In Citti v. Klein, the Ontario Superior Court of Justice considered a motion for default judgment arising from what was alleged to be a fraudulent real estate investment scheme. The plaintiffs, Dr. John Citti and Dr. Lester Yamashita, claimed they were induced to invest a total of $375,000 USD in a series of purported development projects in Quebec, based on representations that ultimately proved to be false.
The defendants, led by Eric Klein, promoted various real estate opportunities through brochures and direct communications. These materials described projects in Montreal and Quebec City, complete with projected returns, proposed acquisitions, and purported partnerships with established development firms. In reality, none of the identified properties were acquired, certain partnerships were fictitious, and at least one of the investment entities did not exist at all.
The procedural history was lengthy and significant. The action was commenced in 2018, and the plaintiffs quickly obtained a Mareva injunction to freeze assets. The defendants were later found in contempt of court for breaching that order. After failing to comply with court-imposed sanctions and cost awards, their pleadings were struck, and they were ultimately noted in default. This set the stage for the plaintiffs’ motion for default judgment.
Despite the defendants being in default, the Court emphasized that judgment does not flow automatically. While the Rules of Civil Procedure deem the pleaded facts to be admitted, those facts must still establish a valid cause of action. The Court applied the well-established test for fraudulent misrepresentation, requiring proof of a false statement made knowingly or recklessly, intended to induce reliance, actual reliance by the plaintiff, and resulting damages.
The Court carefully analyzed each investment made by each plaintiff. This granular approach proved decisive. Dr. Citti claimed losses of $150,000 USD across three investments. However, only his first investment, in the amount of $50,000 USD, was supported by clear evidence of a specific false representation and reliance. The Court found that he had been induced by promotional materials falsely stating that funds would be used to acquire and develop real estate properties, which never occurred. Default judgment was granted for that investment.
By contrast, Dr. Citti’s second and third investments were not supported by sufficient pleaded facts or consistent evidence demonstrating reliance on specific misrepresentations. The Court declined to infer fraud in the absence of proper particulars and directed that those claims proceed to trial, even though the defendants were in default.
Dr. Yamashita’s claim was more straightforward. He invested a total of $225,000 USD across three transactions, each supported by detailed allegations and affidavit evidence. The Court accepted that he had relied on false promotional materials, including claims of partnerships with reputable firms and representations that properties had been acquired when they had not. In his case, the elements of fraudulent misrepresentation were fully established for all three investments, and default judgment was granted in full.
The Court also addressed the liability of the various defendants. Eric Klein, who made the representations directly, was found liable. The corporate defendants were also held responsible, as Klein was their directing mind. However, the claim against Evan Klein could not be resolved on the default record. There was insufficient evidence that he personally made representations or was directly involved in the communications with the plaintiffs. As a result, the claims against him were left for trial.
On the issue of damages, the Court reiterated that each plaintiff could only recover for their own losses, rejecting the plaintiffs’ attempt to treat the investments as a joint claim. In addition to compensatory damages, the Court awarded punitive damages, finding that Eric Klein’s conduct—knowingly making false statements to induce substantial investments—was egregious and deserving of denunciation and deterrence. However, the Court awarded amounts representing approximately 25% of the proven losses, rather than the 50% sought by the plaintiffs, emphasizing proportionality.
In the result, Dr. Yamashita obtained full recovery of his $225,000 USD investment, while Dr. Citti obtained judgment for only $50,000 USD, with his remaining claims to be determined at trial. Punitive damages were awarded to both plaintiffs, and the issue of costs was deferred pending further submissions.
This decision serves as a useful reminder that even in cases of default, courts will closely scrutinize the pleadings and evidence. Fraud must be pleaded with specificity, and each alleged misrepresentation must be tied to a particular investment and a demonstrable reliance. Default judgment simplifies proof, but it does not eliminate the need for it.
Brian Madigan LL.B., Broker