions may be identified and those invoices may be sought. From the chart and the questions, the invoices in question relate to payments made by AF Global for what the plaintiff calls “soft costs”. Those questions should be answered and those specific invoices should be produced.
[43] The plaintiff seeks a list of creditors of AF Global who have been paid between 2011 and the present and the amounts they have been paid. I have already ordered production of the ledgers and accounting records which will include accounts payable. There are specific questions around interest charges discussed in the chart. Those may be the subject of discovery questions. There is no need for a separate list of creditors. The same is true of the list of creditors of Bauen.
[44] The plaintiff requests production of “all documents relating to any Special Purpose Entity”. This a reference to subsidiaries of Bauen including “SPEER” which were intended to complete the Brazilian project or held assets in Brazil. I am not prepared to order production of “all documents” from a subsidiary of a subsidiary of a party to the litigation. There may be specific documents that are in the possession, power or control of AF Global or Bauen which should be produced in answer to specific questions.
[45] The plaintiff seeks production of records relating to payments of dividends or shareholder loans by Bauen. Similar information is sought from AF Global. I have ordered production of General Ledgers and supporting documents. This should include dividends, loan repayments or other funds distributed by either corporation.
Refusals & Undertakings
[46] The Refusals and Undertakings are addressed in Schedule B. I have not dealt with questions that are now acknowledged as answered. Where I refer to numbers, the reference is to the number in the left column of the refusals and undertakings chart and not to the question number in the transcript.
[47] Questions were asked about the transfer of the ARXX licence in Nos. 1 - 5. These have been answered. The defendant has answered that he has not been able to locate any further documents.
[48] Nos. 7 – 9 deal with financial statements. Apparently, there is an audited financial statement for AF Global for 2012 and 2013 in preparation. This is to be produced if and when it is available. In the meantime, the defendant is to confirm the status of those audits. The defendant is also to produce any correspondence between the auditors and the defendants in relation to the status of the audits or missing information.
[49] At Nos. 11 – 34, Mr. O’Dea refused (on the advice of his then counsel) to answer numerous questions in relation to the affidavit of documents he swore on behalf of AF Global and what searches he conducted to inform himself to prepare that affidavit. He is to answer those questions if he knows the answers. In addition, the representative of the corporation who is ultimately produced for discovery will be required to review the affidavit of documents and to produce a supplementary affidavit of documents.
[50] No. 35 – 38 in the chart have been answered or will be answered by the documents that are to be produced.
[51] Mr. O’Dea is to provide a breakdown of the $58,000 set out at No. 39 in the chart.
[52] At Nos. 40 – 43 and 46 - 47 in the chart, the defendant purports to have answered the questions. The plaintiff requires that the defendant specify where in the documents those answers can be found. The plaintiff is entitled to that degree of precision.
[53] No. 44 in the chart is the undertaking I have referred to earlier in these reasons. That undertaking is to be answered.
[54] At No. 51 in the chart, the defendant has answered that all of the expenses are listed in the G.L. The plaintiff is not satisfied with that answer, but the question has been answered. However, the defendant was also asked at No. 58 in the chart to indicate where the receipts could be found n the documents. The plaintiff is entitled to have that question answered or to an admission that there are no receipts.
[55] I have referred to No. 66 in the chart earlier in my reasons. The defendant is to produce the officers and directors’ ledger in the Bauen minute book showing what positions Mr. O’Dea held and during what dates.
[56] Nos. 70 – 73 in the chart have been answered. I agree with the defendant that asking for the particulars of a verbal agreement is a follow up question, but as Mr. O’Dea will have to come back to answer follow up question to other answers and undertakings, this question can be asked then. It may be more efficient to answer it now.
Summary & Conclusion
[57] It is evident that counsel must now engage in discussion about discovery and production. The plaintiff is entitled to access the financial records and to verify their accuracy. There can be no hiding from this, but there is considerable scope for discussion about how to do this most efficiently. One of the problems seems to be that AF Global may no longer be an operating entity and it is not clear who currently controls its records. That will have to be clarified.
[58] Another problem is that it appears AF Global and perhaps Bauen have not maintained proper books and records. Certainly, AF Global has not laid audited financial statements before its shareholders on an annual basis as required by the CBCA. The delay in producing the two years of audited statements that have been promised suggests either lack of documentation or lack of funds to pay for the audit or perhaps both.
[59] The production of the raw QuickBooks data may be one way to achieve efficiency, but in order to make this useful it is probable it should be produced to an accountant or other expert. I leave it to the parties to consider whether continuing to try to extract documents through the discovery process is efficient or whether it might not be more efficient to order an audit.
[60] The defendants will be required to produce the documents covered by this order within 90 days unless the parties agree to a different process. The corporate defendant shall produce a representative for discovery within 120 days.
[61] This action will be case managed. I will designate an Associate Judge to create a timetable for the proceeding and to hear any further motions within the jurisdiction of the Associate Judge. I will designate a judge to hear any motions within the exclusive jurisdiction of a judge.
[62] I will entertain submissions on costs.
Regional Senior Justice C. MacLeod Date: March 9, 2022