Canada: When Victims Attack Other Victims Of The Same Fraudulent Scheme: The Doctrines Of Corporate Identification And Knowing Assistance In DBDC Spadina Ltd. V. Walton

The recent decision of the Ontario Court of Appeal in DBDC Spadina Ltd. v. Walton, 2018 ONCA 60 is significant for being one of the first to cite the Supreme Court of Canada's decision in Deloitte & Touche v. Livent Inc. (Receiver of), 2017 SCC 63. Blair J.A., writing for the majority of the Court of Appeal, cites Livent for the proposition that the doctrine of corporate identification may be applied less stringently in the civil context where a massive, complex fraud is involved in order to affix a corporation with the fault of its directing mind. The case is also significant for its debate about the requirements of the doctrine of knowing assistance. Blair J.A. ultimately concludes knowing assistance does not require the plaintiff to trace specific funds to the defendant in order to be successful in a claim for damages, unlike its colleague in equity, the doctrine of knowing receipt. van Rensburg J.A., dissenting, disagrees.

The Facts of DBDC Spadina Ltd. v. Walton

This matter relates to a commercial real estate fraud perpetuated by Norma and Ronauld Walton. The Waltons convinced the appellants and respondents, among others, to invest "equally" in equal-shareholder, project-specific corporations. In other words, each project was to be funded 50-50 by the Waltons and the other investing party. The corporations were to acquire, hold, renovate and maintain control of commercial real estate properties in the Toronto area. As one might expect knowing this is a fraudulent scheme, the Waltons did not invest any of their own money in the projects. Instead, they moved investors' money in and out of various other corporations, including their "clearing house", Rose & Thistle Group Ltd., to further their own interests and avoid their obligations under the equal shareholder contracts.

This particular appeal involves only one of many proceedings involving the Waltons' fraudulent scheme. As is so often the case, when the fraud came to light, the Waltons were unable to satisfy the judgments against them. The investors therefore turned to the assets of the various commercial real estate corporations created by the Waltons' investment scheme. The parties in this proceeding, with the exception of the Waltons, are all innocent victims in the fraudulent scheme. The appellant corporations, collectively known as the DBDC Applicants, entered into an equal shareholding agreement with the Waltons to invest in the "Schedule B Companies". The respondents, known as "DeJong", entered into an equal shareholder agreement with the Waltons to invest in the "Schedule C Companies". The Schedule C Companies acquired properties known as the "Schedule C Properties".

In 2014, the DBDC Applicants applied to Brown J. (as he then was) for various forms of relief, including a declaration that the DBDC Applicants were entitled to constructive trusts where their funds could be traced directly into the purchase of a Schedule C Property, and damages against the Schedule C Companies for all the losses suffered by the DBDC Applicants in respect of funds diverted from the Schedule B Companies to the Schedule C Companies. DeJong opposed the DBDC Applicants' claim for a constructive trust over the Schedule C Properties. Brown J. concluded that the Waltons did not use the DBDC Applicants' funds in accordance with the terms of their contract, but rather, diverted some funds for their personal benefit and the benefit of the Schedule C Companies. Brown J. also found that the DBDC Applicants were not aware that the Waltons were withdrawing funds from the Schedule B Companies bank accounts because the Waltons (and particularly Ms. Walton) deliberately hid the transfers from the DBDC Applicants. Brown J. deferred the issue of relief, including the claims for damages against the Schedule C Companies.

In 2016, Newbould J. heard and decided the DBDC Applicants' deferred claim for damages, from which this appeal arises. The DBDC Applicants framed their request for relief as (1) a claim for damages against the Waltons personally and (2) a claim for damages against certain of the Schedule C Companies for knowing assistance and knowing receipt arising from the Waltons' breach of fiduciary duty.

Newbould J. dismissed the DBDC Applicants' claim for damages against the Schedule C Companies, concluding that Norma Walton was not the controlling mind of the Schedule C Companies. As a result of his conclusion that Ms. Walton was not the directing mind of the Schedule C Companies, Newbould J. dismissed the DBDC Applicants' claim for joint and several damages against the Schedule C Companies. Since Ms. Walton was not the controlling mind of the Schedule C Companies, the Schedule C Companies could not be liable for knowing assistance or knowing receipt arising from her breach of fiduciary duty.

Corporate Identification

Given Brown J.'s decision only two years earlier, in the same matter, that Norma Walton was the controlling mind of the Schedule C Companies, on appeal Blair J.A. holds that the Application Judge's decision that Ms. Walton was not the controlling mind of the Schedule C Companies was a palpable and overriding error.

Having concluded that Ms. Walton was the controlling mind of the Schedule C Companies, Blair J.A. considers whether the Schedule C Companies can be held liable for her personal conduct pursuant to the test in Canadian Dredge & Dock Co. v. The Queen, [1985] 1 S.C.R. 662. Proving the Canadian Dredge test would permit the DBDC Applicants to claim damages against the Schedule C Companies for the conduct of Ms. Walton, and specifically, for Ms. Walton's fraudulent transfer of funds from the DBDC Applicants to the Schedule C Companies via Rose & Thistle Group Ltd. There are three elements of the test: (1) the directing mind, Ms. Walton, was acting within her assigned field of operation; (2) her actions were not totally in fraud of the company; and (3) her actions were by design or result partly for the benefit of the corporation.

Justice Blair holds that the criteria from Canadian Dredge, particularly criteria (2) and (3), may be approached in a less demanding fashion in civil cases, especially in cases like this one involving a complex multi-real estate transaction investment fraud implicating numerous corporate actors and numerous victims. Unsurprisingly, given the "less demanding fashion" with which he is now permitted to approach Canadian Dredge, he finds that all three criteria are met, and the Schedule C Companies may be held liable for the conduct of Ms. Walton. This conclusion is underpinned by Blair J.'s emphasis on the separate identity of a corporation and its shareholders. While the investors in the Schedule C Companies were victims of the fraudulent scheme, the personalities of the Schedule C Companies are separate and distinct from their shareholders.

Both Blair J.A. and van Rensburg J.A. use the recent Supreme Court of Canada decision in Livent to support their view of how the Canadian Dredge test should be interpreted. For Blair J.A., Livent militates against a rigid application of the Canadian Dredge criteria in the context of a civil case, since the doctrine of corporate identification has roots in policy considerations. The irony is evident: the majority reasons in Livent declined to find corporate identification, despite this apparent "relaxation" of the test, because it would have permitted the auditors to disclaim responsibility on the basis that their client acted illegally when that illegal activity was precisely what the auditors were hired to prevent and/or uncover. For van Rensburg J.A., Livent provides the Court with discretion (which she would exercise) not to grant a remedy based on the corporate identification doctrine, even if all criteria are met.

Knowing Assistance

The majority and dissenting judgments also debate what elements are required to make out claims for knowing assistance as compared to knowing receipt. Knowing receipt is a restitutionary claim. A stranger to a trust or a fiduciary relationship may be liable under "knowing receipt" if the stranger receives trust property in his or her personal capacity with constructive knowledge of the breach of trust or fiduciary duty. A claim of knowing receipt will succeed only if the funds can be traced from the trust to the stranger.

In this case, the DBDC Applicants claimed damages arising from knowing assistance, which also imputes liability to strangers to a trust or fiduciary obligation. Knowing assistance is engaged where the stranger, with actual knowledge, participates in or assists a defaulting trustee or fiduciary in a fraudulent or dishonest scheme. In other words, knowing assistance is fault-based and concerned with correcting actions taken to further a fraudulent scheme. It is not based on restitutionary principles like knowing receipt.

The majority and dissent disagree on whether the elements of knowing assistance are met in this case. Justice van Rensburg, dissenting, concludes it cannot because the Schedule B Companies cannot trace their funds into the Schedule C Companies with sufficient certainty or precision. This conclusion would therefore prevent the DBDC Applicants from recovering from the sale of assets of the Schedule C Companies, and likewise protect DeJong and the other investors in the Schedule C Companies. Justice Blair disagrees with Justice van Rensburg's analysis, which incorporates a tracing requirement into the test for knowing assistance where one previously did not exist. Justice Blair argues that reading in a tracing requirement would likely result in substantial future injustice. If tracing were required, many cases involving complex fraudulent schemes (including this one) would fail even where the stranger to the trust has actual knowledge of, and participates in, the fraudulent scheme because the funds were successfully comingled and became untraceable. This result is incongruent with the current distinction between knowing assistance as a fault-based doctrine and knowing receipt as a restitutionary one.

Justice van Rensburg's reasoning is rooted in her concern that DeJong and the other investors in the Schedule C Companies are also victims of the Waltons' fraud. She sees it as fundamentally unjust that the Schedule B Companies now find themselves in the position of being able to claim the assets of the Schedule C Companies because their money was used to purchase the Schedule C Companies contrary to the terms of their agreements with the Waltons. DeJong and other investors in the Schedule C Companies also lost money to the Waltons' fraudulent scheme. Justice van Rensburg's skepticism is obvious when she notes that the DBDC Applicants have claimed against only those Schedule C Companies with valuable assets remaining.

The dissent either ignores or does not consider the basic principle of corporate law that a corporation is distinct from its shareholders. While perhaps not specifically traceable, it is clear that the Schedule C Companies obtained a benefit from Ms. Walton's fraudulent conduct: they were able to purchase properties with the money of the Schedule B Companies' investors. This is a somewhat uncomfortable distinction in that the investors in the Schedule C Companies clearly were not complicit in the fraud; however, it is critical to corporate law and cannot be overlooked in this circumstance simply because we may be sympathetic to the circumstances of the Schedule C Company investors.

Conclusions

It is striking that the majority is only able to conclude that the test for knowing assistance is made out because there was some evidence of funds being traced from the Schedule B Companies to the Schedule C Companies, despite Blair J.A.'s insistence that a tracing requirement should not be read into the test for knowing assistance. While victims of fraudulent schemes will not be required to prove tracing in a knowing assistance claim with the particularity required for a knowing receipt claim, practically speaking, there must be some evidence in the record to show the movement of funds. Without the evidence from the prior proceedings, where tracing was required to succeed on claims of constructive trusts over certain of the Schedule C Companies' assets, Blair J.A. would not have had any basis on which to conclude that Ms. Walton (acting qua the Schedule C Companies) knowingly assisted the fraudulent scheme as it related to the Schedule B Companies. van Rensburg J.A. takes great pains to point this out in her dissenting reasons.

Given the practical reality that most fraudulent commercial real estate schemes involve the movement of money, and those are the fraudulent schemes with which Blair J.A. was primarily concerned when relaxing the application of the corporate identification doctrine, it is remains to be seen whether his resistance to adding a tracing requirement to the doctrine of knowing assistance will have any meaningful impact on its successful use in future cases involving commercial real estate fraud.

Case Information

DBDC Spadina Ltd. v. Walton, 2018 ONCA 60

Docket: C62822

Date of Decision: January 25, 2018

To view the original article click here

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions