COURT FILE NO.: CV-21-00667945-0000
DATE: 20220810
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
BANK OF MONTREAL
Plaintiff
- and –
1886758 ONTARIO INC. operating as REJUV MEDICAL and NAJAT DANIAL ORAHA also known as NAJAT D. ORAHA also known as NAHAT ORAHA
Defendants
Randy Schliemann for the Plaintiff
HEARD: In writing
PERELL, J.
REASONS FOR DECISION
A. Introduction
[1] This is a motion for a default judgment and related relief in a debt collection and fraud action by the Bank of Montreal (“BMO”) against 1886758 Ontario Inc. operating as Rejuv Medical (“Rejuv Medical”) and Najat Danial Oraha also known as Nahat Oraha.
[2] On this motion, BMO seeks:
a. an Order granting the Plaintiff Default Judgment as against the Defendants in accordance with paragraph 1 of the Plaintiff’s Statement of Claim, including: a. judgment in the aggregate sum of $442,723.36 as at June 29, 2021, plus accruing pre- and post-judgment interest from that date;
b. punitive damages in the amount of $150,000.00;
c. substantive indemnity for all costs, charges, expenses and fees, including legal fees, incurred to date;
d. a mandatory Order compelling the Defendants to deliver forthwith an accounting of all monies or benefits received from the Plaintiff, and the accounting shall include particulars as to how and where the money obtained from the Plaintiff was expended, accompanied with an Order for disgorgement of such funds and profits earned thereby;
e. a declaration that the Defendants are trustees for the benefit of the Plaintiff as beneficiary in respect of monies obtained from the Plaintiff, directly or indirectly, including any benefits, in the absence of consideration or entitlement, accompanied with an order entitling the Plaintiff to trace such monies, including any benefits, to any real or personal property in which the Defendants have any legal or beneficial interest or to any other person, corporation or other entity who received such funds, accompanied with an order for a declaration of a constructive trust over all such property in favour of the Plaintiff;
f. an Order for possession of any and all assets of the Defendant 1886758 Ontario Inc. operating as Rejuv Medical, if any, including, without limitation, all personal property, accounts receivable, inventory, equipment, goodwill and intangibles, wherever located including those assets located at 290 Caldari Road, Unit 2, Vaughan, Ontario, L4K 4J4 (the “Assets”), along with:
i. an Order restraining the Defendants and all persons except for the Plaintiff to whom notice of such order may be given from selling, transferring, assigning, encumbering or removing the Assets;
ii. an Order that the Plaintiff or its duly authorized agent may enter upon whatever premises the Assets are located for the purpose of taking possession of them; and
g. a declaration that any amounts awarded herein are debts arising from having obtained property by false pretences or fraudulent misrepresentation.
[3] For the Reasons that follow, BMO’s motion is granted.
B. Procedural and Evidentiary Background
[4] On August 31, 2021, BMO commenced this action by Statement of Claim.
[5] After the filing of the Statement of Claim, BMO’s process server made several unsuccessful attempts to serve Mr. Oraha with the Statement of Claim.
[6] On November 14, 2021, Associate Justice Abrams made an Order for substitute service on Mr. Oraha.
[7] On January 14, 2022, substitute service was made on Mr. Oraha and Rejuv Medical by regular letter mail to 1421 Cottonwood Court, Mississauga, Ontario, which is the last registered address of the corporation as filed with the Ministry of Consumer and Business Relations.
[8] On February 14, 2022, Mr. Oraha and Rejuv Medical were noted in default for failure to deliver a Statement of Defence within the timeline prescribed by the Rules of Civil Procedure.[^1] To date, neither Rejuv Medical nor Mr. Oraha have responded to the Statement of Claim.
[9] On March 29, 2022, BMO filed a motion in writing for a default judgment. The motion was supported by:
a. the affidavit of Peter Scopazzi dated March 9, 2022. Mr. Scopazzi is a Vice-President, Business Banking (Central Canada Region) for BMO.
b. the affidavit of Sharon Mohamed dated March 14, 2022. Ms. Mohamed is a Senior Forensic Analyst with the Legal & Regulatory Compliance department of BMO.
C. Facts
[10] When a defendant is noted in default, rule 19.02(1) of the Rules of Civil Procedure provides that the defendant “is deemed to admit the truth of all allegations of fact made in the statement of claim”. Under rule 19.05 (1), where the claim is for unliquidated damages and the motion for default judgment is brought before a judge, the motion is to be supported by an affidavit, and rule 19.06 rule requires the judge to inquire into whether the deemed factual admissions flow from the pleaded facts and whether as a matter of law the facts entitle the plaintiff to a judgment.[^2]
[11] Based on my inquiry into the deemed admissions and having considered the affidavit evidence of Mr. Scopazzi and Ms. Mohamed, I make the following findings of fact.
[12] Rejuv Medical is an Ontario corporation with its registered office address located at 1421 Cottonwood Court, Mississauga, Ontario. Mr. Oraha is a director of Rejuv Medical and is its principal and controlling mind.
[13] On November 16, 2020, BMO and Rejuv Medical signed a letter agreement pursuant to which BMO agreed to provide three credit facilities; namely:
a. The first facility was a $350,000 loan pursuant to the Canada Small Business Financing Act with interest at BMO’s prime rate of interest in effect from time to time plus 3.00% per annum (the “CSBFA Loan”).
b. The second facility was a $120,000 operating loan, payable on demand with interest at BMO’s prime rate of interest plus 2.15% per annum (the “Overdraft Facility”). The Overdraft Facility was provided in respect of the Rejuv Medical business account at BMO bearing account number 3858-1970796.
c. The third facility was a $30,000 commercial credit card agreement with interest at 21.00% per annum (the “Mastercard Facility”).
[14] It should be noted that with respect to the CSBFA Loan, BMO will advance proceeds only for prescribed purposes and to eligible businesses, in accordance with the Canada Small Business Financing Act and its regulations. Accordingly, a loan applicant must specify and confirm how it will satisfy one of these prescribed purposes during the CSBFA Loan application process.
[15] On November 18, 2020, on behalf of Rejuv Medical, Mr. Oraha signed the following Declaration, which stated:
“1886758 ONTARIO INC. (the “Borrower”) understands that, under the Canada Small Business Financing Regulations (the “Regulations”) made pursuant to the Canada Small Business Financing Act (the “Act”), loans cannot be made for certain purposes and under certain circumstances. To assist Bank of Montreal (the “Bank”) in determining whether a loan to the Borrower is within the ambit of the Act, the Borrower makes the following declarations:
(1) The Borrower declares that it is in business for profit, or gain.
(2) The Borrower declares that it has applied to the Bank for a loan to finance: …
c. the purchase or improvement of equipment.
(3) The Borrower declares that the purchase or improvement for which the loan is requested (as declared above) is necessary for the operation of the Borrower’s small business.”
[16] In applying for the loans, Mr. Oraha and Rejuv Medical represented orally and in writing that:
a. the CSBFA Loan proceeds would be used to purchase laser equipment as described in an invoice dated October 22, 2020, from Northern Optotronics; and
b. Rejuv Medical would operate a medical clinic using the equipment set out in the invoice dated October 22, 2020.
[17] The BMO relied on the application form, CSBFA Loan Agreement, the Declaration, the Invoice, and the representations in advancing funds under the Loans.
[18] As described below, BMO would later learn that the representations were lies and the invoice was a fabricated document.
[19] Rejuv Medical’s indebtedness to BMO was secured by a General Security Agreement dated November 18, 2020, which security was registered by financing statement on November 23, 2020, in the Personal Property Security Act registry.
[20] Rejuv Medical’s indebtedness to BMO was also secured by two guarantees provided by Mr. Oraha: (a) a guarantee limited to the amount of $87,500.00 plus interest to accrue from the date of demand at the Prime Rate plus 3.00%. This guarantee pertains to the CSBFA Loan; and (b) a guarantee limited to the amount of $150,000.00 plus interest to accrue from the date of demand at the Prime Rate plus 3.00%.
[21] In June 2021, Rejuv Medical was in default of its obligations to BMO for the Loans, and it was at this time that BMO determined that there were material inaccurate and false representations made by Mr. Oraha and his corporation, Rejuv Medical.
[22] As at June 29, 2021, Rejuv Medical was indebted to BMO for an aggregate sum of $442,723.36
[23] On June 30, 2021, BMO, through its counsel, made demand upon Rejuv Medical as principal debtor and on Mr. Oraha as guarantor. BMO declared the entire amount of the indebtedness immediately due and payable, and enclosed a Notice of Intention to Enforce Security against Rejuv Medical pursuant to s. 244 (1) of the Bankruptcy and Insolvency Act.[^3]
[24] Rejuv Medical and Mr. Oraha did not respond to the BMO’s demands for repayment and the indebtedness remains outstanding.
[25] As of February 23, 2022, the outstanding debt inclusive of principal and interest was $460,204.99. Interest continues to accrue on the CSBFA Loan at $49.77 per diem, on the Overdraft Facility at $10.66 per diem and on the Mastercard Facility at $11.14 per diem.
[26] By virtue of Rejuv Medical and Mr. Oraha being noted in default and not defending the action, it is taken to be admitted that:
a. Rejuv Medical and or Mr. Oraha did not intend to use the funds advanced by BMO to purchase the equipment specified in the CSBFA application process, or the Invoice.
b. Rejuv Medical never purchased the equipment specified in the invoice, or any comparable property or asset.
c. Rejuv Medical never intended to purchase the equipment in the manner represented, or at all.
d. Rejuv Medical and or Mr. Oraha did not intend to operate a small business for a sustained period intending to make a profit or gain, or at all.
e. The representations and declarations were false, and Rejuv Medical and Mr. Oraha made the representations and declarations knowing that they were false, without belief in their truth, or they were recklessly indifferent to whether the representations and declarations were true or false.
f. The fraudulent misrepresentations caused BMO to suffer losses and damages, including for the amounts owing for the loans.
[27] A review of the account statements and transaction histories in connection with Rejuv Medical’s Business Account at BMO from its inception in November 2020 through to and including April 2021 reveals the following:
a. The Business Account was opened with a nil balance on November 24, 2020. The CSBFA Loan in the sum of $350,000.00 was received and then transferred into the Business Account on November 24, 2020.
b. The funds were depleted through a series of three bank drafts dated November 25, 2020, January 4, 2021, and March 17, 2021 totaling $399,637.25. The Bank Drafts were made purportedly payable to: (a) Northern Optotronics”, (b) 1903092 Ontario Ltd., and (c) “Floran General Contracting Inc. but actually deposited in two BMO accounts; i.e.,
i. account no. 0002-1700-612 held in the name of Alpha Capital Inc.
ii. account no. 0654-1991-596 held in the name of Dionysus Capital Corporation.
[28] While BMO has not, to date, identified a direct connection between these accounts to Rejuv Medical, it believes that Alpha Capital and Dionysus may have been operating as a form of cheque casher/cheque factoring companies, and they and related parties are tied to other CSBFA loans that bear similar concerns as this one, where BMO is now pursuing borrowers for fraud. BMO has terminated its banking relationship with Alpha Capital and Dionysus and its related parties and closed their accounts.
[29] On May 17, 2021, Ms. Mohamed, a Senior Forensic Analyst with the Legal & Regulatory Compliance Department of BMO contacted Northern Optotronics Inc., the equipment supplier indicated in the invoice and spoke to Maria Medina, who identified herself as the bookkeeper.
[30] BMO learned from Ms. Medina that:
a. The account no. 4368 on the Invoice is for a quote prepared for Rejuv Medical.
b. The quote for the equipment was $43,787.50, and not the $196,000.00 indicated on the Invoice, and the invoice included equipment that was not part of the quote.
c. However, Rejuv Medical did not actually purchase any equipment from Northern Optotronics Inc.
D. Discussion and Analysis
[31] Treating the case at bar as a debt collection case, the evidence establishes that the loans went into default and have not been repaid. The evidence establishes that Rejuv Medical owes and is liable to pay BMO $442,723.36 as at June 29, 2021, plus accruing pre- and post-judgment interest from that date. Subject to their limits, Mr. Oraha is also liable under his guarantees.
[32] Treating the case at bar as a fraud case, both Defendants are jointly liable to pay BMO $442,723.36 as at June 29, 2021, plus accruing pre- and post-judgment interest from that date plus punitive damages of $150,000.
[33] The elements of a claim of fraudulent misrepresentation are: (1) a false statement by the defendant; (2) the defendant knowing that the statement is false or being indifferent to its truth or falsity; (3) the defendant having an intent to deceive the plaintiff; (4) the false statement being material and the plaintiff having been induced to act; and, (5) the plaintiff suffering damages.[^4] As my findings of fact reveal, the elements of a claim of fraudulent misrepresentation have been proven in the immediate case against the Defendants jointly and severally and there should be judgment accordingly.
[34] A court may award punitive damages on a motion for a default judgment.[^5] The Bank seeks punitive damages of $150,000.00.
[35] In Whiten v. Pilot Insurance Co.,[^6] the Supreme Court of Canada held that the purposes of punitive damages were retribution, denunciation, and deterrence. Justice Binnie, writing for the majority, stated at paragraph 36:
- Punitive damages are awarded against a defendant in exceptional cases for "malicious, oppressive and high-handed" misconduct that "offends the court's sense of decency": Hill v. Church of Scientology of Toronto, 1995 59 (SCC), [1995] 2 S.C.R. 1130, at para. 196. The test thus limits the award to misconduct that represents a marked departure from ordinary standards of decent behaviour. Because their objective is to punish the defendant rather than compensate a plaintiff (whose just compensation will already have been assessed), punitive damages straddle the frontier between civil law (compensation) and criminal law (punishment).
[36] It follows from Justice Binnie’s remarks that an assessment of punitive damages requires an appreciation of: (a) the degree of misconduct; (b) the amount of harm caused; (c) the availability of other remedies; (d) the quantification of compensatory damages; and (e) the adequacy of compensatory damages to achieve the objectives or retribution, deterrence, and denunciation. These factors must be known to ensure that punitive damages are rational and to ensure that the amount of punitive damages is not greater than necessary to accomplish their purposes.[^7]
[37] In the immediate case, the purposes of retribution, denunciation, and deterrence would be well served by an award of punitive damages.[^8] The facts reveal that this was an organized fraud and the Defendants took advantage of a government sponsored program, which is designed to assist small business, to defraud a bank into making a loan for an entity that did not carry on business.
[38] In my opinion a proportionate response to the victimization of the bank and of the public is $150,000. I, therefore, award BMO $150,000 in punitive damages.
[39] In furtherance of the collection of its loans and the Defendants’ ill-gotten funds, BMO seeks an order that it has a constructive trust over the loan proceeds and a tracing order.
[40] Courts may impress a constructive trust over fraudulently obtained funds, and issue tracing and accounting orders, in cases such as this, to assist in recovery efforts.[^9] Such orders are appropriate in the immediate case where the moneys were fraudulently procured and there is evidence that the funds were not used for their designated purposes and that BMO has not to date been able to trace what happened to the loan funds. Orders to go accordingly.
[41] BMO seeks a declaration that the Defendants’ debt and liability herein results from obtaining property or services by false pretences or fraudulent misrepresentations.
[42] BMO does not seek a direction that its claim will survive a bankruptcy discharge or fall within s. 178 of the Bankruptcy and Insolvency Act, but BMO is transparent that its intent is to rely on s. 178 of the Bankruptcy and Insolvency Act should the Defendants take the protection of bankruptcy.
[43] Section 178 of the Bankruptcy and Insolvency Act states:
Debts not released by order of discharge
178 (1) An order of discharge does not release the bankrupt from
(a) any fine, penalty, restitution order or other order similar in nature to a fine, penalty or restitution order, imposed by a court in respect of an offence, or any debt arising out of a recognizance or bail;
(a.1) any award of damages by a court in civil proceedings in respect of
(i) bodily harm intentionally inflicted, or sexual assault, or
(ii) wrongful death resulting therefrom;
(b) any debt or liability for alimony or alimentary pension;
(c) any debt or liability arising under a judicial decision establishing affiliation or respecting support or maintenance, or under an agreement for maintenance and support of a spouse, former spouse, former common-law partner or child living apart from the bankrupt;
(d) any debt or liability arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity or, in the Province of Quebec, as a trustee or administrator of the property of others;
(e) any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation, other than a debt or liability that arises from an equity claim;
(f) liability for the dividend that a creditor would have been entitled to receive on any provable claim not disclosed to the trustee, unless the creditor had notice or knowledge of the bankruptcy and failed to take reasonable action to prove his claim;
(g) any debt or obligation in respect of a loan made under the Canada Student Loans Act, the Canada Student Financial Assistance Act or any enactment of a province that provides for loans or guarantees of loans to students where the date of bankruptcy of the bankrupt occurred
(i) before the date on which the bankrupt ceased to be a full- or part-time student, as the case may be, under the applicable Act or enactment, or
(ii) within seven years after the date on which the bankrupt ceased to be a full- or part-time student;
(g.1) any debt or obligation in respect of a loan made under the Apprentice Loans Act where the date of bankruptcy of the bankrupt occurred
(i) before the date on which the bankrupt ceased, under that Act, to be an eligible apprentice within the meaning of that Act, or
(ii) within seven years after the date on which the bankrupt ceased to be an eligible apprentice; or
(h) any debt for interest owed in relation to an amount referred to in any of paragraphs (a) to (g.1).
Court may order non-application of subsection (1)
(1.1) At any time after five years after the day on which a bankrupt who has a debt referred to in paragraph (1)(g) or (g.1) ceases to be a full- or part-time student or an eligible apprentice, as the case may be, under the applicable Act or enactment, the court may, on application, order that subsection (1) does not apply to the debt if the court is satisfied that
(a) the bankrupt has acted in good faith in connection with the bankrupt’s liabilities under the debt; and
(b) the bankrupt has and will continue to experience financial difficulty to such an extent that the bankrupt will be unable to pay the debt.
Claims released
(2) Subject to subsection (1), an order of discharge releases the bankrupt from all claims provable in bankruptcy.
[44] There are cases where before there has been an assignment into bankruptcy, courts have granted a declaration that the debt survives a bankruptcy discharge under s. 178 of the Bankruptcy and Insolvency Act.[^10] I need not consider these cases because no such declaration is being sought in the immediate case.
[45] What is appropriate in the immediate case is simply to declare that the Defendants’ debt in the immediate case results from “fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity” or “from obtaining property or services by false pretences or fraudulent misrepresentation, other than a debt or liability that arises from an equity claim”, which declaration characterizes the debt or liability reflecting the language of s. 178(1)(d) and (e) of the Bankruptcy and Insolvency Act. This approach has been employed in several cases,[^11] and this approach reflects the reality of the facts and the law of the immediate case.
[46] Finally, there is the matter of costs. Based on the above findings of facts, I agree with BMO’s submission that the Defendants have engaged in reprehensible conduct that merits an award of costs on a substantial indemnity basis.[^12] BMO seeks the all-inclusive sum of $20,632.40 on a substantial indemnity scale, as detailed in its Cost Outline, which claim for costs I find fair and reasonable.
E. Conclusion
[47] A judgment should issue in accordance with these reasons for decision. Counsel may send me a draft judgment for signature.
Perell, J.
Released: August 10, 2022
COURT FILE NO.: CV-21-00667945-0000
DATE: 20220810
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
BANK OF MONTREAL
Plaintiff
- and –
1886758 ONTARIO INC. operating as REJUV MEDICAL and NAJAT DANIAL ORAHA also known as NAJAT D. ORAHA also known as NAHAT ORAHA
Defendants
REASONS FOR DECISION
PERELL J.
Released: August 10, 2022
[^1]: R.R.O. 1990, Reg. 194.
[^2]: Bank of Montreal v. Mathivannan, 2021 ONSC 2538; Canada Mortgage and Housing Corp. v. CMC Medical Centre Inc., 2017 ONSC 7551; Elekta Ltd. v. Rodkin, 2012 ONSC 2062; Fuda v. Conn, 2009 1140 (ON SC), [2009] O.J. No. 188 (S.C.J.).
[^3]: R.S.C. 1985, c. B-3.
[^4]: Midwest Amusement Park, LLC v. Cameron Motorsports Inc., 2018 ONSC 4549; Tsui-Wong v. Xiao, 2018 ONSC 3315; Bruno Appliance and Furniture Inc. v. Hryniak, 2014 SCC 8; Fiorillo v. Krispy Kreme Doughnuts, Inc. (2010), 2009 29902 (ON SC), 98 O.R. (3d) 103 (S.C.J.); Parna v. G. & S. Properties Ltd. (1970), 1970 25 (SCC), 15 D.L.R. (3d) 336 at p. 344 (S.C.C.); Derry v. Peek (1889), 14 App. Cas. 925 (H.L.).
[^5]: Barrick Gold Corp. v. Lopehandia, 2004 12938 (ON CA), [2004] O.J. No. 2329 (C.A.); Canadian Premier Life Insurance Co. v. Ho, 2016 ONSC 496.
[^6]: 2002 SCC 18.
[^7]: Midwest Amusement Park, LLC v. Cameron Motorsports Inc., 2018 ONSC 4549 at para. 103.
[^8]: Gennett Lumber Co. v. John Doe a.k.a. Milton Harvey et al., 2019 ONSC 1345; IBEW, Local 353 Trust Funds (Trustees of) v. Shojaei, 2014 ONSC 3656.
[^9]: Kim v. Jung, 2021 BCSC 1352; Noreast Electronics Co. v. Danis, 2018 ONSC 5169; Elekta Ltd. v. Rodkin, 2012 ONSC 2062; Soulos v. Korkontzilas, 1997 346 (SCC), [1997] 2 S.C.R. 217.
[^10]: See: University Plumbing v. Solstice Two Limited, 2019 ONSC 2242; Sunwell Investments Ltd. v. Cheung, 2013 ONSC 483.
[^11]: Ontario Limited v. Larkin, 2021 ONSC 1608; B2B Bank v. Batson, 2014 ONSC 6105.
[^12]: Growth Capital Corp. v. 2221448 Ontario Inc. d.b.a. Caliber Express, 2020 ONSC 3063; Canadian Premier Life Insurance Co. v. Ho, 2016 ONSC 496; IBEW, Local 353 Trust Funds (Trustees of) v. Shojaei, 2014 ONSC 3656; Elekta Ltd. v. Rodkin, 2012 ONSC 2062; Davies v. Clarington (Municipality), (2009), 100 O.R. (3d) (C.A.).```