Court File and Parties

Court File No.: CV-21-00665448-0000 Date: 2023-02-15 Ontario Superior Court of Justice

Re: Bank of Montreal for itself and all creditors of Yogarajah Sinnathurai also known as Sinnathurai Yogarajah, Plaintiffs And: Sakara Wood Inc. and Yogarajah Sinnathurai also known as Sinnathurai Yogarajah and Kaladevi Yogarajah and Thurkka Yogarajah, Defendants

Before: Robert Centa J.

Counsel: Sean Zeitz and Randy Schliemann, for the plaintiffs No one appearing, for the defendants

Heard: February 13, 2023 (in writing)

Endorsement

[1] The Bank of Montreal moves for default judgment against Yogarajah Sinnathurai, the directing mind of Sakara Wood Inc., which defaulted on loan obligations to BMO.

[2] For the reasons that follow, BMO has proven that Mr. Sinnathurai committed civil fraud in obtaining those loans. I grant judgment in favour of BMO in the amount of the loans obtained and order a constructive trust and related equitable relief in favour of BMO. I also set aside a transfer of property from Mr. Sinnathurai to his spouse Kaladevi Yogarajah as a fraudulent conveyance or unjust preference.[^1]

Facts

[3] BMO commenced this action on July 13, 2021. None of the defendants have delivered statements of defence and BMO has noted them all in default. The defendants, therefore, are deemed to have admitted the facts in the statement of claim.

[4] BMO has moved for summary judgment on notice to the defendants. I am satisfied that BMO served its motion record for default judgment, including the triage order of Myers J. dated December 23, 2023, on Mr. Sinnathurai and Ms. Yogarajah. The motion record contains the affidavit of Peter Scopazzi, sworn December 20, 2022. I find the following facts based on the defendants’ deemed admissions and the affidavit of Mr. Scopazzi.

[5] BMO agreed to lend money to Sakara Wood Inc. pursuant to loan agreements with the company and guarantees provided by Mr. Sinnathurai. The loans included a loan under the Canada Small Business Financing Act, a demand loan, and a commercial credit card. Mr. Sinnathurai made a series of misrepresentations in the personal financial statement he submitted in support of the loan application. Among other things, he misrepresented his marital status, his ownership interest in his house, and his assets.

[6] Mr. Sinnathurai represented to BMO that the proceeds of the CSBFA loan were to be used to purchase specifically identified equipment for use in its business of producing custom millwork. In support of this loan, the company provided BMO with an invoice dated October 9, 2020, from a business called Jiann Affordable Machinery. The invoice identifies two millwork machines and related equipment to be purchased for $411,320.00, inclusive of tax.

[7] The CSBFA loan was transferred to the company’s bank account on November 13, 2020. The company quickly made three drafts payable in the aggregate sum of $345,000 to Jiann Affordable Machinery. One draft was deposited into the account registered to Alpha Capital Inc., which appears to have been operating as a cheque cashing business and two other drafts were deposited into accounts registered to a numbered company that had registered Jiann Affordable Machinery as its business name on November 16, 2020, which was notably after the date on the invoice presented by the company to BMO. Several other large cheques and drafts were made payable to various numbered companies and $449,365 was transferred out of the company’s account between November 17 and December 3, 2020. A further invoice from Jiann Affordable Machinery dated December 3, 2020, indicates that the Equipment Invoice was fully paid by way of four installments.

[8] BMO began to investigate these invoices in spring 2021. It realized that the two invoices spelled Jiann Affordable Machinery differently. On May 6, 2021, a BMO investigator visited the address listed on the invoices and found that there was no business located there and the unit was vacant. The website addresses listed on the invoices do not exist.

[9] On May 6, 2021, Mr. Sinnathurai severed the joint tenancy and transferred his interest in the house to Ms. Yogarajah for no consideration. That same day, she granted Royal Bank of Canada a $1 million charge on the property.

[10] By June 24, 2021, Sakara Wood owed BMO $480,627.90. The next day, BMO demanded that the company and Mr. Sinnathurai repay the entire amount owing. To date, BMO has received no response to its demand for repayment.

[11] On September 1, 2021, Mr. Sinnathurai filed an assignment in bankruptcy. BMO obtained an order under s. 38 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, which permitted it to pursue the fraudulent conveyance claim against Mr. Sinnathurai and Ms. Yogarajah. BMO also obtained an order lifting the automatic stay of proceedings imposed by s. 69.3(1) of the Bankruptcy and Insolvency Act, which permitted it to proceed with the fraudulent misrepresentation claim against Mr. Sinnathurai.

[12] BMO’s statement of claim pleads, and the defendants are deemed to admit, the following:

a. At no point in time did the company or Mr. Sinnathurai intend to use the funds advanced by BMO to purchase the equipment specified in the CSBFA loan application or the invoice;

b. Jiann Affordable Machinery, the business that was purported to have provided the invoice to the company, does not operate or exist;

c. The company never purchased the equipment specified in the invoice and the company and Mr. Sinnathurai never intended to purchase the equipment in the manner represented or at all;

d. The company or Mr. Sinnathurai never intended to operate a small business for a sustained period intending to make a profit or gain;

e. The company and Mr. Sinnathurai made a series of knowingly false representations and declarations to BMO;

f. BMO relied on those fraudulent misrepresentations and suffered losses and damages.

[13] As of December 14, 2022, the amount owing had increased to $535,810.87 in principal and interest.

Conclusions

[14] Considering the deemed admissions of fact flowing from the statement of claim, and the evidence filed by BMO, I am satisfied that BMO has proved its claim and damages: Fuda v. Conn, 2009 1140 (ON SC), at para. 16; Elekta Ltd. v. Rodkin, 2012 ONSC 2062 at para. 14.

[15] 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: Bank of Montreal v. 1886758 Ontario Inc., 2022 ONSC 4642 at para. 33; Bruno Appliance and Furniture Inc. v. Hryniak, 2014 SCC 8, [2014] 1 S.C.R. 126 at paras. 18-20.

[16] Based on my findings of fact, I am satisfied that BMO is entitled to judgment against Mr. Sinnathurai for fraudulent misrepresentation for all amounts owing to BMO under the loan agreements. I adopt the reasons of Myers J. in the remarkably similar case of Bank of Montreal v. 1874232 Ontario Ltd. et al.(unreported):

On the deemed admissions and evidence adduced by the plaintiff for this motion, I am satisfied that the defendants defrauded the bank. The corporate defendant obtained a secured and guaranteed small business loan to pay for equipment, a secured and guaranteed line of credit and Mastercard facility. The defendants induced the bank to make the loans by providing a fictitious invoice in the name of a known supplier. They then registered a similar name and deposited the funds in accounts opened in that name. No equipment was purchased. The money was obtained by the defendants under false through a scheme created with malice aforethought.

[17] BMO seeks punitive damages of $150,000. As Perell J. held in Midwest Amusement Park, LLC v. Cameron Motorsports Inc. 2018 ONSC 4549, at para. 103, when considering an award of punitive damages, the court should consider the following factors:

(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.

[18] In the remarkably similar case of Bank of Montreal v. 1886758 Ontario Inc., 2022 ONSC 4642, Perell J. awarded $150,000 in punitive damages where the fraudster owed BMO $442,723.36. Justice Perell concluded:

In the immediate case, the purposes of retribution, denunciation, and deterrence would be well served by an award of punitive damages. 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.

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.

[19] I agree and award BMO $150,000 in punitive damages.

[20] In my view, BMO is entitled to a constructive trust over the loan proceeds that Mr. Sinnathurai obtained through fraud, a tracing remedy to determine where the funds ended up, and a constructive trust over any traceable proceeds. Such remedies are common in cases of fraud in order to assist innocent parties to recover their losses: Soulos v. Korkontzilas, 1997 346 (SCC), [1997] 2 S.C.R. 217 at para. 34; Bank of Montreal v. 1874232 Ontario Ltd. et al. (unreported).

[21] I decline to make a declaration under s. 178 of the Bankruptcy and Insolvency Act. This court has repeatedly held that such relief should is not available on a motion for default judgment: B2B Bank v Batson, 2014 ONSC 6105, at paras. 9 to 18; Royal Bank of Canada v. Elsioufi, 2016 ONSC 5257, at paras. 5 to 11; L-Jalco Holdings Inc. v. Bell, 2017 ONSC 1035, at para. 21; Bank of Montreal v. 1874232 Ontario Ltd. et al. (unreported)

[22] On May 6, 2021, Mr. Sinnathurai transferred his interest in the Markham property to Ms. Yogarajah. In his land transfer tax statements registered with the Land Registrar at the time of the transfer, Mr. Sinnathurai affirmed that he was the married to Ms. Yogarajah and transferred the property for love and affection. Interestingly, as part of his application for bankruptcy, he claimed that he transferred his interest as part of a separation agreement with Ms. Yogarajah and that he had been separated from her since December 2020. It is difficult to reconcile his two filings.

[23] I find that it is appropriate to void the transaction pursuant to s. 2 of the Fraudulent Conveyances Act, R.S.O. 1990, c. F.29.[^2] I find that there has been a conveyance of property with an intent to defeat creditors: Stevens v. Hutchens, 2022 ONSC 1508, aff’d 2022 ONCA 771. The transfer of the property has many of the badges of fraud from which I may infer intent. The badges of fraud are well known and recognized by modern courts as follows:

a. the donor continued in possession and continued to use the property as his own;

b. the transaction was secret;

c. the transfer was made in the face of threatened legal proceedings;

d. the transfer documents contained false statements as to consideration;

e. the consideration is grossly inadequate;

f. there is unusual haste in making the transfer;

g. some benefit is retained under the settlement by the settlor;

h. embarking on a hazardous venture; and

i. a close relationship exists between parties to the conveyance.[^3]

[24] I accept BMO’s submissions that his transaction presents several badges of fraud:

a. the transfer was secret. Mr. Sinnathurai never informed BMO he was transferring his only significant illiquid asset, notwithstanding the fact that he acted as guarantor for the loans and ought to reasonably have known that BMO would be relying on his assets as represented on the personal financial statement should the loans become due and owing;

b. the transfer was made about two months after the operating line became overdrawn and a month before BMO made demand on Mr. Sinnathurai pursuant to his guarantee obligations;

c. Mr. Sinnathurai participated in a fraudulent scheme to defraud BMO using a false invoice and depleted the CSBFA loan proceeds within a month of the funds being deposited into the company's account;

d. there was no consideration for the transfer of Mr. Sinnathurai's interest in the property;

e. there is a close relationship between spouses who were parties to the transfer; and

f. Mr. Sinnathurai transferred his interest in the property to a non-arm's length party only four months before making an assignment in bankruptcy, which is presumed to be a transfer at undervalue under the Bankruptcy and Insolvency Act.

[25] It was open to Mr. Sinnathurai or Ms. Yogarajah to deliver evidence that might have persuaded me that the badges of fraud should not cause me to draw an inference of a fraudulent intent, but they did not deliver any such evidence.

[26] In all the circumstances, I find that there has been a conveyance of property with a fraudulent intent to defeat BMO and other creditors and I order that it be set aside as a fraudulent conveyance. I direct the Land Registrar for the Land Titles Office for the City of Markham, in the Regional Municipality of York, to rule off and delete from the Parcel Register the impugned Property Instrument and reinstate Mr. Sinnathurai as a registered joint owner thereof in accordance with the transfer/deed of land registered on title to the Property on May 5, 2017.

Costs

[27] Fixing costs is a discretionary decision under section 131 of the Courts of Justice Act, R.S.O. 1990, c C.43. In exercising my discretion, I may consider the result in the proceeding, any offer to settle or to contribute made in writing, and the factors listed in rule 57.01 of the Rules of Civil Procedure R.R.O. 1990, Reg 194. These factors include the principle of indemnity (rule 57.01(1)(0.a)), the reasonable expectations of the unsuccessful party (rule 57.01(1)(0.b)), the amount claimed and recovered (rule 57.01(1)(a)), and the complexity of the proceeding (rule 57.01(1)(c)).

[28] I am to make a costs order that is fair and just depending on the circumstances of the case before me: Boucher v. Public Accountants Council (Ontario) (2004), 2004 14579 (ON CA), 71 O.R. (3d) 291 (C.A.) at para. 24.

[29] Substantial indemnity costs are an exception to the general rule and awarded only under special circumstances, where a party makes allegations or engages in conduct that is "reprehensible, scandalous, or outrageous": 1238915 Ontario Limited v. Nothdurft, 2022 ONSC 5250, at para. 9; Baryluk v. Campbell, 2009 34041 (ON SC) at paras. 8-10.

[30] Fraudulent conduct often attracts an elevated costs order: Growth Capital Corp. v. 2221448 Ontario Inc. d.b.a. Caliber Express, 2020 ONSC 3063, para. 12; IBEW, Local 353 Trust Funds (Trustees of) v. Shojaei, 2014 ONSC 3656, para. 12; Elekta Ltd. v. Rodkin, 2012 ONSC 2062 at paras. 39-41; Canadian Premier Life Insurance Co. v. Ho, 2016 ONSC 496 at para. 49.

[31] BMO seeks its costs of the action on a substantial indemnity scale, fixed in the amount of $50,360.54, all inclusive. BMO submits that the amount it seeks for costs is "fair and reasonable", and within the defendants' reasonable expectations, given the number of steps in the process and the amounts at stake. I agree. BMO’s request is reasonable in the circumstances. I order the defendants to be jointly and severally responsible to pay BMO $50,360.54, inclusive of disbursements and taxes within 30 days of the date of this order.

Conclusion

[32] I grant default judgment in favour of BMO against Mr. Sinnathurai and Ms. Yogarajah in accordance with the draft order provided by BMO.

[33] Counsel for BMO may email a revised draft judgment that reflects these reasons to my judicial assistant for my review.

Robert Centa J.

Date: February 15, 2023

[^1]: BMO discontinued the action against Thurkka Yogarajah, the daughter of Mr. Sinnathurai and Ms. Yogarajah, on June 20, 2022.

[^2]: Section 2 provides that “Every conveyance of real property or personal property and every bond, suit, judgment and execution heretofore or hereafter made with intent to defeat, hinder, delay or defraud creditors or others of their just and unlawful actions, suits, debts, accounts, damages, penalties or forfeitures are void as against such persons and their assigns.”

[^3]: Indcondo Building Corp. v. Sloan, 2014 ONSC 4018, 121 O.R. (3d) 160, at para. 52.