COURT OF APPEAL FOR ONTARIO

CITATION: Golden Oaks Enterprises Inc. v. Scott, 2022 ONCA 509

DATE: 20220704

DOCKET: C67501 & C67502

Strathy C.J.O., Roberts and Sossin JJ.A.

BETWEEN

Doyle Salewski Inc. in its capacity as Trustee in Bankruptcy of Golden Oaks Enterprises Inc. and Joseph Gilles Jean Claude Lacasse

Plaintiff (Respondent/Appellant by way of cross-appeal)

and

Lorne Scott, Monique Lalonde, Paul Lalonde, Marc Laframboise, Janet Arsenault, Jeremy Mitchell, Josée Bouchard, Le Thu Nguyen, Ronald Leduc, 204475 Ontario Inc., Mark McKenna, Judy McKenna, Susan McKillip, 1531425 Ontario Inc., Joe Messa and Ernest Toste

Defendants (Appellants/Respondents by way of cross-appeal)

Alyssa Tomkins, for the appellants/respondents by way of cross-appeal

Harvey Chaiton and Doug Bourassa, for the respondent/appellant by way of cross-appeal

Heard: February 16, 2022, by video conference

On appeal from the judgment of Justice Sally A. Gomery of the Superior Court of Justice, dated August 30, 2019, with reasons reported at 2019 ONSC 5108, 76 C.B.R. (6th) 3.

Sossin J.A.:

OVERVIEW

[1] This appeal arises out of a failed financial company and the attempt of a trustee in bankruptcy to recover the funds lost to a Ponzi scheme.

[2] Golden Oaks Enterprises Inc. (“Golden Oaks”), founded by Joseph Gilles Jean Claude Lacasse, was a Ponzi scheme operating in Ottawa between 2009 and 2013. It was publicly advertised as a “rent-to-own” business but was promoted to certain individuals as a way to turn a quick profit by advancing funds for short periods of time in exchange for high-interest promissory notes.

[3] During its operational period, Golden Oaks issued 504 promissory notes to 153 investors, with early investors earning commissions for persuading new investors to make loans. While the initial interest rates on the promissory notes were merely attractive, the company’s financial situation worsened and it began issuing notes with interest rates in excess of 60%, which is considered usurious and criminal under s. 347 of the Criminal Code, R.S.C. 1985, c. C-46. Eventually, money from new investors was being used to pay existing investors. The scheme collapsed in July 2013. Both Golden Oaks and Mr. Lacasse, Golden Oaks’ principal and directing mind, went into receivership and made assignments in bankruptcy a few weeks later.

[4] Doyle Salewski Inc. was appointed as trustee in bankruptcy (the “Trustee”). It began over 80 separate legal actions against creditors in 2015. Seventeen of these actions were brought against individuals and companies who received payments from Golden Oaks in 2012 and 2013, which included commission payments and interest on promissory notes. The theory of these 17 actions was that, as a Ponzi scheme, Golden Oaks was by definition insolvent, it never had enough money to pay what it owed to legitimate creditors, and the commission payments and usurious interest payments to the defendants deprived those creditors of their share of the company’s remaining equity.

[5] The 17 actions were heard together in a summary trial. The appellant Lorne Scott, who appeals on a separate issue from the other appellants, was a defendant in the summary trial. He was a real estate agent who became involved with the company’s operations in 2011 and signed a referral agreement for commissions on referrals on February 13, 2012.

[6] The trial judge granted a claim under s. 95(1)(b) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“BIA”) against Mr. Scott for repayment of $72,575 in preferences, while dismissing other claims against him. I will refer to this claim as the “Scott Action.”

[7] With respect to the other investor appellants, the trial judge granted claims for repayment of interest in varying amounts between $4,000 and $67,500. I will refer to these claims as the “Usurious Interest Action.”

[8] The trial judge found that the appellant investors in the Usurious Interest Action knew or ought to have known that the returns promised on their investment were too good to be true.

[9] The trial judge also made a number of findings against other defendants who are not a part of this appeal.

[10] The appellants contend that this appeal is not about the Ponzi scheme. The claims resulting in the trial judgment were framed in unjust enrichment, not fraud. The appellants emphasize that it was open to the Trustee to pursue remedies in fraud either under the BIA or at common law, but they chose not to do so.

[11] While I agree that the trial judgment must be considered in the legal context pursued by the Trustee, many of the trial judge’s findings are rooted in the factual matrix within which the Ponzi scheme was perpetrated. This matrix was described succinctly by the trial judge, at para. 474:

Through Golden Oaks, Lacasse operated a Ponzi scheme. It was built on fraudulent misrepresentations about how money lent to Golden Oaks would be used. The loans advanced by the defendants were not being used to help disadvantaged families buy houses, as the brochures and radio advertisements suggested. They were used to pay interest and referrals to other investors. They were also used to preserve the illusion that Golden Oaks was a successful business and that Lacasse was a canny real estate investor and a philanthropist.

[12] In my view, the legal and factual context must be considered together. While the Trustee’s claims may be based on unjust enrichment, the reason for the claims was rooted in the Ponzi scheme.

[13] For the reasons elaborated below, I would dismiss this appeal.

[14] I would allow the cross-appeal, which raises a number of discrete alleged errors of the trial judge in dealing with the Trustee’s claims, in part.

ANALYSIS

[15] The appellants raise three grounds of appeal relating to the trial judge’s decision in the Scott Action and the Usurious Interest Action:

1. With respect to the Scott Action, the trial judge made a palpable and overriding error in finding that Mr. Scott and Golden Oaks were not dealing at arm’s length for the purpose of s. 95(1)(b) of the BIA;

2. With respect to the Usurious Interest Action, the trial judge erred in law in concluding that the claim was not discoverable within the meaning of s. 5(1)(a)(iv) of the Limitations Act, 2002, S.O. 2002, c. 24, Sched. B; and

3. With respect to the Usurious Interest Action, the trial judge erred in law in applying the incorrect test for set-off under s. 97(3) of the BIA.

[16] The Trustee cross appeals on the following five grounds:

1. The trial judge erred in dismissing the Trustee’s claims pursuant to s. 95(1)(b) against all but Mr. Scott and another individual and in dismissing the Trustee’s claims pursuant to s. 96 on the ground they were not properly pleaded;

2. The trial judge erred in dismissing the Trustee’s claims for unjust enrichment by receipt of commission payments for the referral of investors;

3. The trial judge erred in dismissing the Trustee’s claim, which had been withdrawn prior to trial, for a declaration that any judgment against Mr. Scott or Mr. Ho is not released by a discharge in bankruptcy of either party under s. 178 of the BIA;

4. The trial judge erred in rejecting the Trustee’s request for an order declaring that Mr. Scott and Mr. Ho would not be entitled to a dividend from the estate until all claims of other creditors were satisfied; and

5. The trial judge erred in refusing to pierce the corporate veil with respect to Ronald Leduc for the amounts ordered against his company, 204475 Ontario Inc.

[17] I address each ground of appeal below.

[18] Before turning to the various grounds of appeal and cross-appeal, however, it is important to emphasize the standard of review. This case involves primarily findings of fact and findings of mixed fact and law. These findings are entitled to deference absent a palpable and overriding error: Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235, at para. 36. Questions of law alone are to be reviewed on a standard of correctness: Housen, at para. 8.

RELEVANT LEGISLATION

[19] The relevant sections of the BIA provide:

Preferences

95 (1) A transfer of property made, a provision of services made, a charge on property made, a payment made, an obligation incurred or a judicial proceeding taken or suffered by an insolvent person

(a) in favour of a creditor who is dealing at arm’s length with the insolvent person, or a person in trust for that creditor, with a view to giving that creditor a preference over another creditor is void as against — or, in Quebec, may not be set up against — the trustee if it is made, incurred, taken or suffered, as the case may be, during the period beginning on the day that is three months before the date of the initial bankruptcy event and ending on the date of the bankruptcy; and

(b) in favour of a creditor who is not dealing at arm’s length with the insolvent person, or a person in trust for that creditor, that has the effect of giving that creditor a preference over another creditor is void as against — or, in Quebec, may not be set up against — the trustee if it is made, incurred, taken or suffered, as the case may be, during the period beginning on the day that is 12 months before the date of the initial bankruptcy event and ending on the date of the bankruptcy.

Transfer at undervalue

96 (1) On application by the trustee, a court may declare that a transfer at undervalue is void as against, or, in Quebec, may not be set up against, the trustee — or order that a party to the transfer or any other person who is privy to the transfer, or all of those persons, pay to the estate the difference between the value of the consideration received by the debtor and the value of the consideration given by the debtor — if

(a) the party was dealing at arm’s length with the debtor and

(i) the transfer occurred during the period that begins on the day that is one year before the date of the initial bankruptcy event and that ends on the date of the bankruptcy,

(ii) the debtor was insolvent at the time of the transfer or was rendered insolvent by it, and

(iii) the debtor intended to defraud, defeat or delay a creditor; or

(b) the party was not dealing at arm’s length with the debtor and

(i) the transfer occurred during the period that begins on the day that is one year before the date of the initial bankruptcy event and ends on the date of the bankruptcy, or

(ii) the transfer occurred during the period that begins on the day that is five years before the date of the initial bankruptcy event and ends on the day before the day on which the period referred to in subparagraph (i) begins and

(A) the debtor was insolvent at the time of the transfer or was rendered insolvent by it, or

(B) the debtor intended to defraud, defeat or delay a creditor.

Establishing values

(2) In making the application referred to in this section, the trustee shall state what, in the trustee’s opinion, was the fair market value of the property or services and what, in the trustee’s opinion, was the value of the actual consideration given or received by the debtor, and the values on which the court makes any finding under this section are, in the absence of evidence to the contrary, the values stated by the trustee.

Meaning of person who is privy

(3) In this section, a person who is privy means a person who is not dealing at arm’s length with a party to a transfer and, by reason of the transfer, directly or indirectly, receives a benefit or causes a benefit to be received by another person.

Protected transactions

97 (1) No payment, contract, dealing or transaction to, by or with a bankrupt made between the date of the initial bankruptcy event and the date of the bankruptcy is valid, except the following, which are valid if made in good faith, subject to the provisions of this Act with respect to the effect of bankruptcy on an execution, attachment or other process against property, and subject to the provisions of this Act respecting preferences and transfers at undervalue:

(a) a payment by the bankrupt to any of the bankrupt’s creditors;

(b) a payment or delivery to the bankrupt;

(c) a transfer by the bankrupt for adequate valuable consideration; and

(d) a contract, dealing or transaction, including any giving of security, by or with the bankrupt for adequate valuable consideration.

Definition of adequate valuable consideration

(2) The expression adequate valuable consideration in paragraph (1)(c) means a consideration of fair and reasonable money value with relation to that of the property assigned or transferred, and in paragraph (1)(d) means a consideration of fair and reasonable money value with relation to the known or reasonably to be anticipated benefits of the contract, dealing or transaction.

Law of set-off or compensation

(3) The law of set-off or compensation applies to all claims made against the estate of the bankrupt and also to all actions instituted by the trustee for the recovery of debts due to the bankrupt in the same manner and to the same extent as if the bankrupt were plaintiff or defendant, as the case may be, except in so far as any claim for set-off or compensation is affected by the provisions of this Act respecting frauds or fraudulent preferences.

Debts not released by order of discharge

178 (1) An order of discharge does not release the bankrupt from

(a) any fine, penalty, restitution order or other order similar in nature to a fine, penalty or restitution order, imposed by a court in respect of an offence, or any debt arising out of a recognizance or bail;

(a.1) any award of damages by a court in civil proceedings in respect of

(i) bodily harm intentionally inflicted, or sexual assault, or

(ii) wrongful death resulting therefrom;

(b) any debt or liability for alimony or alimentary pension;

(c) any debt or liability arising under a judicial decision establishing affiliation or respecting support or maintenance, or under an agreement for maintenance and support of a spouse, former spouse, former common-law partner or child living apart from the bankrupt;

(d) any debt or liability arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity or, in the Province of Quebec, as a trustee or administrator of the property of others;

(e) any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation, other than a debt or liability that arises from an equity claim;

(f) liability for the dividend that a creditor would have been entitled to receive on any provable claim not disclosed to the trustee, unless the creditor had notice or knowledge of the bankruptcy and failed to take reasonable action to prove his claim;

(g) any debt or obligation in respect of a loan made under the Canada Student Loans Act, the Canada Student Financial Assistance Act or any enactment of a province that provides for loans or guarantees of loans to students where the date of bankruptcy of the bankrupt occurred

(i) before the date on which the bankrupt ceased to be a full- or part-time student, as the case may be, under the applicable Act or enactment, or

(ii) within seven years after the date on which the bankrupt ceased to be a full- or part-time student;

(g.1) any debt or obligation in respect of a loan made under the Apprentice Loans Act where the date of bankruptcy of the bankrupt occurred

(i) before the date on which the bankrupt ceased, under that Act, to be an eligible apprentice within the meaning of that Act, or

(ii) within seven years after the date on which the bankrupt ceased to be an eligible apprentice; or

(h) any debt for interest owed in relation to an amount referred to in any of paragraphs (a) to (g.1).

[20] Sections 5 and 12 of the Limitations Act, 2002 provide:

Discovery

5 (1) 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; and

(b) the day on which a reasonable person with the abilities and in the circumstances of the person with the claim first ought to have known of the matters referred to in clause (a).

Principals and agents

12 For the purpose of clause 5 (1) (a), in the case of a proceeding commenced by a person claiming through a predecessor in right, title or interest, the person shall be deemed to have knowledge of the matters referred to in that clause on the earlier of the following:

1. The day the predecessor first knew or ought to have known of those matters.

2. The day the person claiming first knew or ought to have known of them.

(1) The Scott Appeal

[21] With this legislative backdrop in mind, I turn to the first of the three grounds of the appellants’ appeal relating to the Scott Action.

(a) The trial judge made no palpable and overriding error in finding that Mr. Scott and Golden Oaks were not dealing at arm’s length for the purpose of s. 95(1)(b) of the BIA.

[22] The appellants argue that the trial judge misinterpreted the test under s. 95(1)(b) of the BIA as one focused on relationships between parties at large rather than relationships with respect to specific transactions.

[23] The determination that the parties were not dealing at arm’s length is a finding of mixed fact and law that is reviewable on a deferential standard. For the reasons that follow, I disagree that the trial judge misapplied or misinterpreted the test. In my view, the trial judge correctly identified and applied the indicia of a non‑arm’s length transaction and made no palpable and overriding error in her conclusion that the parties were not dealing at arm’s length.

[24] The trial judge identified the indicia of a non-arm’s-length transaction as the following: (1) a common mind directing the bargaining for both parties of a transaction; (2) parties to a transaction acting in concert without separate interests; and (3) de facto control: at paras 203-4, citing Canada v. McLarty, 2008 SCC 26, [2008] 2 S.C.R. 79, at para. 43, and Montor Business Corporation v. Goldfinger, 2016 ONCA 406, 36 C.B.R. (6th) 169, at para. 68.

[25] I agree with the appellants that, in applying these criteria, it is important to focus on the transactions at issue, but necessarily within the overall context of the relationship between the parties and the fraudulent Ponzi scheme in which those transactions occurred and were advanced.

[26] The Trustee sought repayment of $72,575 paid to Mr. Scott between September 24, 2012, and April 2, 2013, on the basis that they were unlawful preferences under s. 95(1)(b) of the BIA. The payments consisted of commissions on referrals and payment on moneys loaned by Mr. Scott.

[27] The trial judge found that, since the payments were admitted by Mr. Scott, the only question was whether the parties were dealing at arm’s length. She found that they were not and that they were acting in concert under Mr. Lacasse’s direction to ensure the continued operation of the Ponzi scheme. As a result, the trial judge ordered Mr. Scott to repay the amount to the estate of Golden Oaks.

[28] According to the appellants, while Mr. Scott may have worked with Mr. Lacasse to further the Ponzi scheme through Golden Oaks, they nonetheless did not act at arm’s length when it came to their own financial dealings involving both commission payments and loans.

[29] The trial judge discounted the testimony of Mr. Scott, finding that he was not truthful in his testimony to the court. She found on the record that Mr. Scott, although he did not receive a salary, was involved in the company’s operations from mid to late 2012 and regularly represented the company or acted on its behalf.

[30] She found, at para. 319, that Mr. Scott was both aware of the Ponzi scheme perpetrated by the company and acted expressly to further it:

I find that, by December 2012, Scott knew that Golden Oaks was not deriving its revenue from its real estate holdings, and that it had the attributes of a fraudulent scheme. He stated as much in a text message to Bourque on December 7, 2012, complaining about his obligation to support the Rent2Own concept at an event that evening:

This is not a good situation to be in I’ll tell ya! JC [Lacasse] is doing his best! He has all of his family in on it; he always gets insurances, etc. etc.! I know he means well; and is trying to be good to everyone! But, it’s still pyramid! And/or Ponzie like! And in order for all these pp [people] to get paid, we need to keep finding additional investors. (Bc, as Eric said, that’s his only revenue right now.) But then, you need more investors, to pay those new investors! Its like a house of cards! One day investors stop, the whole house of cards would collapse! Ugh!!” [Emphasis added.]

[31] In the circumstances of this appeal, I accept the trial judge’s conclusion that the relationship between Mr. Scott and Golden Oaks with respect to the commission payments and loans cannot be disentangled from their collaboration in furtherance of the Ponzi scheme.

[32] I see no error in the trial judge’s conclusion that Mr. Scott and Golden Oaks were not acting at arm’s length for the purposes of s. 95(1)(b) of the BIA.

[33] Consequently, I would dismiss this ground of appeal.

(2) The Usurious Interest Appeal

[34] I turn now to the remaining two grounds of appeal relating to the Usurious Interest Action.

(a) The trial judge should have exercised her discretion not to apply the corporate attribution doctrine and so did not need to address whether the claim was discoverable within the meaning of s. 5(1)(a)(iv) of the Limitations Act, 2002.

[35] The Trustee brought the actions giving rise to this appeal in 2015. While the investments and interest payments giving rise to the Ponzi scheme took place well outside of the two-year limitation period under the Limitations Act, 2002, the trial judge found that the Trustee’s claims against the appellants were not statute‑barred, as the claims were only discoverable once the Trustee was installed, and it received legal authority to bring the actions.

[36] The appellants argue that the trial judge erred in her application of the discoverability principle and that the two-year limitation period on the claims had expired prior to 2015.

[37] Section 5(1)(a) of the Limitations Act, 2002 provides that a claim is not discoverable until the person with the claim knew or ought to have known that (i) an injury, loss, or damage had occurred; (ii) it was caused by a particular act or omission; (iii) the act or omission was that of the person against whom the claim is made; and (iv) a proceeding would be an appropriate means to seek to remedy the injury, loss, or damage.

[38] The trial judge proceeded on the basis that when a trustee has a claim as a result of rights vested in it under s. 71 of the BIA, the bankrupt is a predecessor in right for the purpose of s. 12(1) of the Limitations Act, 2002. In other words, the question was not when the Trustee first discovered the basis for the action it brought, but when the action was first discoverable by Golden Oaks.

[39] In addressing the question of when Golden Oaks could reasonably have first discovered the claim, the appellants argue that Golden Oaks must be imputed with Mr. Lacasse’s knowledge of the fraud under the corporate attribution doctrine (also referred to in the case law as the corporate identification doctrine) pursuant to the Supreme Court’s decision in Canadian Dredge & Dock Co. v. The Queen, 1985 32 (SCC), [1985] 1 S.C.R. 662 (“Canadian Dredge”).

[40] The test for corporate attribution as set out in Canadian Dredge requires the party relying on the doctrine to meet two conditions: (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; pp. 681-82. Further, under this analysis, an individual will cease to be a directing mind unless the action (1) was not totally in fraud of the corporation; and (2) was by design or result partly for the benefit of the corporation; pp. 713-14.

[41] In Deloitte & Touche v. Livent Inc. (Receiver of), 2017 SCC 63 (“Livent”), the Supreme Court emphasized that Canadian Dredge was a criminal law case and addressed the question of who should bear the criminal culpability for the actions of a corporation’s directing mind. Justices Gascon and Brown, writing for the majority in Livent, observed that the policy rationale for the corporate attribution rule differed in civil settings, at para. 103:

While public policy and judicial necessity may favour imputing the corporation with the actions of its directing minds in certain criminal prosecutions, the same cannot be said of attributing the actions of a directing mind for the purposes of a civil suit in the context of an auditor’s negligent preparation of a statutory audit. As indicated above, the very purpose of a statutory audit is to provide a means by which fraud and wrongdoing may be discovered. It follows that denying liability on the basis that an individual within the corporation has engaged in the very action that the auditor was enlisted to protect against would render the statutory audit meaningless (D. L. MacPherson, “Emaciating the Statutory Audit — A Comment on Hart Building Supplies Ltd. v. Deloitte & Touche” (2005), 41 Can. Bus. L.J. 471). As Livent submitted, it would be perverse to deny auditor’s liability for negligently failing to detect fraud “where the harm [to the corporation] is likely to occur and likely to be most serious” (R.F., at para. 94).

[42] In Livent, the Supreme Court recognized that courts retain a discretion to refrain from applying the corporate attribution rule where, in the circumstances, it would not be in the public interest to do so (at para. 104). The Court exercised that discretion to not apply the doctrine in the circumstances of Livent, where an auditor sought to avoid liability for negligent misrepresentation by raising a defence of illegality. Deloitte, the auditor, argued that the illegal actions of certain of Livent’s directors should be attributed to the corporation, thus barring the recovery that the corporation sought from Deloitte. The Court declined to apply the corporate attribution doctrine on the basis that it would not have been in the public interest to do so.

[43] The Supreme Court again addressed the scope of the corporate attribution doctrine in Christine DeJong Medicine Professional Corp. v. DBDC Spadina Ltd., 2019 SCC 30. This case involved a fraud perpetrated through a multi million-dollar commercial real estate deal by the Waltons. DBDC and Dr. DeJong’s corporations had invested monies with the Waltons, who moved the money in and out of numerous corporations. Initially, DBDC brought an oppression application against the Waltons and joined the DeJong companies as respondents. Corporate attribution was invoked by DBDC to recover in priority to the DeJong corporations. DBDC contended that the remedy of knowing receipt and knowing assistance should be awarded against the DeJong companies because Norma Walton was a directing mind of those corporations, and her knowledge and acts should be imputed to those corporations.

[44] A majority of this court concluded that corporate attribution was appropriate. Blair J.A., writing for the majority, held that policy considerations in the context of a complex, multi-corporation, multi-party fraud supported a more flexible and "less demanding" approach to the corporate attribution criteria than in the criminal context. Van Rensburg J.A. dissented, disagreeing with the proposition that there should be a "less demanding application" of the second and third criteria of the Canadian Dredge test in the context of a complex multi-party investment fraud. She concluded that there was no policy reason supporting the use of corporate attribution to impose liability on the DeJong corporations for Walton’s wrongs.

[45] The Supreme Court affirmed van Rensburg J.A.’s approach. The Court reiterated the public policy discretion to refrain from applying the corporate attribution principle, stating, at para. 2:

In view of the statement of the majority at the Court of Appeal that this Court’s decision in Deloitte & Touche v. Livent Inc. (Receiver of), 2017 SCC 63, [2017] 2 S.C.R. 855 (S.C.C.) , invited a “flexible” application of the criteria stated in R. v. McNamara, 1985 32 (SCC), [1985] 1 S.C.R. 662 (S.C.C.) for attributing individual wrongdoing to a corporation, we respectfully add this. What the Court directed in Livent, at para. 104, was that even where those criteria are satisfied, “courts retain the discretion to refrain from applying [corporate attribution] where, in the circumstances of the case, it would not be in the public interest to do so” (emphasis added). In other words, while the presence of public interest concerns may heighten the burden on the party seeking to have the actions of a directing mind attributed to a corporation, Canadian Dredge states minimal criteria that must always be met. The appeal is allowed, with costs throughout.

[46] In Canada Business Corporations Manual, looseleaf (2022 Release 4), 2nd ed. (Toronto: Thomson Reuters Canada Ltd.) at § 10:5, Jack J. Quinn suggested that, in endorsing van Rensburg J.A.’s dissenting reasons, the Supreme Court was discouraging the victims of fraud from suing each other. On this view, victims of a multi-party fraud should not use the corporate attribution principle for the purpose of enlarging their potential recovery at the expense of their fellow victims.

[47] Subsequently, in Caja Paraguaya de Jubilaciones y Pensiones del Personal de Itaipu Binacional v. Garcia, 2020 ONCA 124 (“Caja Paraguaya”), this court considered the discretion not to apply the corporate attribution doctrine in the context of an ex turpi causa defence to an action for fraudulent misrepresentation and breach of fiduciary duty. The court reiterated that “The corporate identification doctrine is not a free-standing rule; rather it is used for the purposes of applying the ex turpi causa doctrine which is also relied on by the appellants. The overriding concern is whether recovery by the respondent would damage the integrity of the legal system. See: Deloitte & Touche v. Livent Inc. (Receiver of), 2017 SCC 63, [2017] 2 S.C.R. 855, at para. 98.”

[48] In Caja Paraguaya, the court upheld the trial judge’s decision not to apply corporate attribution on public interest grounds, explaining, at para. 17,

Perversely, its application would deprive a company, vulnerable to fraud because of the neglect and corruption of board members and officers, of any civil remedy, to the detriment of its shareholders and legitimate creditors. Meanwhile, it would permit fraudsters to pocket their gains with civil impunity.

[49] This court recently considered the application of the corporate attribution doctrine in the bankruptcy context in Ernst & Young Inc. v. Aquino, 2022 ONCA 202. In that case, which involved the application of the corporate attribution doctrine for purposes of s. 96 of the BIA, and the determination of the “intention of the debtor” in that context, Lauwers J.A. stated, at paras. 77-79:

[77] The application of these principles is not clear in the bankruptcy arena, where the policy currents flow rather differently. In particular, attributing the intent of a company’s directing mind to the company itself can hardly be said to unjustly prejudice the company in the bankruptcy context, when the company is no longer anything more than a bundle of assets to be liquidated with the proceeds distributed to creditors. An approach that would favour the interests of fraudsters over those of creditors seems counterintuitive and should not be quickly adopted.

[78] In light of these considerations, I would reframe the test for imputing the intent of a directing mind to a corporation in the bankruptcy context this way: The underlying question here is 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?

[79] Permitting the fraudsters to get a benefit at the expense of creditors would be perverse. The way to avoid that perverse outcome is to attach the fraudulent intentions of John Aquino to Bondfield and Forma-Com in order to achieve the social purpose of providing proper redress to creditors, which is the core aim of s. 96 of the BIA. The application judge did not err in finding that the “intention of the debtor” under s. 96 can include “the intention of individuals in control of the corporation, regardless of whether those individuals had any intent to defraud the corporation itself.”[Footnote omitted.]

[50] The following principles can be taken from these decisions which have considered the discretion recognized in Livent not to apply the corporate attribution doctrine:

• courts should be sensitive to the context and field of law in which corporate attribution arises;

• the exercise of this discretion is grounded in public policy and the social implications of holding a corporation accountable; and

• 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.

[51] Applying these considerations in this case, there are strong public policy grounds to resist permitting those who benefited from the usurious interest scheme perpetrated by Lacasse from avoiding liability in the Trustee’s unjust enrichment action through the application of the corporate attribution doctrine, at the expense of other creditors to Golden Oaks.

[52] In recognizing the discretion not to apply the corporate attribution doctrine, however, the Court in Livent expressly “left for another day” the question of whether the same discretion arises in the context of a “one person” corporation, citing Stone & Rolls Ltd. (in liquidation) v. Moore Stephens, [2009] UKHL 39, [2009] 1 A.C. 1391 (“Stone & Rolls”). That is precisely the context of this case.

[53] In my view, 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. A similar view has been taken in the U.K., where the Stone & Rolls decision has been interpreted narrowly. In more recent cases, such as Singularis Holdings Ltd. (In Official Liquidation) (A Company Incorporated in the Caymen Islands) v. Daiwa Capital Markets Europe Ltd., [2019] UKSC 50 (“Singularis”), the U.K. Supreme Court has reiterated that corporate attribution is a context-based analysis. Lady Hale, at para. 33, rejected the proposition that Stone & Rolls stands for the principle that corporate attribution will apply to one-person corporations where there are no innocent directors or shareholders whatever the context and purpose of the attribution. To the extent that the guiding principle is context and purpose, she suggested, at para. 34, that “Stone & Rolls can finally be laid to rest.”

[54] While the Supreme Court has yet to settle the question of the one-person corporation left open for another day in Livent, I see no principled basis on which to apply a different framework for determining whether to apply the corporate attribution doctrine to Golden Oaks in this case.

[55] Returning to the decision on appeal, the trial judge’s reasons do not consider the implications of Golden Oaks as a one-person corporation in this case, nor do they advert to the discretion recognized in Livent not to apply corporate attribution on public interest grounds. Rather, the trial judge considered the criteria set out in Canadian Dredge as if the application of corporate attribution was automatic if those criteria were met:

[408] The defendants argue that Golden Oaks must be imputed with Lacasse’s knowledge, pursuant to the corporate identification doctrine. The Trustee contends that the doctrine does not apply in the context of a Ponzi scheme. Both parties rely on the Supreme Court of Canada’s decision in Dredge v. R., 1985 32 (SCC), [1985] 1 S.C.R. 662.

[409] In Dredge, four companies appealed their criminal convictions for conspiracy to commit fraud. The companies each had a manager responsible for preparing bids for dredging contracts from the federal government. The managers were involved in a price-fixing scheme. In any given tender, three of their companies would submit artificially high or low bids. The fourth would submit the low and winning bid. The price submitted for the bid included an amount used to pay the managers of the other companies. The question before the Court was whether the companies were criminally liable based on the managers’ fraudulent activities.

[410] The Court held the corporate identification doctrine applies where it is established that the acts taken by the directing mind of a corporation was “not totally in fraud of the corporation” and “was by design or result partly for the benefit of the company”: pp. 713-14. A company will accordingly be imputed with the knowledge of person directing actions within the scope of his or her authority unless that person was acting solely for their personal benefit and against the company’s interests. Applying this doctrine in Dredge, the Court dismissed the appeals. It found that the managers had acted within the scope of their authority and that the bid-rigging scheme did not only benefit them personally but also their employers.

[411] The corporate identification doctrine applies in cases involving civil fraud: DBDC Spadina Ltd. v. Walton, 2018 ONCA 60, 288 A.C.W.S. (3d) 75, at para. 59, citing the Ontario Court of Appeal’s earlier decision in Standard Investments Ltd. v. Canadian Imperial Bank of Commerce (1985), 1985 164 (ON CA), 52 O.R. (2d) 473, at para. 55, leave to appeal refused, [1986] S.C.C.A. No. 29. In fact, the criteria for establishing that company should be imputed with the knowledge of its directing mind in civil cases is less onerous than in criminal cases: DBDC Spadina, at para. 71.

[412] In the case of Golden Oaks, the Trustee has not established that Lacasse acted solely to defraud the company for his own benefit. Based on the Trustee’s calculations, the Ponzi scheme attracted over $16 million from investors. Of this, $7 million was used to pay other investors, and Lacasse caused the company to pay him a total of $1.3 million. The remaining funds were used for the company’s operating expenses, the purchase, renovation and repair of properties, and advertising and other administrative expenses.

[413] As a result, I find that the corporate identification doctrine applies, and that Golden Oaks is imputed to have known what Lacasse knew about the payments to the defendants.

[56] The trial judge erred by failing to consider the discretion not to apply the corporate attribution doctrine on public interest grounds. Considering those public interest grounds, it is clear to me that this discretion should have been exercised in this case so as not to attribute the knowledge of Lacasse to Golden Oaks.

[57] Corporate attribution in the particular circumstances of the present appeal would undermine a fundamental tenet of insolvency law, the policy of ensuring equitable distribution of the assets between creditors. Attribution here would lead to the perverse outcome of saving the appellants from the consequences of their collection of usurious interest, as well as depriving the trustee of a civil remedy that would inure solely for the collective benefit of legitimate creditors. Furthermore, the social policy goal of promoting corporate responsibility to prevent fraud and regulatory non-compliance through the corporate attribution doctrine is not advanced where a sole fraudster is in charge of a one-person corporation.

[58] Although the unjust enrichment action was, on the specific findings of the trial judge, brought in the trustee’s capacity as successor to the debtor rather than in the trustee’s representative capacity, this provides no principled policy justification for applying corporate attribution in the circumstances. Attribution could also wrongly encourage victims of a multi-party fraud to use the corporate attribution principle to enlarge their potential recovery at the expense of their fellow victims.

[59] For these reasons, the attribution of Lacasse’s knowledge to Golden Oaks during the period that the Ponzi scheme was in operation is not appropriate in this case. Without the application of the corporate attribution doctrine, Golden Oaks would have lacked the requisite knowledge to bring the Usurious Interest Action until the appointment of the Trustee. In light of the fact the Usurious Interest Action was brought within two years of the Trustee’s appointment, the action is not time‑barred as a result of the Limitations Act, 2002.

[60] In light of this conclusion with respect to the corporate attribution doctrine, it is not necessary to consider the trial judge’s analysis of whether the Trustee was properly found to be a “successor” for purposes of s.12 of the Limitations Act, or whether the Usurious Interest action was discoverable prior to the appointment of the Trustee, and her finding as part of that analysis that this action was not “appropriate” within the meaning of s.5(1)(a)(iv) of the Limitations Act, 2002. I would expressly refrain from doing so and this should not be taken as necessarily agreeing with the trial judge’s reasons.

[61] Having reached the same conclusion as the trial judge that the Usurious Interest Action was not time-barred, albeit by a different path, this ground of appeal is dismissed.

(b) The trial judge did not err in law in applying the test for set-off under s. 97(3) of the BIA.

[62] The appellants argue that the amounts they have been ordered to repay in interest payments should be set off against the principal amounts of their outstanding loans to Golden Oaks. The appellants base their argument on the doctrine of equitable set-off.

[63] According to the appellants, the trial judge erred because she did not permit the appellants to have the amounts they invested as principal in Golden Oaks set off against the interest to be repaid by virtue of the unjust enrichment claim. The appellants do not appeal the trial judge’s finding that legal set-off was unavailable to them and base their arguments on appeal instead on the trial judge’s finding that equitable set-off did not apply either.

[64] I am not persuaded by these submissions.

[65] The trial judge’s conclusion rejecting these arguments at trial, correctly in my view, was set out in two brief paragraphs, 549 and 550:

Equitable set-off arises “where there is such a relationship between the claims of the parties that it would be unconscionable or inequitable not to permit a set-off”: King Insurance, at para. 15.

In my view, the defendants’ argument for equitable set-off is simply a repackaging of their net loser argument and their argument for notional severance. In King Insurance, Cumming J. observed that “because the effect of set-off is to prefer one creditor over the general body of creditors (inasmuch as the effect is to give the setting‑off creditor a full recovery of the amount set-off), the permissible set-off [under s. 97(3)] is confined within narrow limits”: King Insurance, at para. 21. I agree. I have already considered the defendants’ submissions on the equities in the context of the juristic reason analysis.

[66] The trial judge had several remedial options open to her. For example, she could have deprived the defendants only of their net gain, taking into consideration a reasonable rate of interest. Alternatively, she could have required that the appellants pay back both the interest received and the principal of their loan. Instead, she chose a “blue pencil” remedy, in which the appellants remained entitled to recover their principal (as ordinary creditors to the bankrupt company) but were required to repay all of the interest received through the Ponzi scheme.

[67] The trial judge explained the option she chose in the following terms:

Prohibiting the defendants from recovering any principal loaned would be unduly harsh. That is not, however, the outcome of a finding that notional severance is inappropriate in this case. The defendants each submitted claims in bankruptcy for their outstanding loans when Golden Oaks went into receivership. The company’s debts far exceed its assets, and the defendants will not recover the entire amount of their loans. However, they will recover the same proportion as other unsecured creditors. I am unable to conclude that this is unjust in these unfortunate circumstances. [Emphasis added.]

[68] The appellants rely on the trial judge’s finding that depriving them of the principal of their loans would be “unduly harsh” as a basis for their claim of equitable set-off. Further, the appellants argue that s. 97(3) of the BIA preserves any set-off rights that the appellants would have had against Golden Oaks notwithstanding the bankruptcy. Therefore, according to the appellants, the trial judge erred in denying their equitable set off claims on the basis that it would give them priority over other creditors in recovering the principal of their loans.

[69] I disagree. The party relying on a set‑off must show some equitable ground for being protected against the other party’s demands: Holt v. Telford, 1987 18 (SCC), [1987] 2 S.C.R. 193, at p. 212. In this case, the trial judge found that the appellants lacked the “clean hands” required to take advantage of an equitable remedy. She found that the appellants did not conduct themselves in a manner consistent with above‑board dealings and knew or ought to have known the usurious interest promised on their loans was illegal.

[70] In my view, there is no basis for appellate intervention with these findings.

(3) The Cross-Appeal

[71] I turn now to the Trustee’s five grounds of appeal in its cross-appeal.

(a) The trial judge did not err in dismissing the Trustee’s preference claims pursuant to s. 95(1)(b) against all but Mr. Scott and another individual and in dismissing the Trustee’s transfer at undervalue claims pursuant to s. 96 on the ground they were not properly pleaded.

[72] The Trustee argues that the trial judge erred in failing to read the pleadings generously as required, including its reply. The Trustee submits that the claims were properly pleaded and that the defendants knew the case that they had to meet as they were able to defend the claims and never sought particulars or to strike the claims before trial.

[73] I am not persuaded that the trial judge made any error in her conclusions.

[74] The trial judge dismissed the Trustee’s preference claims under s. 95(1)(b) against three of the named defendants, Mr. Nguyen, Mr. Leduc, and Mr. Lalonde, and all the transfer at undervalue claims under s. 96 against these and other defendants, based on the longstanding principle under r. 25.06 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, that bald allegations unsupported by material facts cannot sustain a claim. She found that the amended claims against these defendants did not contain the requisite material facts in support of the preference and transfer at undervalue claims that the Trustee sought to advance. Importantly, the trial judge found that although the pleadings were amended in September 2017, to include reference to preferences, transfers at undervalue and the relevant sections of the BIA, they still did not meet the requirements of r. 25.06(2).

[75] In my view, the trial judge’s conclusions are supported by a generous reading of the pleadings. The fact that the defendants did not incur the expense of a motion to strike and delivered a general denial of baldly pleaded claims did not cure these pleading deficiencies. As the trial judge noted, the pleadings, including the reply, remained deficient notwithstanding that the Trustee had amended them. The Trustee did not seek a further amendment at trial.

[76] Moreover, although she did not find it necessary to address the limitation period issue with respect to the s. 96 claims because of their particular deficiencies, with respect to the preference claims, she determined that, had she accepted that they did meet the requirements of r. 25.06(2), these amendments would be statute barred as they would have introduced a new cause of action more than two years after the Trustee was appointed. The Trustee did not take issue on appeal with this finding.

[77] I would therefore not give effect to this ground of appeal.

(b) The trial judge erred in dismissing the Trustee’s claims for unjust enrichment by receipt of commission payments for the referral of investors.

[78] The trial judge found that the Trustee was unable to recover commission payments for the referral of investors on the basis of unjust enrichment as the referral agreements represented a “juristic reason” for the payments. Specifically, she concluded that as the agreements were not contrary to the Securities Act, R.S.O. 1990, c. S.5, and because the Securities Act constituted a complete code for purposes of the investors, the referral agreements could not form the basis of recovery in unjust enrichment.

[79] The Trustee argues that the trial judge misinterpreted the doctrine of unjust enrichment in this regard.

[80] The trial judge did not address the Trustee’s argument that the referral agreements were illegal contracts at common law (as opposed to breaching the Securities Act). Contracts will be considered illegal where they are either criminal on their face or, while facially legitimate, are entered into for the purpose of perpetrating a criminal act: Youyi Group Holdings (Canada) Ltd. v. Brentwood Lanes Canada Ltd., 2020 BCCA 130, 35 B.C.L.R. (6th) 326, at paras. 47-48. The Trustee alleged the referral agreements were illegal in this latter sense.

[81] The appellants as respondents in the cross-appeal argue that the Trustee’s claims alleged only that the referral agreements breached the Securities Act and not that the referral agreements were unlawful at common law, and it is for this reason that the trial judge canvassed only whether the agreements breached the Securities Act.

[82] While the Trustee’s claims did not expressly plead that the agreements were unlawful at common law, they did allege that the agreements were unlawful and contrary to the Securities Act: see the description of the pleadings by this court in Salewski v. Lalonde, 2017 ONCA 515, 137 O.R. (3d) 750, at para. 8. The allegation that the referral agreements were unlawful in addition to constituting a breach of the Act was sufficient to encompass the claim that the agreements were illegal at common law.

[83] I agree with the Trustee (as cross-appellant) that the trial judge erred in considering only one basis on which the referral agreements could be treated as unlawful for the purposes of unjust enrichment and that, based on her other findings regarding the conduct of the defendants, the referral contracts were illegal contracts at common law and could not be the basis of a juristic reason for payments enriching the defendants.

[84] In light of this error, the Trustee should be entitled to recover the payments of commissions under these agreements.

(c) The trial judge erred in dismissing the Trustee’s claim, which had been withdrawn prior to trial, for a declaration that any judgment against Mr. Scott or Mr. Ho is not released by a discharge in bankruptcy of either party under s. 178 of the BIA.

[85] The trial judge dismissed the Trustee’s claim for a declaration that any judgment against Mr. Scott or Mr. Ho would survive bankruptcy.

[86] However, the Trustee withdrew this claim prior to trial and reserved the right to make such a claim in the event of the bankruptcy of Mr. Scott or Mr. Ho. Consequently, the trial judge should not have dealt with the claim and erred in doing so.

[87] The appellants, as respondents on the cross-appeal, do not contest this ground of appeal. The Trustee is therefore not precluded from raising this claim.

(d) The trial judge erred in rejecting the Trustee’s request for an order declaring that Mr. Scott and Mr. Ho would not be entitled to a dividend from the estate until all claims of other creditors were satisfied.

[88] In rejecting the Trustee’s claim that certain named defendants were not entitled to any dividend until all other claims against Golden Oaks were satisfied, the trial judge stated that the only provision of the BIA addressing this issue was s. 140.1.

[89] As the Trustee argues on appeal, however, s. 137(1) of the BIA also addresses withholding the payment of dividends where parties were not acting at arm’s length. The trial judge found that the relevant parties in this case indeed were not acting at arm’s length, and, therefore, s. 137(1) applied.

[90] Mr. Scott (an appellant and respondent on the cross-appeal) concedes that if his argument that he was acting at arm’s length from Golden Oaks fails in the main appeal, then s. 137(1) of the BIA would apply to him.

[91] I see no reason why this provision would not also apply to Mr. Ho, as he was also found by the trial judge not to have been acting at arm’s length in his transactions with Golden Oaks.

[92] For the reasons stated above, I do not accept that the trial judge erred in her conclusion that the parties were not acting at arm’s length, and, consequently, I would allow this ground of the cross-appeal and declare that s. 137(1) of the BIA applies to Mr. Scott and Mr. Ho.

(e) The trial judge erred in finding no basis in the pleadings or the evidence for liability against Ronald Leduc in his personal capacity.

[93] The cross-appeal with respect to the action against Mr. Leduc may be addressed briefly. The trial judge’s conclusions with respect to Mr. Leduc were that it was a numbered company, and not Mr. Leduc personally, that received the interest payments from Golden Oaks. She stated, at paras. 527-29:

Similarly, in the Leduc action, the Trustee makes unjust enrichment claims against Ron Leduc and 2044475 Ontario Inc. for $43,500 in interest allegedly paid to them by Golden Oaks between February and December 2012. There is again no submission regarding the relationship between the defendants and no allegation of joint and several liability.

In his affidavit, Leduc admits that he is the principal of the co-defendant numbered company. The lender identified in the promissory notes pursuant to which the payments were made was “2044475 Ontario Inc. (Ron Leduc).” The source of the funds and the recipient of the interest was the numbered company.

There is again [no] basis, either on the pleadings or the evidence, for an order requiring Leduc to repay any interest to the Estate. The unjust enrichment claim against him must therefore be dismissed. [Emphasis added.]

[94] The Trustee argues that Mr. Leduc did personally receive the benefit of the interest payments and that the trial judge misapprehended the evidence in this regard.

[95] The Trustee points to the fact that Mr. Leduc was named personally, together with the numbered company 204475 Ontario Inc., on the promissory note.

[96] While Mr. Leduc as a respondent on the cross-appeal argues the corporate veil should not be pierced in this case, relying on Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co. (1996), 1996 7979 (ON SC), 28 O.R. (3d) 423 (Gen. Div.), affirmed [1997] O.J. No. 3754 (C.A.), I do not see the cross-appeal as one engaging the corporate veil principle.

[97] The Trustee has not argued that this is an appropriate case to look behind the loan of the numbered company but relies instead on the reference to Mr. Leduc in his personal capacity on the promissory note. The Trustee’s action was against both the numbered company and Mr. Leduc personally, and the defendants’ statement of defence, dated October 23, 2017, makes no attempt to distinguish between the numbered company and Mr. Leduc personally in stating that certain amounts were loaned to Golden Oaks by the numbered company and Mr. Leduc as defendants and certain funds were received by them as interest payments on those loans.

[98] In these circumstances, there is no need to pierce the corporate veil in order to conclude that Mr. Leduc participated in these transactions in his personal capacity. The trial judge erred in finding no basis in the pleadings or the evidence for liability against Mr. Leduc in his personal capacity.

[99] The Trustee’s unjust enrichment claim against Mr. Leduc in his personal capacity is therefore allowed.

DISPOSITION

[100] For these reasons, I would dismiss the appeal and allow the cross-appeal in part as I have indicated.

[101] If the parties are unable to agree on the disposition of costs, they may make written submissions as to the costs of the appeal, to be served and filed with the Registrar, within 14 days of the release of these reasons. Those submissions shall not exceed three pages in length, exclusive of the costs outline.

Released: July 4, 2022 “G.R.S.”

“L. Sossin J.A.”

“I agree. G.R. Strathy C.J.O.”

“I agree. L.B. Roberts J.A.”