Chaitons Succeeds in Recovering Ponzi Scheme Payments

In Golden Oaks Enterprises Inc. v. Scott, 2022 ONCA 509, the Court of Appeal for Ontario (the “Court”) upheld the trial judgment in favour of the trustee in bankruptcy for recovery of usurious interest and referral fees paid by the bankrupt to perpetuate a Ponzi scheme, although on different grounds than the trial judge. Importantly, the Court refused to apply the corporate attribution doctrine to attribute the knowledge of the sole officer, director, and shareholder to the bankrupt corporation.

Background

Golden Oaks Enterprises Inc. (“Golden Oaks”) was a “rent-to-own” business that raised funds from third-party investors for short periods of time pursuant to high-interest promissory notes. As Golden Oaks’ financial affairs worsened, it became a Ponzi scheme where money raised from new investors was used to fund payments to existing investors. In order to raise new money to perpetuate the scheme, Golden Oaks offered to pay interest at a rate of return well in excess of 60% per annum, in contravention of s. 347 of the Criminal Code, R.S.C. 1985, c. C-46, and also paid referral fees to existing investors that introduced new investors who made loans to the company.

When the scheme collapsed, Golden Oaks and its founder, Jean Claude Lacasse, went into receivership and bankruptcy. Doyle Salewski Inc. was appointed as receiver and trustee in bankruptcy (the “Trustee”).[1] The Trustee commenced numerous legal actions claiming unjust enrichment against investors who received usurious interest and commission payments by the bankrupt and 17 of these actions were heard together in a summary trial.

The Trial Judge’s Findings Regarding Usurious Interest and Commission Payments

Defendant investors argued that the claims were statute-barred on the basis that Lacasse, and therefore Golden Oaks, had knowledge of the claims more than two years before the actions were commenced. The trial judge found that the Trustee’s claims of unjust enrichment for interest and commission payments were not statute-barred. In her analysis of the limitation period defence, the trial judge considered the corporate attribution doctrine which involves the attribution of the knowledge and actions of a corporation’s directing mind to the corporation. The trial judge determined that the corporate attribution doctrine did apply, and therefore Golden Oaks had Lacasse’s knowledge of the fraud. This did not, however, mean that Golden Oaks discovered the claim within the meaning of s. 5(1)(a) of the Limitations Act, 2002, S.O. 2002, c. 24. Under s. 5(1)(a) of the Limitations Act, a claim is discovered on the earlier of:

(a) the day on which the person with the claim first knew,

(i) that the injury, loss or damage had occurred,

(ii) that the injury, loss or damage was caused by or contributed to by an act or omission,

(iii) that the act or omission was that of the person against whom the claim is made, and

(iv) that, having regard to the nature of the injury, loss or damage, a proceeding would be an appropriate means to seek to remedy it.

The trial judge found that Lacasse’s control of the company affected the discoverability of the unjust enrichment claims. In her view, “a proceeding was not a legally appropriate means for Golden Oaks so long as it was controlled solely by Lacasse”, the directing mind of the corporation who was behind the fraudulent scheme. The trial judge found that legal proceedings against investors who Lacasse paid through Golden Oaks were “impossible”. The trial judge held that claims were not discoverable by Golden Oaks until the appointment of Doyle Salewski Inc.

History and Framework of the Corporate Attribution Doctrine

Canadian Dredge & Dock Co. v. The Queen, [1985] 1 S.C.R. 662 is a criminal law case decided by the Supreme Court of Canada (the “SCC”) that set out the test for the corporate attribution doctrine. The test requires the party relying on the doctrine to prove: 1) the wrongdoer must be the directing mind of the corporation and 2) the wrongful actions of the directing mind must have been done within the scope of his or her authority. In Deloitte & Touche v. Livent Inc. (Receiver of), 2017 SCC 63 (“Livent”), the SCC confirmed that courts possess the discretion to refrain from applying the corporate attribution rule when it would not be in the public interest to do so.

The Court of Appeal considered a line of cases following Livent to extract the following three guiding principles governing the application of the corporate attribution doctrine:

• courts should be sensitive to the context and field of law in which corporate attribution arises.
• the exercise of the court’s discretion is grounded in public policy and the social implications of holding a corporation accountable.
• uses of corporate attribution which encourage victims of fraud to enlarge their recovery at the expense of other victims, or which permit those who have benefitted from fraud to insulate themselves from accountability against other parties who are victim of the fraud are to be avoided.

Application of the Corporate Attribution Doctrine in this Case

The Court considered the trial judge’s application of the corporate attribution doctrine and held that she erred in her application of same. The Court cited its decision in Ernst & Young Inc. v. Aquino, 2022 ONCA 202 (“Aquino”), where it framed the question of whether corporate attribution should apply within the context of bankruptcy as: “who should bear responsibility for the fraudulent acts of a company’s directing mind that are done within the scope of his or her authority – the fraudsters or the creditors?” In this case, there were strong public policy reasons not to apply the corporate attribution doctrine. A fundamental principle of insolvency law is the equitable distribution of assets. Applying the doctrine here would shield the appellants from liability for unjust enrichment at the expense of other creditors. The Court could not allow such a result. The policy goal of corporate responsibility is not achieved when the corporate attribution doctrine is applied in cases where a sole fraudster controls a “one person” corporation. In addition, the Court noted attribution may set a precedent for victims of similar frauds to use the doctrine as a way to enhance their recovery at the expense of other creditors.

The SCC in Livent did not address whether a different framework must be applied to “one person” corporations. The Court of Appeal determined that “there is no principled basis on which to exclude the discretion recognized in Livent from this case, simply because Golden Oaks was a one‑person corporation”.

Without the application of the corporate attribution doctrine, Golden Oaks lacked the requisite knowledge to commence these actions before the appointment of the Trustee. These actions were not time-barred as they were brought within two years of the Trustee’s appointment.

Takeaways: Guiding Principles for Future Decisions and Discoverability Issues

This decision emphasizes the discretion courts have to apply the corporate attribution doctrine. The guiding principles set out by the Court in this case are important for future decisions and will be foundational to the court’s exercise of its discretion. The question of whether the framework for applying the corporate attribution doctrine is the same in cases involving “one person” corporations is yet to be settled by the SCC.