Our firm is engaged in motions to trace and freeze assets on a daily basis. Over 90% of our cases involve fraud recovery issues, and in most cases we consider or bring motions for what are referred to as Norwich (asset tracing) and Mareva (asset freezing) orders. As a result, we monitor the Court’s decisions continuously on developments in the law as it applies to these issues.
As a result of our monitoring the evolving law on tracing and freezing motions, our firm has published various blogs on this critical aspect of fraud recovery litigation in Ontario and Canada including:
- A Fraud Victim’s Motions to Freeze Their Money (2013)[1]
- A Fraud Victim’s Response to a Fraudster’s Motion to Access their Money (2013)[2]
- What Fraud Victims Should Know About Freezing Orders (2014)[3]
- Stand and Deliver Norwich Orders (2017)[4]
- Criminal Funding Rights Override Victim Mareva Recovery Rights (2019)[5]
- Mareva (Asset Freezing) Injunctions in the COVID-19 Era (2020).[6]
In days of old, the Courts referred to Norwich orders and Mareva injunctions as “extraordinary” orders. The modern reality is that these orders are quite common place in fraud recovery cases – and so they should be. To the extent that Mareva injunctions are “extraordinary”, this comment applies to other forms of civil litigation.
This blog is published as a result of some new 2020 decisions on Mareva injunctions. But before getting to those, we provide fraud victims with our favorite decision that elevated the use of Mareva injunctions in Ontario. It was the 2018 Divisional Court case of 2092280 Ontario Inc. v. Voralto Group Inc., 2018 ONSC 2305, where the Court held:
Fraud is a serious crime which threatens unwitting victims with substantial and often devastating financial losses. The Mareva injunction is an important tool for Plaintiffs to try and recover their losses due to fraud or theft. A requirement to notify the perpetrators of a fraud in advance of an impending Mareva injunction would significantly water-down an important remedy for protecting innocent victims.
Judgments for damages cannot reasonably be expected to be affordable or collectable against fraudsters. If funds cannot be frozen in advance, a vital arrow in the civil law’s quiver to address serious fraud will be lost.
In July 2020, in the case of Ndrive v. Zhou, 2020 ONSC 4568, a judge from the Superior Court of Justice in Barrie held:
It is difficult to overstate the importance of a Mareva injunction in civil proceedings. While not all civil actions involve the recovery of money from an opposing party, a great many do. And while many defendants in civil proceedings are entities for which payment of a judgment is, if not routine, then certainly common place (to wit insurance companies, municipalities, banks and large corporations), there are just as many or more entities for which the payment of a judgment might prove ruinous, or at the very least, quite devastating financially.
For that reason, making oneself “judgment proof” by putting personal or corporate assets beyond the reach of potential judgment creditors has been a feature of the civil litigation landscape for as long as civil judgments have been rendered. The Mareva injunction is a tool designed to address the problem posed when a defendant utilizes the time lag between a claim being prosecuted and a plaintiff’s attainment and execution upon a judgment to divest itself of assets which would otherwise be available to satisfy that judgment in whole or in part.
A preservation of assets order, also known in commercial parlance as a “freezing order”, is thus of great utility. It is often the only means by which to preserve exigible assets where other forms of security for payment of a judgment such as liens, charges, cautions or guarantees are unavailable.
In this case, it is clear from the evidence to date that [the defendant] was able to transfer funds quickly and fluidly to and from a number of accounts. Some of these accounts were in his name; some were in the name of the corporate entity which he controlled; some were located outside of this jurisdiction. This landscape was complicated by the fact that both the source and the destination of many of these transfers remained undisclosed.
The ability and propensity on the part of the defendant to transfer funds was central to the court’s ultimate decision to grant the Mareva order.
In a January 2020 decision in Crawford v. Standard Building Contractors Limited., 2020 ONSC 687, the Superior Court of Justice in Kingston held:
The Courts must provide an enforceable [Mareva] remedy in situations [where fraud is proven] until a determination on the merits has been made.
Context is important in all cases involving Mareva injunctions. Mareva injunctions are granted more readily when the victim appears vulnerable and has come to the Court with clean hands. Where the plaintiff in a fraud action has also engaged in seedy conduct, the Courts may not grant the discretionary and equitable remedies of freezing an asset to recover against after judgment is issued. If they are initially granted, the Courts may not continue a Mareva injunction if a defendant exposes material facts that a plaintiff should have known would have been relevant to a rogue’s defence and raised if they were at the original ex parte motion. A summary of the three cases cited above makes this point:
2092280 Ontario Inc. v. Voralto Group Inc., 2018 ONSC 2305 (April 17, 2018)
In or around January 2016, the defendants, Andy Patruno and Steven Sardinha, the operating minds of the defendant Voralto Group Inc., approached Ahmad Kheir, a director and shareholder of the plaintiff 2092280 Ontario Inc. (“280 Ontario”). During the course of those discussions, Patruno and Sardinha represented that Voralto was a landscaping company and that they wanted to lease a portion of the plaintiff’s property to park Voralto’s landscaping trucks and temporarily store clean landscaping topsoil for use in landscaping projects.
Sardinha had a public record of fraud convictions and therefore executed the lease agreement on behalf of Voralto using the false name “Steve Silva” so that the plaintiffs would not become aware of his criminal past. Following signing of the lease, the defendants illegally dumped 1,500 truckloads of industrial waste on 280 Ontario’s property. Voralto never paid rent to 280 Ontario. Although the lease of the property in Grimsby, Ontario required Voralto to insure the property against environmental contamination, one day after delivering the certificate of insurance to the plaintiffs, Voralto cancelled the policy without telling them.
On August 2, 2017, some 18 months after the lease was signed, the plaintiffs issued their notice of action. On September 1, 2017, a Statement of Claim was filed but not served. On November 6, 2017, the plaintiffs brought an ex parte motion for the Mareva injunction to freeze assets of Voralto, Patruno, Sardinha and Patruno’s spouse.[7]
The original motion judge opposed the plaintiff’s motion. The judge held that Mareva injunctions have to be brought immediately upon a fraud victim learning of their loss, and that in cases where so much time, any motion to freeze assets should be brought on notice to the rogues.
The plaintiffs argued that the timing of the motion did not matter, and a motion for a Mareva injunction ought to proceed without notice to the defendants because unless assets are frozen before a Statement of Claim is served, “there is very little point in proceeding with an action against alleged fraudsters as victims cannot reasonably expect there to be any assets remaining if the perpetrators are given notice of such a motion.”
The Divisional Court agreed that the timing of when a Mareva injunction was brought is not a factor in determining whether the injunction should be granted. It held that the purpose of proceeding without notice is to “obtain an order before those responsible for a fraud become aware of the action so that if the assets are then dissipated, the dissipation can be remedied through the contempt powers available to a court.”
The Court further held that because of the recognized need to grant Mareva orders on a without notice basis, Mareva orders have their own internal protections including a requirement that if granted, the motion must be returnable within 10 days on notice to the defendants affected so that any objections they raise can be considered by the Court.
To balance the perceived unfairness of tying up a defendant’s assets before a Court has rendered judgment, plaintiffs are required to give an undertaking relating to any damages suffered by any defendant affected in circumstances where an improper freezing order has been issued. Plaintiffs must also meet the very high burden of proof in the test for a Mareva injunction. Plaintiffs also bear the extraordinary burden of full and frank disclosure of their own case, as well as disclosing any evidence they have that would support the other sides likely case.
The Divisional Court in Voralto found that the defendant Steven Sardinha had a history of engaging in and being convicted for illegal dumping and other fraudulent or illegal activity. The plaintiff had also made a criminal complaint and the police had charged both Patruno and Sardinha with numerous counts of criminal fraud arising out of their activities in this matter. The Court therefore found that the plaintiff had met the high burden of proof of fraud.
Ndrive v. Zhou, 2020 ONSC 4568 (July 27, 2020)
The Ndrive case, heard in July 2020, is another helpful case in describing the necessity to freeze assets pending judgment where fraud can be proven to an irrefutable level when an action is first issued. This decision issued reflected the cost phase rendered after a Mareva motion was brought and then was later contested by the defendant.
Prior to May 2020, the plaintiff Ndrive Navigation Systems Inc. (“Ndrive”) and the defendants Si Zhou (“Zhou”) and his company Aguazion Inc. (“Aguazion”) were litigating a dispute by way of private arbitration. Funds were placed in an account to be held pending the resolution of the arbitration. At some point, the defendant Zhou transferred funds out of that account, and the plaintiff resorted to the Court system to trace and preserve the funds that were to be held pending the outcome of the arbitration.
On May 6, 2020, the Court in Barrie granted a Mareva injunction after an ex parte hearing. On May 22, 2020, the Mareva injunction was renewed and extended on consent. Based on the record before the Court, it held that the ability and propensity on the part of Zhou to transfer funds was central to the Court’s ultimate decision to grant the Mareva order.
On June 19, 2020, a motion was heard to extend the Mareva. The defendant Zhou opposed this motion. The Court held that in his quest to end the Mareva injunction, the defendant Zhou gave false evidence which unnecessarily lengthened and complicated the proceedings. It appears from the decision that the Court extended the Marevasubject to some variations of the original order.
As a result of Zhou’s deceitful conduct during his motion to set aside the Mareva, the plaintiff sought costs of $108,445.75 on a substantial indemnity basis against Zhou his company, Aguazion Inc., for the plaintiff’s initial Mareva motion and Zhou’s subsequent motion to set it aside.
The plaintiff submitted that the defendants must have reasonably expected to face costs of the magnitude sought considering the defendants’ own claim for substantial indemnity costs in their counterclaim; the time, effort and expense spent by the Defendants in opposing the two motions; the suggestion that Zhou had incurred $75,000 in responding to the two motions; and Zhou’s statement that he was incurring legal costs of $2,500 per day.
The Court held that the plaintiff was successful in achieving most of the relief it was seeking on the motions, and accordingly it was presumptively entitled to costs of both motions. It is against the backdrop that the Court made the following important quote for use by victims of fraud generally:
It is difficult to overstate the importance of a Mareva injunction in civil proceedings. While not all civil actions involve the recovery of money from an opposing party, a great many do. And while many defendants in civil proceedings are entities for which payment of a judgment is, if not routine, then certainly common place (to wit insurance companies, municipalities, banks and large corporations), there are just as many or more entities for which the payment of a judgment might prove ruinous, or at the very least, quite devastating financially.
For that reason, making oneself “judgment proof” by putting personal or corporate assets beyond the reach of potential judgment creditors has been a feature of the civil litigation landscape for as long as civil judgments have been rendered. The Mareva injunction is a tool designed to address the problem posed when a defendant utilizes the time lag between a claim being prosecuted and a plaintiff’s attainment and execution upon a judgment to divest itself of assets which would otherwise be available to satisfy that judgment in whole or in part.
A preservation of assets order, also known in commercial parlance as a “freezing order”, is thus of great utility. It is often the only means by which to preserve exigible assets where other forms of security for payment of a judgment such as liens, charges, cautions or guarantees are unavailable.
The Court held that the first Mareva order was issued on consent and included a clause that costs would be payable in the cause. For this reason, the Court held costs should be assessed on a partial indemnity scale. The Court issued a cost order of $31,000 inclusive of taxes and disbursements payable in the cause (when the action resolved).
The Court held that the second Mareva order was contested and lengthened as a result of Zhou submitting highly misleading evidence for the purpose of deceiving the plaintiff and the Court in respect of important issues. The Court held that substantial indemnity costs were appropriate in these circumstances. The Court fixed costs of the second motion inclusive of HST plus disbursements at $52,415.07 payable within 30 days. The Court gave Zhou the option of paying these costs from the funds that were supposed to be held for the arbitration.
Crawford v. Standard Building Contractors Limited., 2020 ONSC 687 (January 31, 2020)
In July of 2019, a fire destroyed the home of the plaintiffs, the Crawford family. The plaintiffs were forced to move into a trailer on the property together with their infant child. Their insurance company responded to their claim and allowed them to rebuild their home with approved total rebuild funds in the amount of $411,000.00 plus HST.
The plaintiffs entered into arrangements with the defendant contractor to rebuild their home for them. The plaintiffs initially forwarded $139,000.00 to the defendants from proceeds they received from their insurance company for the demolition and construction of their replacement home.
The plaintiffs provided a second payment of $113,000.00 to the defendants with the understanding that it was to be used for labour and materials necessary to secure the building permits and approvals of construction drawings and plans to allow construction of the home to begin.
In other words, the plaintiffs provided the defendants with about $252,000 to be used for construction purposes. The defendant contractors provided the plaintiffs with permits and construction drawings, but failed to proceed with construction of the new home.
After much delay, the plaintiffs contacted the local building inspector and were advised that no building plans or requests for permits had ever been received. The building inspector reviewed the documents that the defendant contractors had given the plaintiffs and discovered that the engineering approval and certification stamp signature had been forged.
On December 17, 2019, the plaintiff homeowners moved for a Mareva injunction (asset freezing order) on three days notice to the defendant contractors. On December 20, 2019, the Court issued a Mareva injunction in favour of the plaintiffs. The order indicated that if $139,000 was paid into Court, the general asset freezing order would be lifted and the defendants would be permitted to deal with other funds in their possession.
The contractors did not pay the $139,000 of the plaintiffs’ funds into Court. Rather, on January 31, 2020, the contractors moved to set aside the Mareva injunction alleging that the plaintiffs had not met the test for the Court to issue an asset freezing order before judgment. The plaintiffs moved to have the contractors declared in contempt of court for failing to account for their money.
The Court treated the Mareva extension motion on a de novo basis, meaning the plaintiffs had to prove again why an asset freezing order was appropriate before judgment. The Court held that the forgery had again been proven by the plaintiffs on a prima facie basis (proven unless new evidence shows otherwise) and the defendants had not rebutted this allegation. This, coupled with the defendants’ failure to account, was sufficient to meet the first part of the Mareva test.
The Court found that the second part of the Mareva test, the risk of dissipation of assets, was proven as the defendant contractors refused to return the plaintiffs’ funds or account for what they did with them. The Court held that the failure to account, coupled with the demonstrated dishonesty reflected by the forgery, was sufficient evidence of the risk to dissipate assets.
As to the balance of convenience part of the test, the Court found that the plaintiffs and their infant child had been left homeless and without the means to rebuild their home. Conversely, the inconvenience to the defendants was limited to paying the $139,000 they received from the plaintiffs into Court. It was based on these facts that the Court held:
The Courts must provide an enforceable remedy in such situations of alleged misconduct until a determination on the merits has been made.
The Court varied the Mareva injunction to allow the defendants’ banks to accept deposits into any of the defendants’ bank accounts and to require the bank to provide the defendants with paper copies of any banking information requested by the defendants in relation to the defendants’ bank accounts. The Court also allowed for the defendants to post other forms of security if it wished to have the Mareva discontinued.
The Court adjourned the plaintiffs’ contempt of court motion to allow the defendants another opportunity to account for their money. It is the risk of being declared in contempt and possibly being incarcerated, and the inconvenience of having their assets frozen at least until a judgment is heard, that hopefully motivates the defendants to do the right thing and return the plaintiffs’ funds.
Inquiries
At Investigation Counsel PC, we investigate and litigate fraud recovery cases. If you discover you are a victim of fraud, contact us to have your case assessed and a strategy for recovery mapped out before contacting police or alerting the fraudster. We also promote victim advocacy and academic discussion through various private and public professional associations and organizations. If you have an interest in the topics discussed herein, we welcome your inquiries.
Norman Groot, Director
Investigation Counsel PC
Fraud Recovery Lawyers
August 31, 2020
[1] https://investigationcounsel.com/2013/09/30/fraud-victims-motions-freeze-money/
[2] https://investigationcounsel.com/2013/10/07/fraud-victims-response-fraudsters-motion-access-money/
[3] https://investigationcounsel.com/2014/11/20/what-fraud-victims-should-know-about-freezing-orders-mareva-injunctions/
[4] https://investigationcounsel.com/2017/08/22/fraud-victims-know-using-evidence-obtained-hacking/
[5] https://investigationcounsel.com/2019/07/16/why-the-criminal-process-is-secondary-in-fraud-recovery-part-ii-criminal-funding-rights-override-victim-mareva-recovery-rights/
[6] https://investigationcounsel.com/Services/practical-information-for-fraud-victims-about-fraud-recovery/
[7] On October 6, 2017, the Niagara Police laid criminal fraud charges against Steven Silva Sardinha and Anselmo A. Patruno – see www.havanafraud.com (link broken).