Court File and Parties
COURT FILE NO.: CV-23-00697221-00CL DATE: 20240217 ONTARIO - SUPERIOR COURT OF JUSTICE – COMMERCIAL LIST
RE: WAYNE SAFETY INC., Plaintiff AND: DIANA GENDELMAN, NATAN GENDELMAN, 12069253 CANADA INC., BEST SHOWA INC., HEALTH IN MOTION REHABILITATION INC., HEALTH IN MOTION MEDIA INC., ENABLED KIDS INC., 13829103 CANADA INC., 2663788 ONTARIO LTD., 14807031 CANADA INC., ALEXANDER DOBRINSKI, DDNG CORPORATION, JOHN DOE, JANE DOE, and other persons unknown who have conspired with the named Defendants
BEFORE: Peter J. Osborne J.
COUNSEL: Mark Ross, Eric Brousseau and Lauren Grammar, for the Plaintiff Brendan van Niejenhuis and Karen Bernofsky, for the Defendant Diana Gendelman Daniel Naymark and Jamie Gibson, for the Defendants Natan Gendelman and related companies Michael Simaan, for the Defendant Alexander Dobrinski Justin Papazian, for the Non-Party / Proposed Defendants
HEARD: February 17, 2024
Endorsement
[1] The Defendants, Natan and Diana Gendelman (the “Gendelman Defendants”), seek to vary, for the third time, the existing Mareva Order in place in this proceeding. Specifically, they seek an order authorizing and permitting:
a. the sale of the property located at 84 Ravel Drive, Vaughan, Ontario (the “Ravel Property”), with the net proceeds of sale preserved in the trust account of counsel for the Gendelman Defendants;
b. the payment of reasonable legal fees and expenses of the Gendelman Defendants, in such amounts as may be agreed with the Plaintiff or fixed by the court in the absence of such agreement, from the sale proceeds of the Ravel Property;
c. an increase in the amount available to the Gendelman Defendants for living expenses from $10,000 up to $16,333 per month;
d. the payment of any ordinary living expenses (in an unlimited amount) incurred by the Gendelman Defendants from the Unfrozen Accounts (as defined below);
e. the payment, from the sale proceeds of the Ravel Property or from such other funds as may be directed by the Court, of the amount of $243,046 (a one-time payment only) to discharge amounts owing to third-party creditors of the Gendelman Defendants; and
f. the payment of legal fees incurred to date by counsel for the Gendelman Defendants, together with an order approving those legal fees, from the sale proceeds of the Ravel Property.
[2] The Plaintiff, Wayne Safety Inc., also moves for leave to amend the Statement of Claim and for other relief.
[3] All parties consented to the amendments to the Statement of Claim. Accordingly, leave to amend was granted at the hearing of this motion and the Statement of Claim was amended in accordance with the form appended to the Notice of Motion of the Plaintiff, all pursuant to my consent order of January 15, 2024.
[4] Defined terms in this Endorsement have the meaning given to them in the motion materials and/or my earlier Endorsements made in this proceeding, unless otherwise stated.
[5] Much of the background to, and context for the Mareva order, is set out in my earlier Endorsements, and particularly in my Endorsement of April 5, 2023, setting out my reasons for granting the Mareva order, my Endorsement of April 13, 2023 varying that Mareva order for the first time and my Endorsement of June 23, 2023 setting out my reasons for varying that Mareva order a second time as described below.
[6] The existing Mareva order was made in this proceeding on April 4, 2023. It has already been varied twice, at the request of the Gendelman Defendants, to permit or increase their access to funds for legal fees and/or living expenses.
[7] On April 13, 2023, I varied the Mareva order to approve $3500 per month for living expenses for the Gendelmans and to authorize the payment of legal fees in the additional amount of $25,000, which was paid to former counsel for the Gendelmans.
[8] On June 23, 2023, I varied the Mareva order again, on the consent of all parties (specifically including the Plaintiffs), to:
a. authorize the sale of six properties beneficially owned by the Gendelman Defendants;
b. transfer the net sales proceeds of two of those properties to the trust account of counsel to the Gendelman Defendants to be used for the payment of reasonable legal fees;
c. transfer the net sales proceeds of the other four properties to the Plaintiff, to the credit of amounts determined to be owing to the Plaintiff by the Gendelman Defendants;
d. authorize an increase in the amount available for the payment of living expenses from the previously authorized amount of $3500 per month, to $10,000 per month, to the Gendelman Defendants for ordinary living expenses for a period of three months; and
e. authorize the opening of new bank accounts by the Gendelman Defendants to be used to receive business and employment income and to pay ordinary course living and business operating expenses not enjoined by the Mareva order (the “Unfrozen Accounts”).
[9] The Gendelman Defendants now bring this motion on the basis that they need access to additional funds for ordinary living expenses, to pay outstanding debts, and to pay ongoing legal expenses over and above those legal expenses that have been paid so far from the net proceeds of the sale of the Ravel Property.
[10] They submit that the Plaintiff cannot trace funds that it claims were stolen and misappropriated from it by Diana Gendelman, the former bookkeeper for the Plaintiff, into the Ravel Property, with the result that it cannot establish any proprietary claim to that asset.
[11] With respect to living expenses, they submit that the amount of $10,000 per month was agreed by the parties as a temporary measure and is not sufficient to cover the living expenses being incurred by the Gendelmans.
[12] With respect to legal expenses, they submit that their counsel have not received payment of legal fees for work already undertaken as well as anticipated in the future, largely as a result of the fact that two properties beneficially owned by the Gendelman Defendants (the “King and Shuter Properties”) had not been sold as of the date of the hearing of this motion, notwithstanding the consent order of June 23, 2023 pursuant to which they were listed for sale.
[13] The Gendelman Defendants further submit that even if the King and Shuter Properties were sold, market conditions have deteriorated such that anticipated sales proceeds would be insufficient to pay legal expenses in any event, and their counsel have advised that they are not prepared to continue to act absent a sufficient alternative source of funding.
[14] The Plaintiff also seeks an order permitting the sale of the Ravel Property, but provided that the full net proceeds of sale are paid into court pending a final determination in this action. The Plaintiff opposes any further variation of the Mareva order that would make available to the Gendelman Defendants any additional funds that are currently frozen.
[15] The parties are agreed on the four-part test to be applied on a motion to vary a Mareva injunction as set out in Canadian Imperial Bank of Commerce v. Credit Valley Institute of Business & Technology, 2003 CarswellOnt 35 (ONSC) (“Credit Valley”), at para. 26, (which was endorsed by the Ontario Court of Appeal in Waxman v. Waxman, 2007 ONCA 326 (“Waxman”) at para. 37):
(a) The defendants must establish on the evidence that they have no other assets available to pay their expenses other than those frozen by the injunction;
(b) If the defendants have met the first branch of the test, they must show on the evidence that there are assets caught by the injunction that are from a source other than the plaintiffs; i.e., assets that are subject to the Mareva injunction, but that are not proprietary to the plaintiffs;
(c) The defendants must establish that they have exhausted all non-proprietary assets frozen by the Mareva to pay their reasonable living expenses, debts, and legal costs. If they have not, those assets must be exhausted before the defendants are entitled to look to the assets subject to the proprietary claim; and
(d) If the defendants have met the previous three tests and still require funds for legitimate living expenses and to fund their defence, the court must balance the competing interests of the plaintiffs in not permitting the defendants to use the plaintiffs’ money for their own purposes and of the defendants in ensuring that they have a proper opportunity to present their defence before assets in their name are removed from them without a trial. In weighing the interests of the parties, it is relevant for the court to consider the strength of the plaintiffs’ case, as well as the extent to which the defendants have put forward an arguable case to rebut the plaintiffs’ claim.
[16] The party seeking to vary a Mareva injunction has the onus of proving that they have no other assets available for legal fees or living expenses: Waxman at para. 39 and HMQ v. Madan, 2020 ONSC 8093 (“Madan”) at para. 16.
[17] As observed by Dietrich, J. in Madan, such a party is required to make full disclosure of all assets and liabilities and is expected to be candid about its ability to obtain funds from various sources. (Madan, at paras. 17 and 18, quoting with approval Trade Capital v. Peter Cook, 2015 ONSC 7776, at para. 41).
[18] In Waxman, the Court of Appeal held the defendant will not meet his onus if he refuses questions related to potential sources of income, and an adverse inference will be drawn if the defendant refuses to answer questions about his or her ability to finance living and legal expenses from other sources (paras. 41–43). If the defendants fail to provide evidence, they cannot discharge their onus: Madan, at para. 17.
[19] Defendants that have not been forthcoming about their ability to draw on the assets of friends and family cannot meet their onus under the first branch of the Credit Valley test, since they have failed to establish on the evidence that they do not have access to assets that can be used to pay for legal fees or living expenses: Royal Bank v. Welton at para. 35; and Li v. Hendren, 2021 ONSC 1692 at paras. 37-38.
Analysis
[20] As set out in earlier Endorsements in this proceeding, the principal allegation of the Plaintiff is that Diana Gendelman misappropriated some $5.6 million from Wayne Safety during the period in which she was employed as its bookkeeper, between August 2020 and March 2023. The Plaintiff pleads that Diana Gendelman’s husband, Natan Gendelman, is also personally liable for knowingly participating in or receiving the misappropriated funds.
[21] Natan Gendelman denies any knowledge of misappropriated funds, and maintains that he believed that all funds used in the real estate investment business of the Gendelmans were from legitimate sources, such as past profits or funds borrowed against properties they owned. He has sworn four affidavits in this proceeding. Diana Gendelman has delivered a statement of defence in which she denies the allegations of the Plaintiff and pleads that she did not commit any fraud or misappropriation. She provided a statement of assets as required but has not filed any affidavit in this proceeding.
[22] The Gendelman Defendants submit on this motion that they satisfy each of the elements of the Credit Valley test. One of their principal arguments is that the Ravel Property was purchased by them years before the events giving rise to this claim and the Plaintiff cannot trace any of the stolen funds in to that property, with the result that they ought to be permitted to sell it and use the net proceeds of sale as they wish.
[23] The Plaintiff submits that, on the contrary, the Gendelman Defendants cannot meet any of the elements of the Credit Valley test, that there is still no evidence whatsoever from Diana Gendelman, and that the Gendelman Defendants have generally failed to disclose all of their assets or how, absent the alleged fraud, they funded their obligations as they came due, and that they have failed to account for the use of the funds to which they have been given access or justify the additional funds now sought.
[24] As a preliminary matter, the Plaintiff submitted that the quantum of frozen funds to which the Gendelman Defendants should be entitled is res judicata, having been determined on the most recent motion to vary. The Plaintiff further submits that since that order was made on consent, the present motion is an attempt to renegotiate those consent terms with the result that this motion could be dismissed on that basis alone.
[25] The Gendelman Defendants submit that at the time they agreed to the earlier consent order, it was the expectation that the net proceeds of sale from the King and Shuter Properties would have been significantly higher than they are, with the result that access to additional funds is required. They further submit that nothing in the earlier order prohibited or limited their ability to seek to vary the order in the future.
[26] I agree with the position of the Gendelman Defendants on this point. In my view, nothing in my earlier order prohibits them from seeking to further vary the terms of the Mareva order, assuming naturally that they can meet the required test. However, they are not estopped or barred from bringing such a motion, either on the basis that it was varied previously or on the basis that that previous variation order was made on consent such that it constituted an agreement not to seek further variations. There was no such undertaking or agreement.
[27] Accordingly, I must assess the evidence as against the Credit Valley factors.
Have the Gendelman Defendants established that they have no other assets available to pay their expenses other than those frozen by the Mareva?
[28] There is no issue between the parties that the existing Mareva applies to all assets of the Gendelmans.
[29] This first element of the Credit Valley test requires me to consider first what the expenses are that the Gendelmans seek payment for on this motion, and then second, whether they have established that they have no other assets available to pay those expenses.
[30] What are the expenses for which access to the frozen funds is now sought? They are legal expenses, living expenses, and the repayment of prior debts.
[31] With respect to legal fees for which the Gendelman Defendants seek to access funds now, those parties have filed redacted accounts from each of their two law firms (Diana and Natan Gendelman are separately represented in this action) describing the work done to date. The Gendelman Defendants have already spent $244,434 in legal fees (inclusive of disbursements and taxes).
[32] Without question, these fees are significant, particularly in the context of this action where it has not even proceeded yet to the discovery stage. The Gendelmans have filed straightforward statements of defence denying the Plaintiff’s allegations.
[33] As stated above, $25,000 was paid to former counsel for the Gendelman Defendants. Current counsel for those parties have been involved in attending at the various court appearances, liaising with the Independent Supervising Solicitor with respect to the scope of documents to be provided pursuant to the Mareva order, involvement in the sale of properties, the negotiation of living and legal expenses, and other matters.
[34] On the basis of the evidence filed, I am unable to conclude that there has been any unnecessary or duplicated work completed, or that the legal fees, while significant, are unreasonable or improper.
[35] In addition to the $25,000 paid to previous counsel, my earlier order made in April 2023 provided that the proceeds of sale of the King and Shuter properties could be used for their reasonable legal fees with the consent of the Plaintiff or court approval, up to a maximum of $250,000. The evidence on this motion is to the effect that the proceeds from the sale of the Shuter property will yield only approximately $16,000, and the King property less than $25,000 than the anticipated sale price. In short, the expected net sale proceeds of several hundred thousand dollars have not materialized and are anticipated to fall short of the legal fees already incurred.
[36] I accept that while legal fees for which the release of Mareva funds is sought must be reasonable, it is important not to undermine the solicitor client relationship of the defendant and unfairly put a defendant in the position of having their lawyers constantly looking over their shoulders to worry about how much is being spent: Revenue and Customs Commissioners v. Begum, [2010] EWHC 2186 at p. 9.
[37] In my view, there is no basis upon which I can conclude that the legal fees were unreasonable or improper. The Plaintiff argues vigourously that the work in respect of which these fees were charged “did not add value to the case” and therefore should not be paid.
[38] Whether they should be paid from frozen funds depends upon the ability of the Gendelman Defendants to meet all of the elements of the Credit Valley test. However, if all of the elements were met, I would not decline to vary the Mareva order to pay these legal fees on the basis that they were unreasonable. The test is whether they were reasonably incurred, not whether they “added value” in the eyes of the Plaintiff.
[39] Similarly, a defendant is also generally entitled to pay their ordinary living expenses, (as well as legal fees) which are legitimate expenses, from the frozen funds: Credit Valley, at para. 18.
[40] In this case, the Plaintiff does not challenge the right of the Gendelman Defendants to pay ordinary living expenses. It does, however, submit that the quantum of expenses for which access to funds is sought here is grossly excessive, and includes amounts that materially exceed any known sources of income and also are not in fact ordinary living expenses at all, but rather expenses related to various other investment properties owned by the Gendelmans.
[41] Natan Gendelman explains the living expenses for which, the Gendelman Defendants submit, a variation of the Mareva order is needed, in his third affidavit. His evidence is that their total monthly expenses are $16,334, comprised of mortgages and other expenses for the Ravel Property of $10,389 and other household expenses of $5,944. He provides a breakdown of those expenses at paragraph 18 of that third affidavit and acknowledges that the housing expenses are expected to change, in that once the Ravel Property is sold, they plan to live in rental accommodations and if necessary, they may seek to vary the permitted living expense amounts at that time.
[42] As stated above, these declared monthly expenses exceed by an order of magnitude the declared combined annual incomes of the Gendelman Defendants as reported to the CRA. That is unexplained.
[43] Moreover, given the post-Mareva income declared, albeit belatedly, by Natan Gendelman in respect of both his own income and that of his wife, Diana (there being no direct evidence from her), to the effect that he has income of approximately $25,000 from his medical clinic, has earned approximately $17,000 from his construction management services and that Diana Gendelman earns “less than” $3000 per month (which I infer to be a statement that she earns almost that amount), there is no basis upon which I can conclude that the existing Mareva order should be varied to increase the permitted amount for living expenses above the current threshold of $10,000.
[44] Moreover, all parties are in agreement that the Ravel Property should be sold and, as noted above, costs related to that property represent approximately $10,000 of the $16,000 now sought. As to Natan Gendelman’s advice that the Gendelman Defendants may move for further variations when they move into rental accommodations, as they intend to do, that is for another day.
[45] For all of these reasons, I am not satisfied that the proposed increase in monthly living expenses is reasonable or should be approved, even if the other Credit Valley factors were satisfied.
[46] Finally, the Gendelmans seek the release of an additional $243,046 to pay in full other outstanding debts owed to other third-party lenders, which include credit card debts of $150,806, other personal loans, and a mortgage deficiency relating to the McAllister Property (now sold) of another $85,240.
[47] Natan Gendelman described the debts beginning at paragraph 21 of his third affidavit. He states that he has so far successfully negotiated with the financial institutions to which the debts are owed, to defer payments and to pay these amounts over time, but that interest continues to accrue.
[48] He provides no details of what deferment arrangements have in fact been made (i.e., whether he or his wife have acknowledged the debts owing, what amounts he has agreed with those financial institutions to repay, to which financial institutions (since there are several), and over what period of time). There are no details whatsoever. Accordingly, there is no evidence upon which I can conclude with any accuracy specifically what debts are owing now or when in the future, and to whom, so as to justify a variation of the Mareva order.
[49] Moreover, the particulars provided by Natan Gendelman as to the $243,000 said to be outstanding, show that this amount includes past-due debts on credit cards and other debts, as further described in Exhibits “E” and “N” to his second affidavit.
[50] Exhibit “E” is a notice of overdue property taxes on the Ravel Property in the amount of $3560.89.
[51] Exhibit “N” includes several credit card statements for one or other of the Gendelmans: an RBC Visa statement reflecting an account balance of $7140.20, an RBC MasterCard statement showing a balance of $11,021.70, an MBNA credit card statement for Diana Gendelman showing a balance of $35,757.07, a CIBC Visa card for Diana Gendelman showing a balance of $430.76, a CIBC Costco MasterCard of Diana Gendelman showing a balance owing of $660.44, a Bank of Montréal Business MasterCard of Diana Gendelman reflecting a balance of $7389.35, a Triangle MasterCard of Diana Gendelman showing a balance owing of $20,165.48, an AMEX account statement of Diana Gendelman showing a balance owing of $7631.65, and a TD business travel Visa card of Diana Gendelman showing a balance of $15,741.64.
[52] Accordingly, almost all of these debts are not in the name of Natan Gendelman at all, but rather in the name of Diana Gendelman who has not put forward any affidavit evidence in respect of these amounts. Moreover, and as further discussed below, the evidence of Natan Gendelman is to the effect that his wife looked after all of their accounts and banking matters (although, as stated above, he states that it was he, not her, who has negotiated some forbearances or extensions with respect to these debts).
[53] Further, there are no details or particulars whatsoever to explain the transactions to which these charges and debts described above relate. On the contrary, virtually every one of the above noted credit card statements reflects the amounts owing as a previous balance carried forward. There is no evidence offered by the Gendelmans as to what these charges or expenses relate to. I pause to further observe that none was disclosed at all in the Net Worth Statement sworn in February 2023 discussed below.
[54] In his affidavit, Mr. Gendelman offers no particulars of what these expenses or charges related to either, and simply submits at paragraph 25 that “if we cannot use our assets to repay these outstanding debts as a lump sum, the ordinary living expenses limit should at least be increased to cover the past-due amounts and monthly interest payments.”
[55] In short, there is no evidence in the record based on which I can conclude that the Mareva should be varied to pay these expenses in the complete absence of any evidence as to the matters to which they relate. Given that the record reflects that, if the Gendelmans are to be believed, the Plaintiff will suffer a very significant shortfall even if all disclosed assets are realized on and monetized, an order varying the Mareva to authorize the payment of these previous debts of approximately $243,000 amounts to a priority for those creditors over the Plaintiff, and there is no basis to authorize that.
[56] Accordingly, even if I were satisfied as to the other elements of the Credit Valley test, I would not vary the Mareva order to provide for the payment of these debts owed to other creditors for unknown or at least undisclosed goods and services that may have been provided.
Are there other available assets or has everything been disclosed?
[57] I must now determine in the consideration of this first element of the Credit Valley test, whether the Gendelman Defendants have established that there are no other available assets from which they can pay their expenses.
[58] The Gendelman Defendants submit that they have disclosed their assets and further have given the Plaintiff access to banking records and other documents, such that there are no undisclosed assets.
[59] The Plaintiff, on the other hand, submits that the Gendelman Defendants have not been forthright, open and transparent with respect to their assets. Aside from the sworn statement of assets from Diana Gendelman, she has not sworn any affidavit and the only evidence is from her husband, Natan Gendelman.
[60] His evidence does not meet this element of the test, the Plaintiff submits, since Natan Gendelman states that he has no knowledge of his family finances and that the person who does have that knowledge is his wife, Diana. This is consistent with their Statements of Defence in which they plead that Diana Gendelman was responsible for the financial affairs and accounting of their real estate business and that she controlled the banking and financial books and records for that business.
[61] The Plaintiff relies on the cross-examination of Natan Gendelman on his statement of assets in which he conceded that he “really didn’t have any time to look into any accounts” and that “Diana was taking care of all the financial affairs”. A significant number of questions were refused on that cross-examination, including questions as to how his lifestyle was afforded, how he and his wife are going to finance construction on one particular project based on their income of $85,000 per year (12975 Mill Road) and others. The Plaintiff submits that this failure to answer all relevant questions is a factor relevant to this analysis.
[62] The Plaintiff also submits that Natan Gendelman’s credibility was further materially compromised by his failure to voluntarily disclose the income he has earned subsequent to the Mareva order. The Plaintiff became aware of that income only after having retained a private investigator and serving responding materials including an affidavit from that private investigator that stated that the Gendelman Defendants appear to have been working “since at least sometime this summer”.
[63] In reply, but only in reply, Natan Gendelman clarified that he had been operating a medical clinic since August 2020 that had yielded net income of $25,005, and that he had also performed various project management services in respect of which he had earned an additional $17,000. Natan Gendelman also stated that Diana Gendelman had earned revenue of “less than” $3000 per month since August 2023.
[64] The Plaintiff submits that this information ought to have been proactively disclosed by Natan Gendelman (and by Diana Gendelman, who did not provide any affidavit to confirm or corroborate the statement of her husband about her income referred to above), and not revealed only reluctantly in reply when they were confronted with the evidence of the private investigator retained on behalf of the Plaintiff. The Plaintiff submits that this lack of transparency and disclosure about the income being earned is inconsistent with the obligations of a defendant who is seeking to vary a Mareva order.
[65] In addition, the Plaintiff submits that Natan Gendelman’s credibility is further compromised by his evidence regarding his own net worth and assets, which the Plaintiff submits is “unconvincing and false”.
[66] On February 4, 2023, Natan Gendelman submitted a Personal Net Worth Statement to Tarion, the consumer protection organization established by the Ontario government to administer its new home warranty program, that he personally signed and declared that the statements therein were: “to the best of my/our knowledge true and correct”. This Statement was delivered in connection with the application by Mr. Gendelman to be registered as a new home builder. The Statement required the value of real estate referred to therein to be substantiated with a “current year tax bill, or proof of title transfer if the property was new, that clearly shows ownership and value”.
[67] By that statement, Natan Gendelman declared a personal net worth of $6,180,817.09, based on assets with a value of $9,750,000 (consisting of his residence and other real estate properties) and liabilities, all of which were mortgages registered against his properties.
[68] Based on this, the Plaintiff submits that there are only two possibilities.
[69] The first is that Mr. Gendelman simply signed a false Net Worth Statement and made a false declaration to Tarion as to its truthfulness, in that he misrepresented the value of the properties. Moreover, the Plaintiff points to the fact that in the Personal Net Worth Statement, Natan Gendelman did not disclose any lines of credit, investments, credit cards, personal loans or business interests, or any cash whatsoever.
[70] Aside from the fact that, in the submission of the Plaintiff, this is not credible (i.e., it is improbable to the point of being absurd that Mr. Gendelman could own almost $10 million worth of real estate, but have essentially no cash or liquid assets whatsoever), the Plaintiff points to the fact that on this very motion, the Gendelman Defendants are seeking the release of approximately $243,000 in funds to pay off credit card loans and other debts, none of which were disclosed in the Net Worth Statement.
[71] If this first possibility is correct, the Plaintiff submits that Natan Gendelman, the only one of the moving parties who has provided evidence on this motion, is not credible and should not be believed with respect to the value of disclosed assets.
[72] The second possibility, in the submission of the Plaintiff, is that the Net Worth Statement was true and accurate as of February 2023, in which case the Gendelman Defendants have failed completely to explain how that net worth of Natan Gendelman plummeted in the course of less than three months so catastrophically from $6,180,817.09 according to the Net Worth Statement as of February 2023, to less than zero as reflected in his Statement of Assets sworn in April 2023 in this proceeding which reflects a negative net worth of - $1,728,314.40, and therefore a stunning decrease in net worth of $7,909,131.49 or over 75% in total value in that short three-month period.
[73] As against this negative net worth, and the $5.6 million that the Plaintiff maintains was misappropriated from it, it appears that there will be barely $1.5 million in equity from the remaining disclosed properties, of which $800,000 is on account of a property at 11 Calderon (all of which is claimed by a mortgagee, Mr. Dobrinski, and is the subject of a separate motion in this proceeding), and approximately $700,000 from the sale of the Ravel Property based on estimates from Mr. Gendelman. The result is that the Plaintiff is very unlikely to recover even a fraction of the allegedly misappropriated funds.
[74] If this second possibility is correct, the Plaintiff submits that the moving parties on this motion have very significant undisclosed assets.
[75] Mr. Gendelman states in his reply affidavit that the Tarion Net Worth Statement values reported were in fact “estimated values of our real estate properties, including the partially completed development projects that decreased in value following the Mareva order”.
[76] I accept the position of the Plaintiff with respect to this first element of the Credit Valley test. Mr. Gendelman’s statements are not responsive to the issue. The Net Worth Statement required that the values reported be based on objective evidence such as a current tax bill or transfer documents in the case of a newly acquired property. His explanation, offered now, to the effect that he simply estimated property values, is not credible. Even if it were correct, it would mean that his Statement provided to Tarion was materially misleading and inaccurate, and was not supported by the objective evidence required such as a tax bill.
[77] I am also left with no alternative but to conclude that in other respects, the Net Worth Statement was at best incomplete, in that it failed to make any reference whatsoever to any current assets. It is highly improbable that he had none. Moreover, the Net Worth Statement failed to make any reference whatsoever to the other liabilities for which access to funds are now being sought to repay in full. There could be other explanations for this incongruity (i.e., all of the liabilities and the approximate amount of $243,000 were incurred after the Net Worth Statement was sworn in February 2023, however unlikely that may be), but no such explanations at all were offered in Mr. Gendelman’s reply affidavit, and as stated, there is no affidavit whatsoever from Diana Gendelman.
[78] Finally, the Plaintiff submits, Mr. Gendelman simply yet fundamentally failed to disclose assets such as would be necessary to explain how he and his wife Diana could possibly have afforded to make payments on the mortgages disclosed on the Tarion Net Worth Statement sworn by him. Their respective net incomes, as reported to the Canada Revenue Agency on their income tax returns, were woefully insufficient to service the very significant mortgages on the properties they owned:
[79] There is no evidence from the Gendelman Defendants to explain how the very significant liabilities and obligations of them personally and/or the corporations they controlled, were serviced.
[80] In the result with respect to the first element of the Credit Valley test, I am not satisfied on the evidence before me that the Gendelman Defendants have established that they have no other assets available to pay their expenses. I find that the evidence from the Gendelman Defendants, in the form of the four affidavits from Natan Gendelman (together with exhibits thereto), raise more questions than they answer with respect to the issue of establishing that they have disclosed that they have no other assets.
[81] Simply put, their evidence, and their position on this motion, raises serious concerns about Natan Gendelman’s credibility (for example, with respect to the Tarion Net Worth Statement, which he swore to be true and accurate), and wholly separate and apart from that, their explanations as to disclosed sources of income simply lack common sense in that I cannot reconcile their lifestyle, assets, liabilities and expenses with their disclosed sources of income. It is all simply unexplained.
[82] For all of these reasons, the moving parties have not satisfied the first element of the Credit Valley test.
[83] That alone is sufficient to dismiss the motion to vary the Mareva order, but in the event I am in error with respect to this first element, I will consider the other elements of the test.
If so, have the Gendelman Defendants shown that there are assets caught by the injunction that are from a source other than the Plaintiff?
[84] The asset in question is the Ravel Property, since it is this asset that the Gendelman Defendants wish to sell and access the proceeds. Their primary submission is that they purchased that property in 2003, approximately fifteen years before the misappropriations alleged by the Plaintiff. There is no issue about the date of purchase. However, the property is and has been heavily mortgaged, and the reduction in the principal owing on the mortgage over the intervening years has naturally resulted in a corresponding increase in the equity in the property.
[85] The Plaintiff does not dispute the date of purchase. However, the Plaintiff asserts a proprietary claim over the equity in the Ravel Property premised on the apparent insolvency of the Gendelmans. In short, the Plaintiff alleges that based on their disclosed assets and sources of income, the Gendelmans were unable to service the mortgage, with the necessary inference that the mortgage payments and the corresponding reductions in the principal amount owing and increases in the equity which the Gendelmans now claim is theirs, was in fact funded through the misappropriation of funds from the Plaintiff.
[86] With respect to this element of the Credit Valley test, as submitted by the Gendelman Defendants, the Plaintiff must establish a constructive trust or other proprietary claim against specific assets that are traceable to their funds: DBDC Spadina Ltd. v. Walton, 2018 ONCA 60 (rev’d, but on an unrelated point, Walton v. DBDC Spadina Ltd., 2019 SCC 30), at paras. 138, and 141-142, per Blair J.A., citing Indalex Ltd., Re, 2013 SCC 6, at para. 230, per Cromwell J.: “it must be shown that the breach resulted in the assets being in [the wrongdoer’s] hands, not simply…that there was a “connection” between the assets and “the process” in which [the wrongdoer] breached its fiduciary duty.”
[87] As stated by the Court of Appeal, a plaintiff seeking a proprietary remedy for alleged fraud must supply a tracing analysis that “follows the funds through as many steps are transferred as necessary to arrive at the conclusion that they are the same funds” or a substitute for them: Sase Aggregate Ltd. v. Langdon, 2023 ONCA 554; Trade Capital Finance Corp. v. Cook, 2017 ONSC 1857 at para. 48; and 306440 Ontario Ltd. v. 782127 Ontario Ltd. (Alrange Container Services), 2014 ONCA 548 (“Alrange”), at para. 30.
[88] The Gendelman Defendants submit that there is no tracing of the Plaintiff’s funds into the Ravel Property, there is no evidence that they were insolvent (and therefore unable to have made the necessary mortgage payments on the property) since at the start of the material period in which the misappropriations are alleged to have occurred, they had assets including cash, two rental properties and two projects which, they submit, could have been accessed to service the mortgages on the Ravel Property. As a result, it is speculative to conclude that the Ravel Property would have been lost without use of the misappropriated funds.
[89] Moreover, the Gendelman Defendants submit that even if every dollar used to pay the mortgages during the material period were sourced from funds taken from Wayne Safety, there would still be significant pre-existing equity in the Ravel Property available to the Gendelmans. The Gendelmans estimate that they made a maximum of $179,245 in mortgage payments during the material period, well short of the estimated $720,000 in estimated equity in that property.
[90] The Plaintiff maintains that its funds can be traced directly into the mortgage payments for, and therefore the equity of, the Ravel Property.
[91] In addition, the Plaintiff maintains the submission that the evidence is such that there was a complete inability on the part of the Gendelmans to service the mortgages on this property absent the fraud on the Plaintiffs. The Plaintiff submits that as of September 2020, the mortgages registered against the Ravel Property totalled $1,285,000, in respect of which the monthly payments totalled $7575.07, for an annual total of $90,900.84.
[92] As against this, the Gendelmans reported total net income (for the two of them) for 2020, that same year, to the Canada Revenue Agency, of $27,544 (itself a marked increase from the total net income for 2019 of $10,764), an amount woefully insufficient to service those mortgage payments, let alone cover living expenses.
[93] As to the funds said to be in bank accounts of the Gendelmans as of September 1, 2020 in the amount of $69,249, (and which they submit were available to them to pay these mortgages), the Plaintiff redoubles its submission that in addition to the fact that the net income of the Gendelmans was insufficient to pay the mortgages on the Ravel Property, the five properties owned by the Gendelmans (Ravel Property, King Street, Latchford Lane, Lombard Street and MacLean Avenue) were such that they operated at a net monthly loss and in the aggregate, just as with respect to the Ravel Property specifically, the Gendelmans known and disclosed sources of income were insufficient to maintain all of these properties and service the mortgage costs.
[94] Finally, the Plaintiff submits that based on the analysis conducted by or on its behalf as reflected in the Affidavit of Aaron Nisker sworn November 3, 2023, between September 20 and April 2023, the joint account of the Gendelmans reflects receipts of inbound funds (deposits) of at least $1,722,081.68 in payments that were not clearly Wayne Safety payroll transfers to Diana Gendelman or Government of Canada deposits. Excluding what appeared to be construction draws (presumably relating to the ongoing redevelopment projects), there remained deposits totaling $355,609.23 during that period. That remains all the more unexplained given the declared income for both Gendelmans for the same three-year period (2019 – 2021) of less than $100,000 in the aggregate.
[95] The source of these funds is not explained by the Gendelmans, and, the Plaintiff further submits, their ability to fund their obligations generally during this same period remains completely unexplained and unaccounted for.
[96] With respect to this second element of the test, I accept the position of the Plaintiff, but only to a limited extent. I am satisfied that a minimum of $179,245 during the relevant period is directly traceable from funds of the Plaintiff into the Ravel Property.
[97] Even beyond that, however, the Plaintiff submits that it can trace its funds directly into the Ravel Property. In this regard, it submits that the record is clear that from September 2020 forward, the joint account of the Gendelmans from which mortgage payments for the Ravel Property were paid, received at least $56,000 from one of the companies owned and controlled by the Gendelmans, DDNG, and that DDNG itself received “millions of dollars in directly traceable Wayne Safety funds”.
[98] I have no difficulty accepting the submission of the Plaintiff that other sources of funds have not been disclosed such as would be necessary to fund the obligations of the Gendelmans. However, and even if I accept the position of the Plaintiff that Wayne Safety funds are directly traceable into the account of DDNG, and further even if I accept that at least $56,000 of funds from the DDNG account were transferred into the joint account of the Gendelmans from which the mortgage payments on the Ravel Property were made, this element of the Credit Valley test requires more.
[99] It requires the Plaintiff to be able to trace its funds directly into the asset, and while I remain very concerned about the failure or refusal of the Gendelman Defendants to disclose all known sources of income or explain how they financed their lifestyle and serviced their mortgage and other debt obligations, the Plaintiff has not established that proprietary tracing with respect to this property, beyond the limited amount referred to above.
[100] For example, there is no evidence from which I conclude that the only funds in the DDNG account were Wayne Safety funds (i.e. there were no funds in that account from other sources whatsoever), from which I could conclude in turn that the DDNG funds transferred into the joint account were also necessarily Wayne Safety funds. They may very well have been, and indeed the lack of disclosure of any other legitimate sources for those funds may increase the possibility that the funds are indeed Wayne Safety funds, but I am not satisfied that such a conclusion is established on the record here.
Have the Gendelman Defendants established that they have exhausted non-proprietary assets frozen by the Mareva to pay their reasonable living and legal expenses?
[101] With respect to this third element of the Credit Valley test, in my view the Gendelman Defendants have failed to establish that they have exhausted all non-proprietary assets frozen by the Mareva to pay their expenses, largely for the reasons set out above: they have failed or refused to disclose, and have not been forthright with respect to all of their assets, whether proprietary or non-proprietary. It follows that they have failed to establish that they have exhausted those assets.
[102] Moreover, and in the alternative, I accept the submission of the Plaintiff to the effect that even if I were in error with respect to this element, and even if the evidence of Natan Gendelman were accepted, the income of he and his wife as disclosed by him in reply is sufficient to fund the increased amount of $16,500 per month that they are requesting for living expenses, such that no variation would be required in any event.
[103] In his fourth affidavit filed on this motion, Natan Gendelman states that he has earned gross business income from his medical clinic (post-Mareva) of $44,000 since August 2023, as against expenses of $18,500, for a net income of $25,500. In addition to this, he reports earnings from his project management consulting services during the same period of $17,000, and that Diana Gendelman has been earning “less than $3000 per month”.
[104] As noted above, in the absence of any further particulars of her income being provided by Natan Gendelman, and in the absence of any evidence whatsoever from Diana Gendelman about her own income, I infer from Natan Gendelman’s reference to the $3000 threshold that her income was less than, but close to, that amount.
[105] It follows that since August 2023, the Gendelman Defendants have earned $51,500. In short, and as submitted by the Plaintiff, the evidence of Natan Gendelman is therefore to the effect that he and his wife together are generating approximately $17,000 per month, an amount that in fact exceeds (slightly) the amount they state they require for living expenses.
[106] I pause again to observe that the $16,000 per month now sought by the Gendelmans for living expenses also exceeds, very materially, their pre-Mareva reported income at any time whatsoever.
[107] Either way, the Gendelman Defendants have also failed to satisfy this element of the Credit Valley test.
If the Gendelman Defendants have met the three elements of the test above, and still require funds for living expenses and legal expenses, how should the Court balance the interests, and what is the strength of the plaintiff’s case (What is the extent to which the Gendelman Defendants have put forward an arguable case to rebut the Plaintiff’s claim)?
[108] For the reasons set out above, I am not satisfied that the Gendelman Defendants have met the three elements of the Credit Valley test addressed above.
[109] Even if I had been satisfied with respect to those three elements, in my view the balancing of the interests between the parties, and a consideration of the strength of the Plaintiff’s case as against the extent to which Gendelman Defendants have put forward an arguable case to rebut that claim, clearly favours the Plaintiff in the circumstances of this motion.
[110] While obviously a final determination of the Plaintiff’s claim on the merits is for another day, based on the record to date and for the purposes of this motion, it appears to have significant merit. The evidence of the transfers of approximately $5.6 million by Diana Gendelman, then an employee of Wayne Safety (and indeed a very trusted employee of this small family business as its bookkeeper) remains unexplained. Diana Gendelman provided her statement of assets as required, but otherwise has provided no affidavit evidence on this or any of the earlier motions, to answer even in a preliminary way the claim of the Plaintiff, or to explain the financial affairs of her and her husband generally.
[111] The obvious yet fundamental questions remain unanswered: how did they accumulate their portfolio of properties and service the mortgage debts on those properties, all the while also funding very significant construction costs on the development of those properties, on their known and reported sources of income?
[112] There may be answers, but the Gendelman Defendants have thus far declined to provide them. Certainly, as noted above, Diana Gendelman has declined to provide any answers. Her defence is simply a blanket denial of the claims of the Plaintiff without any particulars. And Natan Gendelman, for his part, maintains that he knew little, if anything, about their finances, that his wife looked after all of the banking and bookkeeping matters, and effectively he simply assumed that their declared sources of income and revenue from their revenue-generating assets, was sufficient to fund the acquisition and development of their extraordinary and growing real estate portfolio.
[113] It is a challenge to accept this, in the absence of further disclosure and evidence, particularly as against objective pieces of evidence such as the Tarion Statement of Worth referred to above.
[114] In short, some material elements of the Gendelmans’ story do not add up, and other elements remain simply unexplained.
[115] Considering all of the circumstances as disclosed in the record, in my view a balancing of interests would favour by a comfortable margin the position of the Plaintiff.
[116] It would be in the interests of all parties that documentary and oral discoveries be completed as soon as reasonably possible, such that a final determination on the merits can also be completed as soon as possible.
Result and Disposition
[117] The motion of the Gendelman Defendants to vary the Mareva order is dismissed. The Ravel Property may be sold, as is the request of both the Gendelman Defendants themselves and the Plaintiff, and the net proceeds of sale should be paid into court or held in the trust account of one of the counsel, if the parties can agree, pending an agreement among the parties or further order of this Court. The mechanics of that sale should be worked out among the parties, using as a guidepost the mechanics utilized for the sale of other properties that have already been addressed in this proceeding.
[118] I also observe for clarity that if the King and Shuter properties being sold unexpectedly yielded greater net proceeds than are anticipated today, the previous order authorizing those proceeds to be used for reasonable legal expenses up to a maximum of $250,000 continues to apply.
[119] In the same way, I observe that the Unfrozen Accounts (the accounts into which the post-Mareva income of the Gendelmans is deposited) may continue to be used by them to fund living and legal expenses, in addition to the income they are now earning.
[120] The parties are encouraged to agree on costs. If they cannot do so, the Plaintiff may file brief submissions on costs not exceeding three pages in length, together with a Bill of Costs, to be filed with me through my judicial assistant, Mary Sibenik, at mary.sibenik@ontario.ca, within 15 days. The Gendelman Defendants may file responding submissions also not exceeding three pages in length within 10 days thereafter. They have already filed a cost outline.
[121] Order to go to give effect to these reasons.
Osborne J.