ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
CV-12-446378
Norman Gledhill Moving Party
– and –
Nick Le Donne Respondent
CV-12-446381
Scott Gledhill Moving Party
– and –
Mary Stoikos Respondent
CV-12-446385
Scott Gledhill Moving Party
– and –
Louis Klasios Respondent
Jeffrey Leon and Ranjan Agarwal, for the Moving Party Edward Babin, for the Respondent
Jeffrey Leon and Ranjan Agarwal, for the Moving Party Samil Chagpar, for the Respondent
Jeffrey Leon and Ranjan Agarwal, for the Moving Party Allan Sternberg, for the Respondent
HEARD: May 6, 2013
R. F. Goldstein J.
1Paul Yoannou was an investment advisor. He worked for Investors Group Financial Services, a mutual fund dealer. He persuaded clients to invest in short-term construction bridge financing notes that promised great returns. There was just one problem. The investment was actually a Ponzi scheme.
2A Ponzi scheme is a type of fraud. The victims are paid out from their own investments or from later entrants into the fraud. The victims obviously don’t know that their money is being used to pay out other victims. They assume that their money is being invested and earning returns. Ponzi schemes typically collapse when the promoter is unable to find new victims to continue to fund the fraud. In this case, most of the victims learned that their money was being invested in a Ponzi scheme when Yaonnou had filed a proposal in bankruptcy in July 2011.
3According to the Mutual Fund Dealers Association the construction bridge financing scheme was just one of several fraudulent schemes promoted by Yoannou. Yoannou has pleaded guilty to fraud and is either currently serving a jail sentence or is on parole.
4Both Plaintiffs and all three Defendants were victims of Yoannou’s scheme. The Defendants were early entrants. The Plaintiffs were late entrants. When the Plaintiffs invested their money they provided drafts payable to the various Defendants, which is an unusual feature of a Ponzi scheme. Yoannou generally explained that the Plaintiffs were buying out the positions of the Defendants. When the scheme collapsed the Defendants had therefore recovered at least some of their money but the Plaintiffs had not. The Plaintiffs Norman and Scott Gledhill are father and son. Otherwise, the Defendants and the Plaintiffs are, for the most part, unknown to each other and to the Plaintiffs.
5The Plaintiffs subsequently sued the Defendants in three individual actions. They seek return of their money. They have brought a consolidated motion for summary judgment. They say that the Defendants are simply not entitled to the money and that there is nothing to argue about.
6There is no obviously just or fair solution to the issues raised by this case. There is a genuine issue for trial as to whether he Plaintiffs can obtain remedies based on either unjust enrichment or mistake of fact. The Defendants have done no wrong to the Plaintiffs. Furthermore, there are genuine policy issues involved in determining the appropriate judicial response to victims of a Ponzi scheme. For the reasons that follow, the motion for summary judgment is dismissed.
FACTS
7In March 2011 Scott Gledhill learned of an investment opportunity from a colleague that promised great returns on a short-term basis. The colleague told him about Yoannou. Gledhill contacted Yoannou by email. Yoannou explained that the investment was an opportunity to invest in short-term construction bridge financing and earn a 10% return in three months. Gledhill invested $100,000.00. On Yoannou’s instructions he made out a bank draft payable to Louis Klasios. In return he received a post-dated cheque and a promissory note. In May 2011 he made a further investment of $50,000.00 and provided another draft payable to Klasios.
8Klasios had become one of Yoannou’s clients at Investor’s Group in 2003. He invested in various schemes promoted by Yoannou. Over a period of years he rolled his funds over into new investments. When Klasios received the two bank drafts from Scott Gledhill for $150,000.00, he believed that the funds were a return on his investments. He did not know, of course, that he was investing in Yoannou’s various Ponzi schemes. As of July 2011, when Yoannou filed his bankruptcy proposal, Klasios was owed approximately $2,300,000.00.
9In April 2011 Scott Gledhill invested another $50,000.00 in the construction bridge financing scheme. Yoannou told him that he would be purchasing another investor’s investment. He provided a draft payable to Mary Stoikos and received a promissory note and post-dated cheque.
10In 2009 Mary Stoikos had signed a contract with Yoannou to invest money. In March 2009 she invested $100,000.00. She borrowed the funds on her line of credit. Throughout 2009 she invested other amounts. Yoannou promised her that she would receive a return of 12%. Yoannou provided her with post dated cheques. They bounced. Eventually, in 2010 and 2011, Yoannou repaid her $535,000.00, representing principal and interest. The $50,000.00 draft provided by Gledhill was deposited in Stoiko’s bank account by Yoannou. The draft was never directly provided to her.
11In May 2011 Yoannou told Gledhill that another investor wished to sell his investment in the construction bridge financing scheme. Since Gledhill had no more funds to invest, his father, Norman Gledhill, invested $150,000.00. Norman Gledhill provided a draft payable to Nick Le Donne and received a promissory note and post-date cheque.
12In 2010 Nick Le Donne had invested $200,000.00 in the scheme. Yoannou provided with him a promissory note printed on Investor’s Group letterhead. Yoannou only repaid $20,000.00 at the due date, but persuaded Le Donne to roll over the balance. When Le Donne demanded the rest of the money in May 2011, Yoannou provided him with Norman Gledhill’s bank draft. Le Donne is still owed $60,000.00 by Yoannou.
13In July 2011 all of Yoannou’s fraudulent schemes collapsed. Yoannou filed a proposal in bankruptcy. He eventually landed in jail. Both Plaintiffs and all three Defendants are victims.
14The Gledhills have launched three actions:
Scott Gledhill’s action against Klasios for $150,000.00. Klasios has claimed as against Investor’s Group as a Third Party.
Scott Gledhill’s action against Mary Stoikos for $50,000.00.
Norman Gledhill’s action against Nick Le Donne for $350,00.00.
15On July 24, 2012 Justice Stinson ordered that the summary judgment motions in all three actions be consolidated and heard by a single judge. On May 6, 2013 I heard the consolidated motions.
ANALYSIS
16There are three issues to be determined on this motion:
Does unjust enrichment apply?
Does the doctrine of mistake of fact apply?
Should this case be determined by way of a summary judgment motion?
1. Does the doctrine of unjust enrichment apply?
17The Plaintiffs argue that the Defendants have been unjustly enriched. They argue that under the “straightforward economic approach” set out by the Supreme Court of Canada in Garland v. Consumer’s Gas Co., 2004 SCC 25, [2004] 1 S.C.R. 629 the elements of unjust enrichment are satisfied. Those elements are:
(a) an enrichment of the defendant;
(b) a corresponding deprivation of the plaintiff;
(c) an absence of a juristic reason for the enrichment.
18In Royal Bank v. Harowitz, 1994 CanLII 7245 (ON SC), 1994 CarswellOnt 836, 17 O.R. (3d) 671 (Gen.Div.) (appeal dismissed 1997 CanLII 662 (ON CA), 1997 CarswellOnt 2609, 33 O.R. (3d) 704), Mrs. Harowitz invested $250,000.00 in 1986 with Julius Melnitzer, a businessman and lawyer. Melnitzer paid interest when it was due. Mrs. Harowitz demanded repayment in 1991. Melnitzer paid out the $250,000.00 by way of a personal cheque on July 2, 1991. In fact, Melnitzer was engaged in various frauds of which Mrs. Harowitz knew nothing. Melnitzer’s assets were frozen on August 3, 1991. Melnitzer had arranged for personal lines of credit from the Royal Bank based on fraudulent share certificates. Mrs. Harowitz had been repaid from one of these lines of credit. The Bank sued Mrs. Harowitz, arguing that she was a constructive trustee for the bank, and that the principle of unjust enrichment applied.
19Killeen J., the motions judge, was prepared to accept that the corresponding elements of enrichment and deprivation applied, but rejected that there was an absence of a juristic reason:
44 To me, it is crystal-clear that there was a juristic reason for Mrs. Harowitz's receipt of the $250,000.00. and that juristic reason goes back to Mrs. Harowitz's original contract arrangement with Melnitzer himself in 1986, as reflected in the promissory note.
45 After June 1, 1987, Mrs. Harowitz was entitled to demand repayment at any time. She made an entirely innocent and good-faith demand for the return of her money in March, 1991, and received those funds, through Melnitzer's cheque, on July 10. She had no knowledge of Melnitzer's fraudulent misrepresentations to the Royal Bank and, in fact, had no idea that Melnitzer used Royal Bank loan funds to pay her back. On July 10, then, when she received repayment of her funds, she fell into the classic legal position of a bona fide purchaser for value without notice: see Banque Belge v. Hambrouck, [1921] 1 K.B. 321 and Nelson v. Larholt, [1948] 1 K.B. 339. Surely, her position as a bona fide purchaser, receiving repayment of her promissory note entitlement, is a "juristic reason" for receipt of the funds taking this claim out of the unjust enrichment principle. If this is not a juristic reason, then, from my perspective, nothing can be a juristic reason.
20Killeen J. also rejected the notion that the juristic reason must be tied to the person who asserts the unjust enrichment.
21In dismissing the appeal, the Court of Appeal stated:
1 We agree with the reasons of Killeen J. While, in our view, there is real doubt that when an innocent creditor is repaid she can be said to be enriched for the purposes of the unjust enrichment doctrine, there is a sound juristic reason on these facts for the respondent to retain the funds she was owed. The fundamental principle of the doctrine is that retention of the funds be unjust. Given the relative positions of the appellant and the respondent to Mr. Melnitzer, it cannot be said to be unjust for the respondent to retain the funds paid for the debt owed her.
22The fact situation in Ierullo v. Rovan, 2000 CanLII 22322 (ON SC), 2000 CarswellOnt 109, 46 O.R. (3d) 692 (Sup.Ct.) is also somewhat similar to this case. The Plaintiff hired one Nicholls to do some landscaping work and provided cheques with the payee’s name left blank. Nicholls used one of the cheques to pay off a debt for $20,000.00 to the Defendant, who was his lawyer. In dismissing the unjust enrichment portion of the action, Nordheimer J. found:
28 It follows from my findings above that I do not consider this to be a case of unjust enrichment. The defendant has not been unjustly enriched; he has obtained payment of a debt that was due by Mr. Nicholls to him. Granted that payment came with a corresponding harm to the plaintiff but that fact does not, in my view, warrant the imposition of the extraordinary remedy of a constructive trust. Further, even if one imposed a constructive trust on the cheque, the defendant would only be liable for a breach of that trust if it could be shown that he had actual knowledge of the breach or was reckless or willfully blind to the events that constituted the breach of the trust — see Air Canada, supra, at para. 38. That requirement would seem to lead right back to the same inquiry that was necessary regarding whether the defendant had notice of the defect in title to the cheque. For the same reasons I have set out above, I would conclude that the actions of the defendant do not amount to recklessness or willful blindness regarding the activities of Mr. Nicholls.
23See also Brodie v. Thomson Kerhaghan & Co., 2002 CarswellOnt 1587 (Sup.Ct.).
24The Plaintiffs say that the first two elements of unjust enrichment are easily satisfied. It is clear, they say, that by paying money directly they were deprived and the Defendants were correspondingly enriched. With respect, I do not think that the enrichment/deprivation is so clear-cut. Although the bank drafts were all made out to the Defendants, it is clear that the Plaintiffs assumed that they were investing in a scheme promoted by Yoannou. To me, Yoannou’s direction that the funds be made payable to a third party means that it is questionable who, exactly, was enriched. There is an obvious argument that the person being enriched was Yoannou. He was the one who owed money to the Defendants. Directing the funds meant that, in effect, he was able to keep the money that the Defendants had already paid to him. The Court of Appeal in Harowitz also doubted that it could be said that an innocent creditor was enriched in these circumstances.
25Turning to whether there is an absence of a juristic reason for the enrichment, I agree with the Defendants that the reasoning in Harowitz may well apply here. I agree that the Defendants are in a similar position to Mrs. Harowitz. They appear to have been bona fide purchasers who were receiving repayment of their investments.
26In my view, the question of unjust enrichment raises a genuine issue for trial. I cannot say, based on this record, that it would be fundamentally unjust to allow the Defendants to retain the funds.
2. Does the doctrine of mistake of fact apply?
27The Plaintiffs further argue that they paid out the funds to the Defendants under a mistake of fact. They say that they mistakenly believed that they were investing in a legitimate project which prima facie entitles them to recovery of the money: B.M.P. Global Distribution Inc. v. Bank of Nova Scotia, 2009 SCC 15, [2009] 1 S.C.R. 504 at para. 22. They argue that none of the defences set out by Deschamps J. in the second part of that paragraph apply:
22 The test laid down in Simms for recovering money paid under a mistake of fact (at p. 535) is straightforward:
- If a person pays money to another under a mistake of fact which causes him to make the payment, he is prima facie entitled to recover it as money paid under a mistake of fact. 2. His claim may however fail if: (a) the payor intends that the payee shall have the money at all events, whether the fact be true or false, or is deemed in law so to intend; (b) the payment is made for good consideration, in particular if the money is paid to discharge, and does discharge, a debt owed to the payee (or a principal on whose behalf he is authorized to receive the payment) by the payer or by a third party by whom he is authorized to discharge the debt; (c) the payee has changed his position in good faith, or is deemed in law to have done so.
28The Defendants argue that the reliance on BMP by the Plaintiffs is misguided, as it specifically applies to the relationships between banks and their customers: Toronto-Dominion Bank v. 2026227 Ontario Inc., 2012 CarswellOnt 6724 (Sup.Ct.). The Defendants also point to the Court of Queen’s Bench decision in Barclays Bank Ltd. v. W.J. Simms Son & Cooke (Southern) Ltd., [1980] Q.B. 677, which was relied on by the Supreme Court in BMP and directly quoted by Deschamps J. They specifically refer to the following comment made by Goff J.:
However, even if the payee has given consideration for the payment, for example by accepting the payment in discharge of a debt owed by him to a third party on whose behalf the payer is authorized to discharge it, that transaction may itself be set aside (and so provide no defence to the claim) if the payer’s mistake was induced by the payee, or possibly even where the payee, being aware of the payer’s mistake, did not receive the money in good faith.
29In my view, Goff J.’s comment captures the fact situation in this case. It is clear that the payees did nothing to induce the transaction.
30I also point to M. McGrath Canada Ltd. v. Vincent Dagenais Gibson LLP, 2008 CarswellOnt 2293 where A. de L. Panet J. stated:
24 The Plaintiff also claims recovery of the amount in question on the basis of the payment having been made under a mistake in fact. 25 In Dominion Bank v. Jacobs, 1951 CanLII 350 (ON SC), [1951] O.W.N. 421 (Ont. H.C.), the Court referred in para. 6 to the statement in 23 Halsbury, 2nd ed (1936) page 162 which reads:
The mistake must not only be as to some fact affecting the liability to pay, but it must also be a mistake between the party paying and the party receiving the money. If the fact about which the mistake exists has nothing to do with the payee, the rule does not apply.
31It is appears that there was no mistake as between the two parties. The mistake was induced by Yoannou. Whether that fact gives rise to a remedy for mistake of fact is a genuine issue for trial.
3. Should this case be determined by way of a summary judgment motion?
32There is no quick or easy answer to the questions raised in these three actions. The fact situation is novel. Since the whole purpose of a Ponzi scheme is to enrich the promoter, it is unusual that a late entrant into the scheme will directly pay out an early entrant. It is also unusual that a victim be able to directly trace his or her funds into the bank account of another victim.
33In Combined Air Mechanical v. Flesch, 2011 ONCA 764, [2011] O.J. No. 5431, 108 O.R. (3d) 1, 2011 CarswellOnt 13515 (C.A.) the Court of Appeal stated that a motions judge must evaluate whether the attributes of the trial process are required to settle the issues. The legal issues here are not straightforward. Given the novel nature of the situation, it strikes me that it would not be appropriate to decide this issue without fully litigating it.
34More importantly, even if the law were clear and the issues easy, it must be remembered that there is an outstanding bankruptcy process ongoing. In my respectful view, it is possible that piecemeal action might subvert the bankruptcy proceeding. Where there are many victims of a Ponzi scheme there are legitimate policy questions about the preferable legal approach to remedies pursued by the victims. I do not say that independent action by victims constitute an abuse of process, or impute any kind of bad faith whatsoever to the Plaintiffs in bringing these actions. It may be that more clarity about the nature and extent of the bankruptcy proceedings will help to fashion an appropriate policy response. In the circumstances of this case, that is best accomplished with a proper trial record.
DISPOSITION
35The motions for summary judgment are dismissed. I encourage the parties to agree on costs. If they cannot, they may each submit short submissions (no more than two pages) and a costs outline within 30 days of receiving this judgment.
R. F. Goldstein J.
Released: May 30, 2013
CITATION: Gledhill v. Le Donne, 2013 ONSC 2987
COURT FILE NO.: CV-12-446378, CV-12-446381 and CV-12-446385
DATE: 20130530
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
CV-12-446378
Norman Gledhill Moving Party
– and –
Nick Le Donne Respondent
CV-12-446381
Scott Gledhill Moving Party
– and –
Mary Stoikos Respondent
CV-12-446385
Scott Gledhill Moving Party
– and –
Louis Klasios Respondent
REASONS FOR JUDGMENT
R. F. Goldstein J.
Released: May 30, 2013