Executive Summary: Key Legal and Evidentiary Issues

• Default judgment was sought after the defendants’ pleadings were struck for contempt-related non-compliance and they were noted in default, engaging Rules 19.02, 19.05 and 19.06 of the Rules of Civil Procedure.
• The court closely examined whether deemed admissions and affidavit evidence established all elements of civil fraud and fraudulent misrepresentation for each separate investment by each plaintiff.
• Liability was differentiated among defendants, with Eric Klein and his entities found responsible on the evidentiary record, while claims against Evan Klein were left for an undefended trial due to insufficient particularized evidence of his direct misrepresentations.
• The evidentiary record from brochures, emails and affidavits was accepted to show that multiple Quebec real estate projects and partnerships were misrepresented and that investor funds were not used as promised.
• Only some of Dr. Citti’s investments were proven to have been induced by fraudulent misrepresentation on this record, whereas all three of Dr. Yamashita’s investments met the test, leading to partial default judgment.
• The court found Eric Klein’s conduct sufficiently egregious to justify significant punitive damages, while reserving the quantification of costs of the motion to a later written costs determination.

Facts and background

The case arises from a series of alleged fraudulent real estate investment schemes promoted to two U.S.-based investors, Dr. John Citti of Pennsylvania and Dr. Lester Yamashita of California, by Eric Klein and entities associated with him. The plaintiffs had been clients of Cadman Capital Inc., a Toronto-based firm that marketed investments, including promissory notes backed by UK real estate, to accredited U.S. investors. Eric Klein formerly worked at Cadman as an account representative responsible for client relationships and introducing investment opportunities. As a condition of his employment, he signed an employment agreement restricting his use of confidential information and prohibiting him from soliciting Cadman clients for one year after leaving, as well as requiring two weeks’ written notice of resignation. Despite this, Klein resigned in mid-September 2017 and effectively terminated his employment immediately. Before and after his departure, he and his brother, Evan Klein, were operating a new venture, Klein Capital Management, and related entities, including Klein Capital Group, Klein Property Group Inc. (KPG), and a purported vehicle called KPG Capital LP. These entities were represented to investors as boutique real estate development and investment vehicles active in Ontario and Quebec, and particularly in Montreal and Quebec City. The plaintiffs allege that Klein improperly used Cadman precedents and confidential client relationships to solicit them into a series of private loan and promissory note investments, and later into a limited partnership subscription, all ostensibly tied to specific multi-residential and condominium development projects in Quebec.

The investment transactions

The investment pattern spans approximately September 2017 to June 2018 and totals about USD 375,000 between the two plaintiffs. For Dr. Citti, three investments of USD 50,000 each were alleged, totalling USD 150,000. The first, known as the “First Citti Note,” was a USD 50,000 private loan to Klein Capital tied to a “Multi-Family Project” in Quebec. Klein emailed him a brochure titled “Quebec Multi-Family Portfolio,” describing a strategy to acquire, develop, renovate and sell four identified properties in Quebec City and Montreal. Relying on Klein’s claimed experience and the representations in the proposal document, including supposed sources of income to meet obligations, Dr. Citti concluded this was a viable real estate opportunity and wired USD 50,000 to Klein Capital Group in October 2017. The second Citti investment, USD 50,000 in December 2017, was pleaded as a promissory note tied to a Montreal development called the “Pointe Saint-Charles Project,” but the pleadings did not particularize what specific inducing representations were made for this second investment. The third Citti investment, another USD 50,000 said in the pleading to relate to the Pointe Saint-Charles Project, was described differently in Dr. Citti’s affidavit: he deposed that a February 15, 2018 cheque for USD 50,000 was tied to the “Mile End Project,” and that he must have received a brochure on that project, though he did not recall it. This created an inconsistency between the pleadings and the affidavit about which project that third investment actually related to, and there was no specific pleaded representation tied to that transaction. For Dr. Yamashita, three investments totalling USD 225,000 were more clearly aligned with specific, documented misrepresentations and project brochures. First, in September 2017, he was approached by Eric Klein acting for Klein Capital Management and induced to invest USD 75,000 in a note for the “Multi-Family Project.” He received an email with a project proposal and supporting documents, and Klein described using investor capital to acquire the portfolio properties. Dr. Yamashita deposed that he relied on this brochure and pro forma financial projections and sent a USD 75,000 cheque to Klein on September 23, 2017. Second, on or about March 2, 2018, through KPG, Eric Klein induced him to invest another USD 50,000 in the “Mile End Project” in Montreal, a proposed condominium and retail development at 4800 Avenue Hotel-de-Ville. Promotional materials represented that KPG would construct the condo-retail building and that it had secured sophisticated local partners: Renwick Developments as “consultative partner” and IPSO Facto, a Montreal investment firm, as an investment partner, and that together they had taken steps to obtain municipal approvals. The pleading asserts, and the defendants are deemed to admit, that the partnerships with Renwick and IPSO Facto were “wholly false” and that KPG never acquired the Mile End property. Third, in June 2018, Dr. Yamashita signed a term sheet and delivered USD 100,000 to Eric Klein to subscribe for limited partnership units in KPG Capital LP, said to be formed to acquire and improve commercial real estate generally and, specifically, to participate in a Montreal development known as the “Parc Frederic-Back Lofts” project. The “KPG Capital Fund Package” brochure stated that KPG had “also acquired the duplex behind the project for renovation” and listed five additional prospective acquisitions in Montreal and Toronto. The court accepted that the representation about owning the duplex was false and that none of the properties referenced for the Frederic-Back Project or the additional development prospects had been acquired by any defendant.

Procedural history and default

The litigation has a lengthy procedural history. The original statement of claim issued in October 2018, and within days the plaintiffs obtained a Mareva injunction freezing the defendants’ assets, later continued to trial on consent. The defendants eventually delivered a statement of defence in April 2020 but were later found in contempt of the Mareva order, resulting in sanctions including a fine payable to the court and costs awards owed to the plaintiffs. When the defendants failed to comply with those sanctions—specifically, to pay the fine and an outstanding costs award within 60 days—the court ordered that their amended statement of defence and counterclaim would be struck if they did not meet the conditions. Subsequent motions led to an order striking the defendants’ amended pleading in December 2024 and the defendants were formally noted in default in January 2025. On the default judgment motion, the plaintiffs relied not only on their lengthy amended statement of claim but also on a substantial motion record including affidavits from both plaintiffs and other witnesses, as well as affidavit evidence originally filed in support of the Mareva injunction, which the judge accepted as evidence in the default judgment context.

Legal framework on default judgment and fraud

The court applied the Ontario Rules of Civil Procedure on default and default judgment. Under rule 19.02, a defendant noted in default is deemed to admit all properly pleaded facts; under rule 19.05, a plaintiff seeking judgment for unliquidated damages on a default must support the motion with affidavit evidence; and under rule 19.06, deemed admissions alone do not guarantee judgment—the admitted facts, combined with any evidence, must substantively entitle the plaintiff to a remedy. Drawing on Elekta Ltd. v. Rodkin, the judge framed the analysis as a three-part inquiry: what facts are deemed admitted; whether they alone establish liability in law; and, if not, whether the deemed admissions plus the plaintiffs’ evidence suffice to prove the pleaded causes of action. In this case, the key causes of action were civil fraud and fraudulent misrepresentation. The judge recited the established elements: there must be a false representation of fact made knowingly or recklessly, intended to be relied upon, actually relied upon by the plaintiff, and causing loss. The court therefore parsed each investment transaction separately, for each plaintiff, to see whether the pleadings and affidavits together demonstrated all required elements. No insurance policy or contractual policy wording in the sense of coverage clauses was at issue; instead, the case revolved around promissory notes, loan agreements, and offering-style brochures for real estate development projects and whether the investment representations were dishonest.

Liability findings against the defendants

The judge distinguished the roles and exposure of individual and corporate defendants. Although both Eric and Evan Klein were principals or “directing minds” of the various entities, the evidentiary record showed that Eric Klein directly communicated with, and made representations to, the plaintiffs. By contrast, there were no specific pleaded allegations or evidence that Evan Klein personally made false statements to them, nor particularized facts regarding his day-to-day role or his direct involvement in preparing the promotional materials that induced the investments. Given this evidentiary gap, the court held that it could not grant default judgment against Evan Klein on the existing record; the claims against him would instead proceed to an undefended trial where further evidence could be called. For Eric Klein and the corporate entities Klein Property Group Inc. and Klein Capital Group, the situation was different. The misrepresentations were contained in brochures and emails which Eric Klein authored or transmitted, and the amended pleading alleged—and the defendants were deemed to admit—that Eric was the “directing mind” of these entities. That finding meant his fraudulent conduct could be attributed to the corporations, supporting corporate liability. The court accepted that Eric Klein represented that investor funds would be used to acquire specific properties and develop multi-family, Mile End, and Frederic-Back projects, that certain partnerships and property acquisitions existed when they did not, and that the plaintiffs relied on these statements in making their investments.

Treatment of each plaintiff’s claims

When assessing the plaintiffs’ joint claim for a combined USD 375,000, the court emphasized that each plaintiff could only recover their own losses and that none of the investments were joint. Therefore, the court examined each investment separately. For Dr. Citti, the first USD 50,000 investment tied to the Multi-Family Project was well supported: the pleadings and his affidavit showed he received and relied on the “Quebec Multi-Family Portfolio” brochure, that it represented funds would be used to acquire and develop specific properties in Ontario and Quebec, and that none of those properties were in fact acquired. The judge found all elements of fraudulent misrepresentation satisfied as against Eric Klein for that first transaction. However, the second and third Citti investments were not supported by sufficiently particularized misrepresentation evidence. The amended claim did not spell out clear inducing representations for the second investment, and Citti’s affidavit did not even mention that second note. For the third investment, the pleading tied it to the Pointe Saint-Charles Project, while the affidavit described it as relating to the Mile End Project, creating inconsistency and again lacking precise evidence of what false statement was relied on. As a result, the judge declined to infer that those later investments must have been induced by the same or similar misrepresentations and held that Citti’s claims for the second and third USD 50,000 investments must go forward to an undefended trial rather than being resolved by default judgment on the record as it stood. In contrast, all three of Dr. Yamashita’s investments were supported by specific admitted and proven misrepresentations. For the Multi-Family Project, he received the same or similar brochure as Citti and deposed that he relied on it and on financial projections in making his USD 75,000 investment. For the Mile End Project, the court accepted that the defendants represented false partnerships with Renwick Developments and IPSO Facto and falsely suggested meaningful progress toward municipal approvals, and that Yamashita relied heavily on those partnerships as validation of the Kleins’ credibility. For the Frederic-Back Project, the KPG Capital Fund brochure falsely stated that KPG had acquired a duplex behind the project for renovation and listed five additional acquisitions, none of which actually occurred. Yamashita deposed that he relied on these representations, and the court found each of these three transactions met the full test for fraudulent misrepresentation.

Punitive damages and costs

Beyond compensatory damages, the plaintiffs sought punitive damages to denounce and deter fraudulent investment conduct. The court recognized its authority to award punitive damages on a default judgment motion where the combined deemed admissions and evidence justify such relief. It concluded that Eric Klein’s conduct—knowingly making multiple false statements over time to induce large investments into non-existent or misrepresented projects—was sufficiently egregious and malicious to attract punitive damages. While the plaintiffs asked for a punitive award equal to 50% of their claimed losses, the judge instead chose a lower but still substantial level, roughly 25% of the sums for which default judgment was granted: USD 12,000 in favour of Dr. Citti and USD 55,000 in favour of Dr. Yamashita, both payable by Eric Klein personally in Canadian currency equivalent. As for legal costs, the plaintiffs advanced a substantial-indemnity costs claim of approximately CAD 276,952 for the overall proceeding and associated motions, broken down across Mareva relief, amended pleadings, further investigations, and the default judgment motion itself. However, because only part of the action was resolved on this motion and significant claims remain for undefended trial, the court did not fix a global costs figure. Instead, it directed the plaintiffs to deliver further written submissions limited to fees reasonably attributable to the default judgment motion, leaving the quantum of any costs award for later determination. Accordingly, the total costs amount in dollar terms could not yet be determined at the time of this endorsement.

Ruling and overall outcome

In its disposition, the court granted partial default judgment in favour of both plaintiffs. For Dr. Citti, it ordered that Eric Klein, Klein Property Group Inc. and Klein Capital Group are jointly and severally liable to pay him an amount in Canadian dollars sufficient to purchase USD 50,000, calculated on the day before payment, corresponding to his first investment proved on fraudulent misrepresentation. For Dr. Yamashita, the same defendants were ordered to pay, jointly and severally, the Canadian-dollar equivalent of USD 225,000, reflecting all three of his proven investments. In addition, Eric Klein personally was ordered to pay punitive damages to Citti and Yamashita in Canadian currency equivalent to USD 12,000 and USD 55,000 respectively. Together, these compensatory and punitive awards amount to the Canadian-dollar equivalent of USD 342,000 in favour of the plaintiffs, who are the successful parties on this motion, while the precise costs award remains outstanding and will be set after further written submissions.