Canada: A Divided Ontario Court Of Appeal Clarifies "Knowing Assistance" By Corporations Used To Further Fraudulent Schemes By Their Directing Minds

Norma and Ronauld Walton perpetrated a complex commercial real estate fraud in the Toronto area. The Waltons convinced investors to invest "equally" with them in equal-shareholder, specific-project corporations that would acquire, hold, renovate and maintain commercial real estate properties. However, the Waltons did not invest any significant funds of their own but rather, moved the money provided by their investors in and out of numerous corporations through their own "clearing house," Rose & Thistle Group Ltd., in a shell game designed to avoid their obligations and to their personal benefit.

Lower court decision

The Bernstein appellants and DeJong respondents to the appeal were defrauded investors. The appeal was in respect of judgments and orders of a chambers judge dismissing the appellants' claim for joint and several damages against companies owned 50% by the Waltons and 50% by the DeJong respondent investors (the Schedule C Companies) for knowing assistance or knowing receipt arising out of Ms. Walton's breach of fiduciary duty. The appellants also appealed the granting of constructive trusts to the DeJong respondents over property purchased by some of the Schedule C Companies.1

Majority decision

The majority allowed the appeal in respect of knowing assistance by the Schedule C Companies, and overturned the granting of constructive trusts to the DeJong respondents.

Justice Blair reviewed the doctrines of knowing receipt and knowing assistance:

  • "Knowing receipt" is a recipient-based claim arising under the law of restitution. It permits a stranger to a fiduciary relationship to be liable if the stranger receives trust property in his personal capacity with constructive knowledge of the breach of fiduciary duty. The essence of knowing receipt is unjust enrichment.
  • "Knowing assistance" is when a stranger to the fiduciary relationship with actual knowledge participates or assists a defaulting fiduciary in a fraudulent and dishonest scheme.

Justice Blair found that knowing receipt had not been made out, as the Bernstein appellants had not demonstrated the receipt of any particular funds by any particular Schedule C Company (apart from those over which the appellants had previously been granted a constructive trust by the lower court).

Justice Blair found that the Schedule C Companies had knowingly assisted Ms. Walton in the fraudulent breach of her fiduciary duties to the appellants. He held that although the Waltons only held 50% of the Schedule C Companies and the respondents held the other 50%, Ms. Walton was in de facto practical control of the Schedule C Companies and was thus the directing mind. Her knowledge and conduct could be attributed to the corporations – "her perpetration of the scheme was their participation in the scheme."

Justice Blair applied the criteria set out by the Supreme Court of Canada in Canadian Dredge and Dock Company Ltd. v R for determining whether a person is the controlling mind and will of a corporation for a particular transaction. In Canadian Dredge, the court held that the "identification doctrine" operates where the Crown (in a criminal context) demonstrates the action taken by the directing mind (a) was within the field of operation assigned to her; (b) was not totally in fraud of the corporation; and (c) was by design or result partly for the benefit of the company. Justice Blair held that applying the Canadian Dredge criteria is different in a civil context, where the burden of proof is lessened, and that criteria (b) and (c) could be approached in a less demanding fashion than in the criminal context.

For the first criterion, although Ms. Walton perpetrated a fraud on the appellants and the respondents, her fraudulent actions in directing the flow of funds in and out of the various corporations were carried out within the framework of her designated responsibilities.

Justice Blair considered the second and third criteria together, and held that on the basis of a "net transfer analysis," companies invested in by the appellants transferred a net amount of at least $22.6 million to Rose & Thistle, and Rose & Thistle transferred a net amount of $25.4 million to the Schedule C Companies. Accordingly, the Schedule C Companies benefited by acquiring funding necessary for their ongoing operations. The fraud was not against the Schedule C Companies, but their shareholders and investors. Therefore Ms. Walton's conduct was not "totally in fraud of the corporation."

Justice Blair rejected the dissenting view that a specific benefit flowing to each of the Schedule C Companies must be identified in order to affix the companies with Ms. Walton's knowledge and thus with liability for knowing assistance. Justice Blair held that such an approach incorporated a tracing requirement into the knowing assistance claim, collapsing the distinction between knowing assistance and knowing receipt where corporate actors are used to assist in breach of fiduciary duty.

Justice Blair then analysed the measure of damages. Justice Blair held that because knowing assistance is fault based, the appellants were entitled to damages against the Schedule C Companies arising from the participation and assistance of those companies in the fraudulent scheme. He held that the damages were the net transfer of funds to the Schedule C Companies of $22.6 million (minus about $8 million that had been realized by the appellants for Schedule C property over which they had a constructive trust).

As a result of the majority decision, including denial of the claim of constructive trust by the DeJong respondents, the appellants would receive the lion's share of the net proceeds of the sale of properties owned by the Schedule C Companies, which were purchased in part with funds from the respondent investors.

Minority decision

Justice van Rensberg concluded that the "participation" element of knowing assistance could not be made out. Justice van Rensberg held that where a claim of knowing assistance in breach of fiduciary duty is made by one group of defrauded investors against another similarly situated group, there is no reason to expand the equitable claim of knowing assistance beyond its proper bounds.

Justice van Rensberg did not accept the "net transfer analysis" as the basis for personal claims against the Schedule C Companies because it had initially been prepared to demonstrate the Waltons' fraud on the appellants, and not for an analysis of knowing assistance.

The net transfer analysis showed $22.6 million transferred from the corporations in which the appellants invested to Rose & Thistle. Except for funds already accounted for by a constructive trust in favour of the appellants, the net transfer analysis did not show where the money went after it was transferred into Rose & Thistle, or that any of that money ended up in any particular Walton-controlled account, including any Schedule C Company account.

Justice van Rensberg disagreed that the Schedule C Companies "participated" in the Waltons' fraudulent scheme when money was moved to and from their accounts, in the same way money was moved to and from the accounts of the companies in which the appellants had invested. The actions of all of the companies were the same – they were conduits and used as part of the Waltons' shell game. Being used by Ms. Walton in the overall fraud does not equate to participation in the dishonest breach of fiduciary duty to the appellants so as to attract liability for knowing assistance. Justice van Rensberg disagreed that the net transfer analysis supported a finding of actual "participation.".

Finally, Justice van Rensberg disagreed with the measure of damages set out by Justice Blair. In her view, there was no correspondence between the net amount transferred from accounts of companies in which the appellants invested and Rose & Thistle, and actual losses caused by the actions of the fiduciary.

Take-away

This decision provides differing analyses between the majority and the dissent on applying knowing assistance in the context of a complex fraud. The court has indicated that the application of accounting analysis, such as the net transfer analysis in this case, will face careful scrutiny and must be considered with care. In addition, the court will continue to struggle with using equitable remedies in the context of equally innocent defrauded investors.

Footnote

1       That portion of the decision is not the focus of this article.


About Norton Rose Fulbright Canada LLP

Norton Rose Fulbright is a global law firm. We provide the world's preeminent corporations and financial institutions with a full business law service. We have 3800 lawyers and other legal staff based in more than 50 cities across Europe, the United States, Canada, Latin America, Asia, Australia, Africa, the Middle East and Central Asia.

Recognized for our industry focus, we are strong across all the key industry sectors: financial institutions; energy; infrastructure, mining and commodities; transport; technology and innovation; and life sciences and healthcare.

Wherever we are, we operate in accordance with our global business principles of quality, unity and integrity. We aim to provide the highest possible standard of legal service in each of our offices and to maintain that level of quality at every point of contact.

For more information about Norton Rose Fulbright, see nortonrosefulbright.com/legal-notices.

Law around the world
nortonrosefulbright.com

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