Superior Court of Justice - Ontario
Court File No.: CV-22-00683040-00CL Date: 20230927
Re: BARRY THOMAS NAGLE, PAOLA MARIA ROMERO PIZZARO, CRAIG WILLINGMYRE ESCALANTE and MELLOW FELLOW CORP., Applicants
And:
VALDEMIRO PACHECO, COHEN PACHECO MERVYN, MICHAEL MONTGOMERY HARRIS, MARIA CLARA VIEIRA PACHECO, JANE DOES, JOHN DOES AND DOE CORPORATIONS, Respondents
Before: Kimmel J.
Counsel: Russell Bennett, for the Applicants Valdemiro Pacheco and Cohen Pacheco Mervyn, Self-Represented
Heard: September 12, 2023 (Further written update provided September 22, 2023)
ENDORSEMENT OF JUSTICE KIMMEL (APPLICATION FOR JUDGMENT):
[1] The court’s endorsement of July 10, 2023 provided a timetable of steps for the applicants to follow if they wished to ask the court for judgment against the defendants Valdemiro Pacheco and Cohen Pacheco Mervyn, who remain in default of various court orders in respect of which they were found to be in contempt on March 7, 2023 (the “defaulting respondents”). A warrant was issued for the arrest of Mr. Pacheco on or about June 12, 2023, although he temporarily moved to Quebec and the Ontario police have not been able to arrest him, nor has he turned himself in to serve his 30-day sentence despite having represented to the court on more than one occasion that he was going to do so.
[2] The applicants proceeded with their request for judgment in accordance with the court’s July 10, 2023 endorsement. Their materials were served and filed in support of this request, including an extensive evidentiary record to support the requested relief set out in their amended Notice of Application.
[3] Despite having been found in contempt of previous court orders, the defaulting respondents were afforded the opportunity to seek leave to file responding materials and oppose the request for judgment against them on the merits. No materials were filed by them in advance of the September 12, 2023 hearing and they made no request for leave to do so. The July 10, 2023 endorsement directed that they do so by September 1, 2023. Paragraph 6 of that endorsement provided as follows:
If the defaulting respondents do not deliver any proposed responding material and bring a motion seeking leave of the court to file it on this application, the application will proceed on an unopposed basis against either or both of the defaulting respondents on September 12, 2023 during the same one hour hearing time slot that has been reserved that day. The defaulting respondents have been advised that, in that event, judgment may be rendered against either one or both of them if the court is satisfied based on the applicants’ evidence and arguments that the requested relief (or some of it) is appropriate. The defaulting respondents may appear and, if they do, they will be given the opportunity to make submissions (arguments, not evidence) in response to the applicants’ submissions at this hearing even if they remain in contempt and even if they have not sought leave to file any responding material.
[4] Messrs. Pacheco and Mervyn appeared by video at the September 12, 2023 zoom hearing. Although no effort was made to seek leave to file any materials in advance, Mr. Pacheco made ad hoc submissions about the veracity of certain amounts the plaintiffs claim to have paid to him and interjected during the submissions of counsel for the applicants at various points. The court explained to Mr. Pacheco that the court could not consider unsworn statements made by him via video conference as “evidence” in response to the relief sought.
[5] Messrs. Pacheco and Mervyn were invited to make submissions about the relief (judgment) sought against them, which are summarized as follows:
a. Mr. Pacheco represented that he is expecting to have sufficient funds to pay the applicants the full amount that they are claiming (including prior cost awards) within 10 days (according to Mr. Pacheco, Mr. Bennett had told him this would require a payment of $695,000). Mr. Pacheco stated that he intends to turn himself in and serve his 30 day jail sentence once he has made that payment. There was some lack of clarity about whether Mr. Pacheco intended to make the payments contemplated by the court’s April 5, 2023 order (which was an interim order that provided for certain specified payments, some irrevocable and some amounts to be held in trust pending an adjudication of the merits of the applicants’ claims) or a full and final payment to settle the litigation. Mr. Pacheco suggested it was the latter.
b. Mr. Pacheco indicated that he was in the process of re-engaging counsel in this matter. He also mentioned that he was suffering from some health issues that he intends to substantiate.
c. Mr. Mervyn indicated that he hoped his father Mr. Pacheco would follow through this time so that his debts can be satisfied and he can put the litigation behind him. He explained that he had been hoping to be working and to be able to himself pay off the costs that he has been ordered to pay to the applicants but suffered a hand injury that has prevented him from doing so.
[6] The court advised all parties present on September 12, 2023 that a judgment would be signed after September 22, 2023 if Mr. Pacheco did not make the payments provided for in the April 5, 2023 Amended and Restated Order by that date, subject to the following adjustments:
a. At paragraph 2, with the deadline changed to September 22, 2023;
b. At paragraph 3, with the deadline changed to September 22, 2023 and the specified funds to be wired to the applicants’ counsel (instead of the Contemnor’s counsel) to be held in trust in a GIC;
c. At paragraph 4, the remaining outstanding disclosure ordered therein to be provided to the applicants’ counsel by no later than 20 days after Mr. Pacheco’s release from prison if he turns himself in as he has represented he will do once the previously referenced amounts have been paid.
[7] The procedures followed and requirements imposed upon the applicants to obtain judgment against the defaulting respondents in the context of contempt proceedings were directed by the court with regard to the requirements for so doing in the case of Thrive Capital Management Ltd. v. Noble 1324, 2021 ONCA 722.
Mr. Pacheco’s Sentence to Serve 30 days in Jail
[8] The court’s July 10, 2023 endorsement included the following summary of the state of affairs at that time concerning the court’s previous order for the incarceration of Mr. Pacheco, at paragraph 1:
The respondent Valdemiro Pacheco was sentenced to 30 days incarceration on May 16, 2023, although given one last chance to purge his contempt by June 15, 2023, which he failed to do.
There is an outstanding warrant for his arrest and committal. He has not yet been taken into custody by the police, although he advised the court today that he is receiving medical treatment for an ongoing medical condition and intends to turn himself in to serve his sentence upon his release from hospital.
[9] Mr. Bennett advised the court that the police officer in charge of executing the warrant for Mr. Pacheco’s arrest and committal reported that the police have attended seven times at Mr. Pacheco’s residence in Toronto to arrest him and each time have been told that Mr. Pacheco was not there. Mr. Pacheco confirmed at the September 12, 2023 hearing that he is currently residing temporarily in Quebec and that he has been trying to arrange for funds to pay the applicants before turning himself in to serve his jail sentence.
[10] Mr. Pacheco confirmed that he is receiving the service of materials by email from counsel for the applicants and that he can be served in that manner. He also undertook to provide Mr. Bennett with his current address and whereabouts in Quebec and to provide a phone number where he can be reached.
Update as at September 22, 2023
[11] Counsel for the applicants was asked to provide an update to the court by 5 pm on September 22, 2023 as to whether or not the promised amounts had been paid. The court also provided directions orally of what the parties should do if they reached a settlement and were seeking a consent order or something other than the judgment sought by the applicants.
[12] In accordance with the court’s direction on September 12, 2023, Mr. Bennett provided an update to the court on Friday September 22, 2023 as follows:
Pacheco has not kept his promises, yet again. He has not paid the applicants the ordered $695,000, as he promised he would. He has not paid any portion of the amount. Neither he nor Mervyn have disclosed any of the information Your Honour ordered previously. Further, there has been no communication from either respondent/contemnor about the payment or the disclosure.
[13] Mr. Bennett has confirmed that Mr. Pacheco did eventually provide the address at which he is residing in Quebec sometime after the September 12, 2023 attendance.
Judgment Granted
[14] I refer to an earlier case involving civil contempt that the parties were directed to have regard to, in which the following summary was provided regarding the dual purpose of civil contempt order such as has been made against the defaulting respondents: Thrive Capital Management Ltd. v. Noble 1324 Queen Inc., 2022 ONSC 4081 (at paras. 54 and 55):
[54] Civil contempt orders serve a dual purpose. One purpose is practical and focused on the parties before the court: seeking to ensure that the contemnor complies with relevant court orders. A sentence for civil contempt is intended to be coercive and persuasive, designed to enforce the rights of a private party. See Mercedes-Benz Financial v. Kovacevic, 2009 9423 (ON SC), 2009 9423, [2009] O.J. No. 888, at paras. 7-8. The other purpose is focused on the public at large: signaling that the court and its processes, including court orders, are to be respected.
[55] The Developer Defendants have been given many chances to purge their contempt including prior to and at the Contempt Hearing, at the first sentencing hearing, at the appeal, and now at this re-sentencing hearing. While the court’s focus still remains on the primary objective of compelling compliance with the Mareva and Disclosure Order, the deterrence objective cannot be ignored. The court not only must show the Developer Defendants, but also must show the public at large, that eventually the chances will run out. Even if there is a tendency to show some leniency in cases of civil contempt, every case has a breaking point, and it has been reached in this one.
[15] The defaulting respondents have come to the end of the line. The applicants have been forced to attend time after time while the defaulting respondents made promises to pay or to comply with other orders, none of which have been fulfilled. The court has been patient and more than accommodating. At the last attendance it was made very clear that this would be their last chance to do what they had been ordered (and in some instances, agreed) to do, and that the applicants could ask the court for judgment based on a supporting evidentiary record to be filed. They have once again not done so.
[16] In accordance with the court’s previous directions, the applicants filed a detailed record to support the judgment that they seek, for all of the relief claimed in their Amended Notice of Application. In response to a question from the court on September 12, 2023, their counsel provided a letter dated September 22, 2023 in which identifies where in the Amended Notice of Application the relief was sought, corresponding with each of paragraphs 1 through 20 of the draft judgment. This letter also explains the basis upon which the interest specified in the draft judgment was calculated, the conversion rate that was applied to amounts in the judgment that were originally paid in USD and a further explanation of the evidence about, and calculation of, the claimed lost opportunity damages. This letter was received by the court as a supplement to the factum previously filed in support of the judgment.
[17] The evidence and submissions filed by the applicants in accordance with the court’s direction of July 10, 2023 overwhelmingly supports a judgment in their favour, but not all that they have asked for (for reasons detailed below).
[18] The corporate applicant was incorporated and the parties subscribed for shares paying nominal consideration. Mr. Mervyn was a director of the corporate applicant and Mr. Pacheco was a shareholder, the controlling mind and acting as its de facto director, controlling the corporation, its actions and assets and taking on the office of director even when not holding that formal appointment. He was initially identified as the authorized signing officer on the company’s application to be a cannabis retail operator in Ontario, although due to the past criminal records that came to light they had to be removed from the licencing applications and another director was substituted in their place. Various corporate reorganizations ensued that were implemented by counsel being instructed by Messrs. Pacheco and Mervyn, the last of which appears to identify only the individual applicants as the sole shareholders of the corporation.
[19] Shareholder loan advances were made by the individual applicants that Mr. Pacheco received and said he would hold in trust to be invested in the corporate applicant (the “Trust Funds”). Both father and son promised to apply for cannabis licences and to use the applicants’ invested monies for corporate purposes in the cannabis business. Instead, and despite having incorporated the corporate applicant, the evidentiary record discloses that Mr. Pacheco gambled away more than half of the monies the applicants sent to him and spent the balance on personal expenses after transferring some to Mr. Mervyn, which Mr. Mervyn also spent on personal expenses.
[20] It has been established that the Trust Funds advanced by the individual applicants that were to be used for the legitimate business activities of the corporate applicant were instead taken by the defaulting respondents and used for their own personal purposes. The defaulting respondents have had the opportunity since the Mareva injunction order was made against them to comply with the court order and provide an accounting and tracing of what they used the Trust Funds for, and they have not done so. In addition to the evidence that the applicants have obtained from the defaulting respondents’ banking records that show the personal uses to which the Trust Funds were applied, it can be reasonably inferred that if they were used for any legitimate business purposes, the defaulting respondents would have provided the disclosure that was ordered so as to establish that.
[21] I find that both Mr. Pacheco and Mr. Mervyn were fiduciaries to the corporate applicant due to their positions and the roles that they took on in running the corporation’s business, and the power and discretion that they had over the corporation. Their duties to the corporate applicant existed at common law and, for the times when they were appointed as directors and officers, they owed statutory duties as well. They also stood in a fiduciary relationship to the individual applicants, whose participation in this venture they solicited based upon false representations and unkept promises. Mr. Pacheco and Mr. Mervyn, the experienced businessmen and operators running the show in Canada exercised power and discretion over the interests and investments of the individual applicants who were vulnerable to the power and discretion that Mr. Pacheco and Mr. Mervyn wielded due to their day-to-day involvement, experience and active management of the business and through their eventual receipt and control of the Trust Funds.
[22] The self-dealing that Mr. Pacheco and Mr. Mervyn engaged in through their personal use of the Trust funds was a clear breach of trust and breach of fiduciary duty. In the case of Mr. Pacheco given all of the lies he told and broken promises he made that are detailed in the evidentiary record (too many to summarize in this brief endorsement but outlined in both the oppression and fraud sections of the applicants’ factum), his actions and self-dealing were fraudulent. At the very least, he deliberately breached his fiduciary obligations to Barry, Craig and the Corporation, and that constitutes a civil fraud. See Nguyen v. Adas, 2022 ONSC 2541, at paras. 51 to 56.
[23] In the case of Mr. Mervyn, the evidence does not demonstrate that he committed fraud because he was not involved in all of the lies and representations made by Mr. Pacheco, but he was in knowing receipt of Trust Funds received by Mr. Pacheco from the individual applicants (or at the very least, willfully blind).
[24] The actions of the defaulting respondents also harmed the corporate applicant by stripping it of the funding (intended to come from the Trust Funds) that it needed to obtain its retail cannabis licence in Ontario.
[25] Mr. Pacheco’s fraud also entitles the applicants to recover their lost opportunity for not having used their Trust Funds as promised to obtain the retail cannabis licence and build the cannabis stores to sell the cannabis product over the past two and a half years (allowing some latitude for delays).
[26] The licence delay in particular, resulting from Mr. Pacheco’s fraudulent behaviour in gambling away the Trust Funds, can be correlated to the lost opportunity to earn profits. The applicants have calculated this based on their information about the industry gained through their continued efforts to launch this business, despite the conduct of the defaulting respondents. They are not seeking the full profits that were promised by Mr. Pacheco, but rather a more moderate profit level that they have substantiated through their industry research, which I consider a fair and reasonable approach in the circumstances, since they know now that Mr. Pacheco’s representations were too rich.
[27] Further, the conduct of the defaulting respondents was oppressive, unfairly prejudicial to and unfairly disregarded the interests of the individual applicants in that they had a reasonable expectation that Trust Funds advanced for corporate purposes would be used for corporate purposes and not for personal purposes. Taking corporate assets and using them to one’s personal advantage is oppression. Oppressive conduct is "burdensome, harsh and wrongful" and may include appropriation of corporate property and breaches of fiduciary duty, typically arising from an abuse of corporate power." See Dalias et al v. Price et al, 2023 ONSC 4179, at para. 77. Their conduct was a visible departure from the standards of fair dealing, and was an abuse of their positions and effective management and control of the corporate applicant. See Multiguide Gmbh v. Broer, 2022 BCSC 852, at para. 185.
[28] The conduct of the defaulting respondents with respect to the handling of the Trust Funds is deplorable and their conduct in response to this application is equally so. The court’s finding that they are in contempt was not made lightly. They appear to have little if any regard for the court’s process and are seemingly willing to string along the applicants and the court time after time, without following through on their promises.
[29] The court’s sanctions upon the finding of contempt do not appear to have altered their behaviour. It was left open to the applicants to apply for this further sanction of judgment, which they have now done with the appropriate evidentiary foundation.
[30] In addition to the remedies for oppression and fraud the applicants seek punitive damages. This is one of those rare cases in which I find that punitive damages are appropriate to award against Mr. Pacheco, having regard to the principles that must govern such an award as summarized by the Supreme Court of Canada in Whiten v. Pilot Insurance Co., 2002 SCC 18, [2002] 1 SCR 595, at para. 36:
Punitive damages may be awarded in situations where the defendant's misconduct is so malicious, oppressive and high-handed that it offends the court's sense of decency. Punitive damages bear no relation to what the plaintiff should receive by way of compensation. Their aim is not to compensate the plaintiff, but rather to punish the defendant. It is the means by which the jury or judge expresses its outrage at the egregious conduct of the defendant. They are in the nature of a fine which is meant to act as a deterrent to the defendant and to others from acting in this manner. It is important to emphasize that punitive damages should only be awarded in those circumstances where the combined award of general and aggravated damages would be insufficient to achieve the goal of punishment and deterrence."
[31] That said, the court cannot sign the draft judgment in the form presented, as some of the precise relief sought requires clarification and/or cannot be ordered at this time. Specifically:
d. With respect to paragraph 2 of the draft judgment, the court is only satisfied on the record that Mr. Mervyn breached his fiduciary duties as a director and committed knowing receipt and is not prepared to make a finding that Mr. Mervyn committed fraud.
e. With respect to paragraph 3 of the draft judgment, the court is not satisfied on the record that the declaration sought should be granted against Mr. Mervyn and is only prepared to grant that relief against Pacheco.
f. With respect to paragraph 6 of the draft judgment, it should be revised as follows:
…all monies received by Pacheco from the applicant comprising the Trust Funds totalling $362,919.21 USD and $4,165.86 CDN, and the portion of those Trust Funds totalling $45,914.99 that Pacheco transferred to Mervyn, are held in trust and/or constructive trust by Pacheco and Mervyn, respectively, for the benefit of the applicants.
g. With respect to paragraphs 15 and 16 of the draft judgment, the court cannot make orders against, or that affect the rights of, non-parties (lawyers or counterparties to contracts) without them being on notice and having been given an opportunity to respond. The part of paragraph 15 directed to the lawyers and paragraph 16 are removed from the draft judgment.
h. With respect to paragraph 17, it should be revised to read:
The rectification of the Corporation’s registers and records to reflect the shareholdings as at June 27, 2020 as follows: …
i. With respect to paragraph 18 of the draft judgment, the general damages for lost opportunity/ profits should only be against Mr. Pacheco.
j. With respect to paragraph 19 of the draft judgment, the punitive damages should only be awarded against Mr. Pacheco in the amount of $25,000.
[32] The court is not inviting any further submissions from any party on the judgment. The court has signed the draft judgment provided by the applicants with these and other small editorial changes made.
[33] The applicants are entitled to their costs of preparing for the September 12, 2023 motion for judgment, including the preceding case conference on July 10, 2023, the appearances on July 10 and September 12, 2023 and the steps taken afterwards up to and including September 22, 2023, the effective date of the judgment. Given the history of non-compliance by the defaulting respondents (they remain in contempt and have not purged their contempt or complied with the court’s sentence for their contempt), the wasted expense that the applicants’ have been put to as a result, and the repeated “last chances” that the defaulting respondents were given, which has all occurred at the expense of the applicants, I consider full indemnity costs to be appropriate.
[34] In the exercise of my discretion under s. 131 of the Courts of Justice Act and under r. 57 of the Rules of Civil Procedure, the defaulting respondents are ordered to pay to the applicants their full indemnity costs of $50,700.75 (inclusive of all fees, disbursements and applicable taxes as reflected in the applicants’ Amended Bill of Costs) as part of the judgment, Mr. Pacheco as to 80% and Mr. Mervyn as to 20%, in keeping with the court’s prior allocation of costs as between them, on a several basis.
[35] Judgment shall issue in the revised form reflecting the above and signed by me today.
Kimmel J.
Date: September 27, 2023