ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
Doyle Salewski Inc., in its capacity as Trustee in Bankruptcy of Golden Oaks Enterprises Inc. and Joseph Gilles Jean Claude Lacasse
Plaintiff
– and –
Lorne Scott
Defendant
John D. Dempster and Robert J. De Toni for the Plaintiff
Alyssa Tomkins and James Plotkin for the Defendant
HEARD: December 3, 10, 12, 13, 19 and 20, 2018 (at Ottawa)
REASONS FOR JUDGMENT
GOMERY, J.
1Doyle Salewski Inc., as the trustee in bankruptcy of Golden Oaks Enterprises Inc. and Jean-Claude Lacasse, seeks judgment against defendants in seventeen separate Superior Court and Small Claims actions.
OVERVIEW
2Golden Oaks Enterprises Inc. (“Golden Oaks”) was founded by Jean-Claude Lacasse and operated in Ottawa between 2009 and 2013. It was a vehicle for two businesses.
3Lacasse advertised Golden Oaks widely as a business that allowed individuals who did not qualify for a mortgage to buy a home. The company’s operating name was “Rent2Own Canada”. Its core operations ostensibly focused on buying houses that were undervalued, fixing them up, and renting them to prospective buyers. Tenants would make a down payment and pay a slightly inflated rent, in return for a non-binding option to purchase the property three or five years later. Lacasse promoted Golden Oaks as an altruistic enterprise widening the path to home ownership. In the words of a company brochure, it was “Making Dreams Come True … One Family at a Time!”.
4Less publicly, Golden Oaks was promoted as a means to turn a quick profit. Individuals were invited to loan Golden Oaks money to fund its operations. They were described as investors but were actually short-term lenders. In return for their advance of funds for few weeks or months, they got a promissory note entitling them to interest at a rate far greater than they could get otherwise.
5From 2009 to May 2013, the company issued 504 promissory notes to 153 investors. New investors were persuaded to make loans by early investors, who were paid commissions for each loan made by a lender whom they recruited. Initially, the promissory notes offered rates of interest that were merely attractive. As Golden Oaks’ financial situation worsened, however, the company issued more and more notes at effective annual interest rates in excess of 60%, and therefore above the criminal rate of interest under the Criminal Code, R.S.C., 1985, c. C-46.
6Whatever Lacasse’s original intentions may have been when he founded Golden Oaks, it became a classic Ponzi scheme. The Rent2Own scheme was never viable. From March 1st, 2012 to February 28, 2013, only 3% of the monies deposited into Golden Oaks’ bank accounts were rental payments by prospective home-buyers. Over 90% of the money it collected came from investors. Golden Oaks could only service its ever-mounting debt so long as existing and new investors agreed to advance more funds. Money from new investors was used to pay existing investors.
7Despite Lacasse’s powers of persuasion and promises of high returns, the well eventually ran dry. In July 2013, the scheme collapsed. Golden Oaks and Lacasse went into receivership and, a few weeks later, made assignments in bankruptcy. Doyle Salewski was appointed first as receiver and manager, then as trustee. It spent many months combing through Golden Oaks’ records, such as they were. The company had no proper accounting system. Records of many agreements and transactions were not recorded. Many large payments were made in cash. Golden Oaks and Lacasse maintained seventeen bank accounts at five different banking institutions. During its investigation, Doyle Salewski reviewed approximately 10,000 transactions. It found that Golden Oaks and Lacasse had given different investors unregistered assignments in connection with the same properties to secure debt far in excess of the properties’ value.
8In 2015, Doyle Salewski, in its capacity as Trustee of the Estates of Golden Oaks and Lacasse, began over eighty separate legal actions against various creditors. This included seventeen lawsuits against individuals and companies who received payments from Golden Oaks in 2012 and 2013, including but not limited to commission payments and interest on promissory notes. These actions were consolidated and heard together. They are listed at Schedule A to this decision.
9The overarching theory of these seventeen actions is that, as a Ponzi scheme, Golden Oaks was, by definition, insolvent and was used to further a fraud. It never had enough money to fund its operations or pay what it owed to legitimate creditors. The commission payments, usurious interest payments, or other transfers to the defendants deprived these creditors of their share of the company’s remaining equity.
10The Trustee’s claims fall into two broad categories. First, it makes statutory claims seeking repayment of alleged preferential payments and transfers at undervalue under sections 95 and 96 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the “BIA”). Second, it makes unjust enrichment claims. The Trustee argues that there was no juristic reason for the payments that flowed to the defendants, which enriched them at Golden Oaks’ expense. The interest rates on their loans were usurious and therefore illegal. Commissions were paid for the sale of promissory notes, contrary to the Securities Act, R.S.O. 1990, c. S.5. The Trustee contends that these payments should be set aside.
11The seventeen actions were heard together in a summary trial. The defendants have raised many defences, including applicable time bars. They challenge the receiver’s right to make the unjust enrichment claims and argue that the required elements of the statutory claims have not been made out.
12For the reasons that follow, the following claims are granted:
The s. 95(1)(a) preference claims against MRL Telecom Consulting Inc. in the Laframboise action and against Vincent Ho in the Ho action;
The s. 95(1)(b) preference claims against Vincent Ho in the Ho and Ho/Quang actions, and against Lorne Scott in the Scott action;
The unjust enrichment claims for recovery of usurious interest against most of the defendants.
All other claims are dismissed.
ANALYSIS
13I will consider the statutory claims first, then the claims for unjust enrichment. My analysis will proceed as follows:
A. The context for the claims
(1) Summary of the evidence and preliminary findings on credibility
a. The evidence at trial
b. Preliminary findings of credibility
(2) Facts giving rise to the claims
a. Golden Oaks’ Rent2Own operations
b. The promissory note/commission scheme
c. The collapse of Golden Oaks
d. Golden Oaks’ receivership and bankruptcy
e. These lawsuits
(3) Was Golden Oaks a Ponzi scheme? If so, why is this important?
B. Claims under the Bankruptcy and Insolvency Act
(1) Preferential payments
a. The Trustee’s claims under s. 95 of the BIA
b. Have sufficient material facts been pled as required under rule 25.06(2)?
(i) The Ho action
(ii) The Ho/Quang action
(iii) The other Superior Court actions
(iv) The Small Claims Court actions
c. Are the claims time-barred?
d. Have claims under s. 95(1) been proved against any of the defendants?
(i) The preference claims against Vincent Ho
(ii) The preference claims against Marc Laframboise and MRL Telecom
(iii) The preference claims against Lorne Scott
(2) Transfers at undervalue
a. The statutory scheme under s. 96 of the BIA
b. Have sufficient material facts been pled as required under rule 25.06(2)?
c. Are the claims time-barred?
d. Have the claims been proved against any of the defendants?
C. Unjust enrichment claims
(1) In what capacity is the Trustee making the claims?
(2) Are the claims time-barred?
a. When did the person with the claims know about them?
b. Was a legal proceeding appropriate prior to the bankruptcy?
c. When did a legal proceeding become appropriate?
(3) If the claims are not time-barred, has the Trustee proved unjust enrichment?
a. The claims for repayment of usurious interest
(i) The “net losers” argument
(ii) Do the promissory notes constitute a juristic reason for the payments?
(iii) Should recovery be limited?
b. The claims for repayment of commissions
(4) Are the defendants entitled to legal or equitable set-off?
D. Other relief claimed by the Trustee
E. Conclusions
A. The context for the claims
(1) Summary of the evidence and preliminary findings on credibility
14I will not summarize all of the evidence or make all relevant findings of fact at this point. I will, however, provide some context for my analysis and make preliminary observations and findings about the credibility of key witnesses.
a. The evidence at trial
15The parties agreed that the seventeen actions should be heard in a summary trial. The Trustee’s evidence in chief consisted principally of affidavits sworn by Marcia Collins and Brian Doyle, two representatives of Doyle Salewski, and by Christopher Pierre, an investigator. Hundreds of records were introduced through these affidavits as exhibits, including transcripts of examinations conducted by the Trustee during its investigation.
16Collins is the vice-president of Doyle Salewski. She is a chartered professional accountant and a certified general accountant. She has been in practice for forty years. She joined Doyle Salewski in February 2000.
17Collins swore several affidavits. A substantial portion of her first, lengthy affidavit sworn in April 2018 formed the basis of an agreed statement of facts at trial. Collins swore further affidavits dated August 30, September 14, and November 26, 2018, in which she replied to allegations raised in the defendants’ responding affidavits and provided supplementary information.
18Doyle is the president of Doyle Salewski. He is both a chartered accountant and a certified fraud examiner. His April 2018 affidavit supplemented Collins’ explanation of the investigation and described the history of these proceedings. It also attached the Trustee’s reports to the court.
19Pierre is the president of KeyNorth Professional Service Inc., an investigation firm hired by Doyle Salewski in July 2013 to assist in its investigation of Golden Oaks. Like Doyle, he is a certified fraud examiner. His mandate was to help the Trustee identify the circumstances that led to the bankruptcy of Golden Oaks and Lacasse, and to assist in analyzing information to determine the disposition of their funds and assets.
20Collins, Doyle, and Pierre were called as witnesses at trial and cross-examined on their affidavits.
21The Trustee also relied on affidavits sworn by Lacasse and Kristine Bourque, a real estate agent who worked with Golden Oaks in 2012-13. Lacasse and Bourque were also cross-examined at trial.
22Most of the defendants also swore affidavits, but only Marc Laframboise and Lorne Scott were cross-examined at trial. Three of the defendants, Vincent Ho, Mary Quang, and Claudia Nicholson, served statements of defence but did not produce affidavits and were not represented by counsel at trial.
23Finally, the parties agreed on certain facts. At the outset of trial, they submitted an agreed facts brief, which included an agreed statement of facts. They later filed a supplementary agreed statement mid-way through the hearing. In the agreed facts brief, the defendants admitted a substantial portion of Collins’ evidence regarding Doyle Salewski’s investigation and review of the Golden Oaks’ records. The parties also agreed on the timing and amount of payments made to most of the defendants, the effective annual rates of interest they received, and the portion of this interest per year that was above 60%.
b. Preliminary findings of credibility
24I will make specific findings on the credibility of individual parties and witnesses as I review the allegations against them. At the outset, however, I will address two general arguments made by the defendants with respect to the weighing of the evidence. I will also explain my approach to Lacasse’s evidence.
25The defendants argued that I must discount the Trustee’s evidence, and that I must accept all of the affidavit evidence of any defendant who was not cross-examined at trial. I do not accept either of these arguments.
26The defendants argue first that the rule in Browne v. Dunn1 requires that I refrain from making any adverse finding of credibility against an affiant who was not cross-examined. This would mean that I would have to uncritically accept every allegation in the affidavit of every defendant except Laframboise and Scott.
27In my view, the defendants’ position overstates the purpose and impact of the rule in Browne v. Dunn. The rule applies when a party seeks to impeach the evidence of a witness via evidence that it will call later in the trial. Counsel for the party must warn that witness about the anticipated contradictory evidence and give them a chance to explain any inconsistency. Failure to cross-examine a witness “tends to support an inference that the opposing party accepts the witness’ evidence in its entirety”: R. v. Quansah, 2015 ONCA 237, 125 O.R. (3d) 81, at para. 79. Such an inference would disentitle the opposing party from challenging the witness’ evidence in its closing argument.
28The rule is rooted in fairness considerations. It promotes fairness to the witness, who is given a chance to confront contradictory evidence; to the party whose witness will be impeached, who gets notice of the contested parts of its witness’ evidence; and to the trier of fact, by ensuring that it has all relevant evidence: Quansah, at para. 77.
29As noted by the Court of Appeal in Quansah at paras. 80-82, however, the rule in Browne v. Dunn is not fixed or absolute:
The extent of its application lies within the sound discretion of the trial judge and depends on the circumstances of each case… .Where the confrontation is general, known to the witness and the witness’s view on the contradictory matter is apparent, there is no need for confrontation and no unfairness to the witness in any failure to do so. [Citations omitted.]
30Neither the rule in Browne v. Dunn nor general fairness considerations require a judge to accept affidavit evidence that is, on its face, inconsistent or implausible. The rule likewise does not prevent a court from making adverse findings of credibility against defendants who have had a meaningful opportunity to review the evidence against them and to respond with their own affidavit evidence.
31The defendants were served with the Trustee’s motion record, which included the April 2018 affidavits by Collins, Doyle, and Pierre. They were also examined by the Trustee prior to this. Every one of them, except for the defendants in the Ho, Ho/Quang, and Nicholson actions, responded with their own detailed affidavits. There is nothing that suggests that any defendant was taken by surprise by the Trustee’s allegations about Golden Oaks or their involvement in it, or that any defendant lacked a meaningful opportunity to understand and confront the evidence against them.
32In these circumstances, the rule in Browne v. Dunn does not require that the court accept the defendants’ responding affidavits uncritically. If the actions had been heard by jury, I would instruct jury members that they could reject some or all of the defendants’ evidence, to the extent that it was implausible, incomplete, or inconsistent with other evidence that they accepted. As a judge acting as the trier of fact, I have this same ability.
33The defendants’ second argument is that I should give less weight to the evidence of Collins and Doyle than that of the defendants, where these witnesses disagree, because the Trustee’s representatives failed to respect their role as officers of the court.
34A trustee in bankruptcy should not adopt an adversarial or hostile role: Touche Ross Ltd. v. Weldwood of Canada Sales Ltd. (1983), 20 A.C.W.S. (2d) 197, at para. 9. A trustee must furthermore not actively mislead the court by omitting cogent evidence inconsistent with its claim: Canada (Attorney-General) v. Norris Estate, 1996 ABCA 357, 193 A.R. 15, at para. 20.
35According to the defendants, in assembling her affidavit, Collins cherry-picked the evidence favourable to the Trustee’s case. This conduct, they allege, was a violation of the Trustee’s duty to present the evidence in a dispassionate, non-adversarial and even-handed way. The defendants say that Collins’ omission of certain evidence suggests that the Trustee’s investigation was not as thorough as it should have been, and that not all relevant evidence is before the court.
36The defendants based their argument on Collins’ admission, in cross-examination that she was not instructed by Doyle on how to prepare her affidavits and that she included evidence that supported her allegations. They argue that this means she omitted evidence that did not support her allegations.
37Despite this broad claim, the defendants provide only two specific examples of omissions, both relating to the defendant Lorne Scott. First, Collins produced an email on March 7, 2012 from Lacasse to Scott about granting mortgages as evidence of Scott’s inside knowledge of Golden Oaks’ operations. Collins did not, however, produce Scott’s response and Lacasse’s further reply, which showed that Lacasse’s initial email was misdirected. Second, Collins did not produce an email sent by Lacasse to Scott on January 17, 2013, the contents of which defence counsel argues is inconsistent with Scott’s alleged position as an insider.
38I am not persuaded, based on this evidence, that Collins acted in any way inconsistent with her role as trustee.
39Given Collins’ expertise as an accountant, her senior position at Doyle Salewski, and her lengthy history as a trustee, it is not clear to me why she would have needed to receive instructions on how to prepare her affidavits. At trial, she generally struck me as an even-handed, unbiased witness. She did not display any animosity towards the defendants, take unreasonable positions, evade questions, or refuse to make reasonable concessions.
40Collins’ April 2018 affidavit alone was 307 pages long and attached 256 exhibits. As she explained during cross-examination, Doyle Salewski reviewed thousands of emails. It would have been impractical for Collins to refer to every one of them in her affidavits. The failure to do so does not suggest that the Trustee’s investigation was incomplete. In any event, the January 17, 2013 email had already been produced by Scott as an exhibit to his first affidavit on February 6, 2018. There was therefore no danger that the court would not see it.
41Furthermore, I do not consider that the email’s contents disprove that Scott had an active role in promoting investment at Golden Oaks, as defence counsel argues. The email does not appear to have been drafted with Scott, in particular, in mind. It contains generic information and Lacasse refers to “investors like yourself” and “my investors.” In any event, this was one piece of evidence amongst many that spoke to the relationship between Lacasse and Scott, and Scott’s knowledge of Golden Oaks’ operations.
42I agree that Collins should have produced the complete email exchange on March 7, 2012. I do not agree, however, that her failure to do so betrays an intent to mislead the court. I find that she simply overlooked Scott’s response and Lacasse’s further reply.
43Defence counsel alleges that Doyle violated his duty as an officer of the court by trying to build a case instead of simply obtaining information. They cite, as an example, leading questions he asked Lacasse during his examinations in August 2013 and May 2014.
44I have reviewed the transcripts from these examinations for discovery. I did not find that the Doyle’s conduct of the examinations was in any way improper. Defence counsel has identified about 30 leading questions amongst the 1373 questions that Doyle asked Lacasse over the two examinations. This does not strike me as abusive or unreasonable.
45In his first report to the court, he stated that he had supervised the investigation and liquidation of Lacasse’s previous company, Lacasse Enterprises Inc., about twenty years earlier. That company has also operated a failed real estate scheme based on projections of unrealistic cash flows generated by renting condominium units. In the report, Doyle characterized the scheme as “highly improbable and poorly managed.” He also noted that Lacasse had declared personal bankruptcy twice before.
46As the investigation unfolded, Doyle clearly formed a view of the nature of Golden Oaks’ operations. He came to believe that Lacasse used the company as a vehicle for fraudulent dealings, and that some investors had received payments preferentially. This was also not the first time that Doyle was involved in a bankruptcy involving Lacasse.
47Given his history with the bankruptcy of Lacasse’s former company and his suspicions about the Rent2Own scheme, Doyle may well have doubted he would receive straightforward or complete answers from Lacasse at his examination. Lacasse’s evidence during the examination and at trial bears out this suspicion. His explanations for various events and his account of his own motivations were self-serving and disingenuous. In those circumstances, Doyle’s limited use of leading questions during Lacasse’s examination was a legitimate and necessary strategy to obtain insight into Golden Oaks’ operations.
48The defendants’ argument implies that a trustee in bankruptcy must refrain from any advocacy for the position it is taking in litigation. In my view, this is unrealistic and even antithetical to the role of the trustee. A trustee must approach an investigation without any unfounded bias and keep an open mind about what it will find. Having investigated, however, a trustee abdicates its responsibilities under the BIA if it fails to apply its expertise and experience to assess the information received and act on that assessment. Once a trustee has reasonably concluded that there are assets belonging to the estate in third party hands and that there are grounds to recover them, and it obtains instructions to begin legal proceedings from inspectors, its role necessarily involves some advocacy.
49I do not find that Doyle approached the investigation with a closed mind. In his first report to the court, he expressed honest reservations about Lacasse, given his involvement in the bankruptcy of his earlier company and some similarities between that company’s real estate scheme and the Rent2Own scheme. I do not, however, see evidence that Doyle’s past experience with Lacasse gave rise to unreasonable bias or that he engaged in any conduct inconsistent with his role as an officer of the court.
50Finally, defence counsel suggests that Doyle Salewski is an “interested party” to the proceedings because Doyle admitted on cross-examination that it has loaned over $100,000 to the estate. No evidence was presented about the circumstances of this loan. An accusation of conflict of interest should never be made lightly or based on incomplete or vague evidence. I do not draw any conclusions about the Trustee’s conduct based on this admission.
51The case law cited by the defendants in support of their position is distinguishable. In Touche Ross, the trustee in bankruptcy had previously acted as a private receiver for the creditor on whose behalf he sought a BIA remedy and adopted a stance towards the defendants that the judge described as “militant.” In Norris Estate, the trustee failed to mention critical evidence and made active misrepresentations about the record in response to questions from the court.
52The evidence presented by Collins, Doyle, and Pierre was detailed and credible. I accept it without reservation except where otherwise noted. Together, these witnesses describe the methodology and results of Doyle Salewski’s investigation of Golden Oaks’ operations in great detail. Their allegations are supported by contemporaneous records where available. In cross-examination at trial, Collins, Doyle and Pierre demonstrated familiarity with the record. They characterized the evidence fairly, made concessions where appropriate and admitted when their conclusions were based on inferences or opinions. Contrary to defence counsel’s assertions, they did not display any hostility towards the defendants or any improper advocacy for any position.
53By contrast, I found that Lacasse’s evidence had to be approached cautiously. The claims in the actions stem, in one way or another, from his misrepresentations about Golden Oaks’ financial situation and the nature of its core operations. This record demonstrates that Lacasse is not a trustworthy witness. His activities, and the activities of Golden Oaks at his direction, have been referred by the Trustee to the RCMP for criminal investigation, though no charges have been laid to date. Lacasse may therefore have a strong incentive to misrepresent past events. As noted, some of his answers on cross-examination were evasive and disingenuous.
54For these reasons, I accepted Lacasse’s evidence only where it was supported by contemporaneous records or other evidence that I accepted, or where it was inherently plausible.
(2) Facts giving rise to the claims
55Golden Oaks was incorporated by Lacasse in 2006. It also operated under the names “Rent 2 Own Canada” and “Golden Oaks Rent 2 Own Canada.” Lacasse was its sole director and officer. The company had offices on Montreal Road in Ottawa. It employed a small number of staff, including Lacasse’s son and nephew. In 2011, Vincent Ho was hired, and was eventually given the title of vice-president. As of 2012, two real estate agents, Chris Steeves and Lorne Scott, also frequented the company’s offices.
a. Golden Oaks’ “Rent2Own” operations
56The Rent2Own scheme was central to Golden Oaks’ public image. Its stated mission was the rental of properties to tenants who not qualify for mortgages from traditional lenders, so that these tenants could save enough money over time to purchase a home. These properties were either owned or managed by Golden Oaks. A tenant would pay Golden Oaks a non-refundable deposit towards a future option to purchase the property after a set period of time—usually three years. In the meantime, the tenant would make monthly payments consisting of rent and an additional amount that would accrue towards a down payment. At the end of the term, the tenant had the option to purchase the property.
57Golden Oaks heavily advertised the Rent2Own scheme in Ottawa and surrounding areas from mid-2010 onward. On its face, it appeared to be a successful business. The company acquired a significant number of residential properties. Representatives of Rent2Own entertained lavishly from corporate boxes at hockey games and concerts. Lacasse lived in a house worth about $2 million, and he and his vice-president, Ho, drove expensive cars.
58Reviewing the company’s year-over-year income and expenses, however, there were critical flaws in the Rent2Own business model.
59First, the revenue generated by the Rent2Own scheme did not come close to covering its costs. From 2007 to 2013, Golden Oaks generated about $773,600 in rental income. This was dwarfed by the cost of utilities, mortgage payments, and rent paid for houses used by Rent2Own that were owned by third parties. Over that period, these costs totaled about $1.5 million, resulting in a loss of about $750,000.
60Second, the scheme required an enormous amount of capital. The cost of acquiring properties and renovating and repairing them was almost $5.5 million. Golden Oaks generated some revenue through the resale of properties and from the deposits by tenants to acquire an option to purchase. Overall, however, it recorded a loss of $3.7 million in the category of “Properties Income and Expenses.”
61Accounting for these losses, plus administrative costs of $2.4 million, the Rent2Own scheme generated a deficit of over $6.8 million during a six-year period.
62Beyond this issue, the long-term viability of the Rent2Own scheme was precariously premised on the company’s ability to attract tenants who could afford a deposit and save enough money over the next three years to exercise their option to purchase. Tenants without the ability to afford meaningful down payments to qualify for a conventional mortgage when they began to rent from Golden Oaks were not likely to miraculously acquire the means to do so three years later—especially given the assumption about the increased value of the property baked into the model. Moreover, tenants were not obligated to exercise the option to purchase the property at the end of their initial tenancy. Few (if any) did.
63When Golden Oaks went into receivership on July 9, 2013, it owned or managed 68 properties. Only 31 of the 68 properties were occupied by tenants paying rent. The remaining 37 were vacant and generated no rental income. The properties owned by Golden Oaks were heavily encumbered by mortgage debt. Some properties had second or third mortgages registered against their titles. The total registered debt against the properties exceeded the total amount for which they had been purchased. The properties were also encumbered by unregistered assignments to promissory note holders.
b. The promissory note/commission scheme
64In addition to promoting Golden Oaks as a means of opening the door to home ownership, Lacasse vaunted the company and the Rent2Own scheme as an attractive investment opportunity. In fact, by 2012, the company’s activities centered much more on generating investment than its purported mission of “Making Dreams Come True … One Family at a Time!”
65Based on Doyle Salewski’s calculations, which I accept, from March 1st, 2012 to February 28, 2013, just 3% of Golden Oaks’ revenues were from rental payments by tenants.2 About 2% of deposits were from the sale or refinancing of the company’s properties. About 92% of the money that flowed into its accounts during this period was from investors.
66Golden Oaks induced investors to make loans by offering very high interest rates on promissory notes. The notes’ terms were simple. An investor advanced a capital amount for a set term. They would typically receive one or more post-dated cheques for the return of the amount loaned plus interest.
67Golden Oaks issued 504 promissory notes from November 2009 to May 2013. As already noted, the persons to whom they were issued are more accurately described as short-term lenders than investors, since they were promised a fixed amount in return for a short-term loan, as opposed to an amount contingent on the profitability of the company. From 2009 to mid-2011, most loans were for terms of one to two years and had interest rates ranging from 12% to 40%. In 2011, Golden Oaks’ bank account went into overdraft and the company began to rely on its line of credit. According to Collins’ calculations, promissory note investments jumped from $450,000 in 2011 to $2.3 million in 2012. There were six investors by the end of 2010, 33 by the end of 2011, 106 by the end of 2012, and 153 as of May 29, 2013.
68Golden Oaks issued its first usurious promissory note—that is, with a rate of interest above 60%—on July 1st, 2011. By 2012, most notes issued were for short-term loans at usurious interest rates. In total, 64% of the 504 promissory notes issued by Golden Oaks were usurious.
69Under the terms of 19 promissory notes, investors would receive bonus payments, in addition to interest, when the principal was repayable. Bonus payments were offered as an incentive for the investor to rollover their loan for another term or to increase their investment, allowing Golden Oaks to delay repaying the principal amount of the initial loan. Almost all notes that promised bonus payments were issued in 2012 and 2013. The total amount that Golden Oaks promised to pay as bonuses was just over $417,000.
70Investors in Golden Oaks were sometimes offered assignments of contracts as collateral for their loans to the company. The assigned contracts related to a specific property and were enforceable until the investor was repaid for its investment. During its investigation, Doyle Salewski identified 82 assignments made for 46 different properties. Some of the assignments related to properties owned not by Golden Oaks but third parties. Contracts with respect to the same property were also often assigned to multiple noteholders. This occurred despite Lacasse having issued letters to noteholders stating that rights in the property had not been and would not be offered to other investors without the noteholder’s approval.
71As of 2010, Golden Oaks also offered commissions to individuals who introduced new investors to the company. The company signed a formal referral agreement with Steeves and Scott. This triggered a significant wave of new promissory agreements as Steeves and Scott promoted guaranteed, high returns on short-term promissory notes to friends, family members, colleagues and clients.
72The commissions were calculated as a percentage of new investors’ loans to the company. Scott and Steeves were paid not only on new investors’ first investments, but on subsequent rollovers of those investments, as well as on investments by further investors referred in turn by the new investor. As a result of the “referrals of a referral” arrangement, commissions were sometimes payable to two different individuals for the same investment.
73In addition to the written agreemenst with Scott and Steeves, Golden Oaks entered into verbal referral agreements with some other defendants to these actions. In total, the company made 91 commission payments totaling $331,457. More than half of these commissions were paid between July 2012 and Golden Oaks’ receivership a year later.
74From 2009 to 2013, the company deposited $16.4 million received from investors. It repaid investors approximately $7.7 million in interest and return of capital. Factoring in commission payments, the income from investors during this entire period was $8.3 million, or 85% of Golden Oaks’ revenues. In the year preceding receivership, however, the money that the company took in from investors was, as already noted, 92% of its income.
c. The collapse of Golden Oaks
75Through 2012, Golden Oaks attracted enough new investment to pay the interest due to promissory note holders and referral payments from new loans by existing or new investors. In Lacasse’s January 17, 2013 email to Scott, Lacasse boasted that 2012 had been a “great year.” He claimed that Golden Oaks was worth over 4.9 million.
76In reality, as noted in Doyle Salewski’s first report to the court, Golden Oaks was the debtor on $12,700,000 worth of promissory notes. Even assuming an average, non-usurious interest rate of 30% per year, the yearly interest payable on the notes would have been over $3.8 million per year, or $317,500 per month. This greatly exceeded revenues generated by the Rent2Own scheme (which was in fact running at a massive loss) or, as it turned out, new investments.
77Lacasse testified that he did not intend to do anything illegal. He stated that the promissory notes were issued to cover financial difficulties which, in hindsight, were not temporary in nature. He recognizes now, however, that Golden Oaks ended up being a Ponzi scheme.
78I reject Lacasse’s claim that he only unwittingly misled investors and the public. He was the only officer of Golden Oaks and the only person with complete insight into its operations and finances. By early 2012, at the latest, Lacasse knew that new loans made to the company were being used to pay existing obligations to investors. In his communications to the public and to investors, he actively misrepresented the value of the company’s assets and its revenues. He granted collateral on the same property to multiple investors, sometimes despite explicitly undertaking not to do so. When asked questions, Lacasse refused to provide meaningful information and took steps to conceal the true state of the business.
79Lacasse benefitted directly from Golden Oaks’ operations. From 2009 to July 31st, 2012, he made payments from the company to himself of over $600,000. In the last ten months of Golden Oaks’ operations, Lacasse paid himself a further $887,583. He also made significant cash withdrawals from the company, from 2009 to 2013, of $142,000, including about $108,000 in the last ten months of operations. Lacasse visited a casino just outside Ottawa at least 85 times in 2012, where he purchased gambling chips worth $372,000.
80Lacasse gained other intangible benefits from the Golden Oaks scheme. It allowed him to present himself as a sophisticated and successful real estate developer who was using his skill and knowledge to help disadvantaged families. This was an essential element of the fraud.
81In March 2013, Golden Oaks’ cheques began bouncing regularly, and a few investors became aware of the extent of the company’s financial difficulties. In April and May 2013, Lacasse sent emails to the company’s investors acknowledging liquidity issues but offering reassurances based on the alleged value of Golden Oaks’ real estate portfolio and the prospect of significant new funding. Nevertheless, Golden Oaks’ offices closed a short time later as rumours of Lacasse’s potential fraud and the company’s insolvency began to circulate more widely.
d. Golden Oaks’ receivership and bankruptcy
82On July 9, 2013, Doyle Salewski was appointed as Receiver and Manager of the assets, undertakings, and properties of Golden Oaks and Lacasse.
83On July 25, 2013, Doyle Salewski appeared before my colleague Justice Kershman with its first report on its activities as receiver. On July 26, Kershman J. issued an order replacing the July 9, 2013 order. That day, Golden Oaks and Lacasse made assignments in bankruptcy and Doyle Salewski was appointed as the Trustee of their estates. A first meeting of creditors was held on August 19, 2013.
84Pursuant to the court’s July 2016 order, the Trustee investigated and reviewed records kept by the company and Lacasse to identify assets available to its creditors. This took a great deal of time and effort. Golden Oaks’ records were not properly kept. The company had no proper accrual accounting system. The terms of many agreements were not recorded. Doyle Salewski had to obtain copies of many documents from financial institutions and other third parties. This was no easy feat, since Golden Oaks and Lacasse maintained seventeen bank accounts at five different banking institutions and held twenty credit cards. In his affidavit, Doyle described the process of obtaining relevant information about Golden Oaks’ operations as “tedious, time consuming and painstaking.” It reviewed approximately 10,000 transactions and 30,000 emails and text messages.
85The July 2016 order also permitted the Trustee to examine individuals with any relevant information. Doyle Salewski examined 25 individuals involved with Golden Oaks from August 2013 to July 2014, including the defendants in these actions.
86Doyle Salewski filed six further written reports with the Court from August 13, 2013 to October 7, 2015. It also attended seven case conferences before Kershman J.
87A receivership order often empowers the receiver to initiate legal proceedings with respect to the debtor or its property. The July 2016 order did not include such a provision. In its third report on March 10, 2014, Doyle Salewski asked the court for the authority to commence litigation. In his supporting affidavit, Doyle explained that, although the Trustee’s investigation was not yet complete, it believed that various investors had improperly received payments from the company.
88In response to this request, several investors asked the Court to order the Trustee to “show cause”, that is, to justify its request for expanded powers. The Trustee then prepared a fourth report dated May 30, 2014, setting out the claims it proposed to advance. Doyle maintains that it was only as of this date that the Trustee was in a position to trace payments by Golden Oaks to defendants in these actions.
89The show cause hearing was originally scheduled for September 2014 but was adjourned for various reasons to late December 2014.
90On June 16, 2015, Kershman J. issued an interim decision on the show cause hearing, authorizing the Trustee to begin these actions. A test case by the Trustee against Steeves and another recipient of payments by Golden Oaks was proceeding by way of arbitration but was taking much longer than originally expected. Doyle Salewski had expressed concern about the possible expiry of limitation periods. Kershman J. noted that inspectors of the estates of Golden Oaks and Lacasse had authorized the Trustee to preserve the rights of unsecured creditors by commencing legal proceedings against persons who had potentially received preferences subject to s. 95(1) of the BIA and against parties who had received commissions on the sale of promissory notes. He authorized the Trustee to have statements of claim issued and to serve them on the defendants, but ordered that no statements of defence would be required and no default proceedings should be taken until further court order.
91From June 23 to July 23, 2015, Doyle Salewski, in its capacity as Trustee, began 88 separate actions.
92On October 20, 2015, Kershman J. issued his final decision on the show cause hearing. He authorized Doyle Salewski to initiate legal proceedings generally with respect to Golden Oaks, Lacasse, and their property, and granted leave in particular to commence proceedings to recover interest payments and commissions. This part of his order was retroactive to January 15, 2015.
e. These lawsuits
93The seventeen actions that are at issue in this decision, listed on Schedule A, were among the actions commenced by the Trustee in June and July 2015. Seven of these actions were commenced in Superior Court. Ten of them are Small Claims Court actions.
94One of the defendants is Ho, Golden Oaks’ vice-president. Another is Scott, the real estate agent who acted for Golden Oaks and who, according to the Trustee, was also involved in the company’s operations. The Trustee likewise alleges that defendant Marc Laframboise had a role in Golden Oaks’ management. All three defendants, along with Laframboise’s company, MRL Telecom Consulting Ltd., are alleged to have received usurious interest, commissions, and other payments.
95All of the other defendants were paid interest on loans secured by promissory notes with Golden Oaks in the year prior to the receivership. Some of them—the Lalondes, the McKennas, and Susan McKillip—also received commissions for their referral of other investors to the company.
96The Trustee amended its statement of claim in the Scott action in January 2016. It amended its statements of claim in the Small Court actions in early 2016, and again in September 2017. No leave was required to make these amendments.
97In early 2016, the defendants served a motion to strike some of the actions. In response, the Trustee served a cross-motion to amend its statements of claim in four of the Superior Court actions. On August 22, 2016, Kershman J. dismissed the defendants’ motion and granted the plaintiff’s cross-motion. The defendants appealed this decision to the Court of Appeal. On June 20, 2017, the Court quashed the appeal. It held that the appeal should have been made to the Divisional Court, because Kershman J.’s order was interlocutory rather than final in nature. Following this decision, amended statements of claim in the Lalonde, Leduc, Nguyen, and Laframboise/MRL actions were served in September 2017.
98I will deal in further detail with the subject matter of the motion and cross-motion and the effect of the Court of Appeal’s decision later in these reasons.
(3) Was Golden Oaks a Ponzi scheme? If so, why is this important?
99I find that Golden Oaks was an illegal Ponzi scheme. The defendants in fact admit that it was a Ponzi scheme at the time they received the payments at issue in these proceedings.
100In Re Titan Investments Ltd. Partnership, 2005 ABQB 637, 383 A.R. 323 [Titan], at para. 8, Hawco J. defined Ponzi schemes as:
fraudulent investments schemes whereby individuals are enticed by a con-man or fraudster to make investments in an operation promising an unreasonably high rate of return. Once the first few investments are made, subsequent investors are enticed to invest partly through reported gains and partly through the high payouts to earlier investors. Ultimately, the con-man either spends or disappears with the remaining money, or the scheme collapses on itself as funds are exhausted by payouts to earlier investors.
101In Millard v. North George Capital Management Ltd., 2006 CanLII 41287 (ON SC), [2006] O.J. No. 4902, at para. 11, my colleague Cumming J. succinctly described a Ponzi scheme as a fraud whereby “the source of distributions to the early investors consist primarily of a return of their own capital or moneys obtained from new investors and with the payments ultimately stopping when there are no further investors.” As a result, “everyone loses money except the perpetrators of the fraud.” These definitions were accepted by the B.C. Supreme Court in Boale, Wood & Company Ltd. v. Whitmore, 2017 BCSC 1917, [2017] B.C.W.L.D. 6598, at paras. 46-47, and I also adopt them.
102Based on these definitions, Golden Oaks was a Ponzi scheme. Its core business was persuading investors to lend the company money with the lure of unrealistically high returns, to the profit of Lacasse and early investors. These returns were not being funded by the Rent2Own operations. These operations were not viable and generated almost no income. The interest and commissions paid to early investors in Golden Oaks were funded by money from later investors. Early investors and insiders did very well, assuming they withdrew their funds before the whole scheme collapsed in on itself in June 2013. Later investors and ordinary creditors who were totally unaware of the true nature of Golden Oaks’ business were left holding the bag.
103There are two important implications of the finding that Golden Oaks was a Ponzi scheme.
104First, as a Ponzi scheme, Golden Oaks was insolvent by definition. On this point, I again agree with and adopt the reasoning in Titan, at para. 16, and Boale, at para. 49.
105In mid-2011, Golden Oaks ceased to be able to obtain conventional financing and began to offer usurious interest rates on promissory notes. It did not have the means to pay off its creditors. The scheme would have collapsed if it was unable to persuade its investors to commit to further loans or find new investors to pay old investors. This is in fact what eventually happened.
106The finding that Golden Oaks was insolvent from mid-2011 is critical to the Trustee’s claims under the BIA. It will also have implications for the Trustee’s equitable claims.
107Second, Golden Oaks’ operations as of mid-2011 were, by definition, fraudulent. Potential investors were told that the Rent2Own business was profitable. This was false. The rental operations were underwater. There is no evidence that the company’s business model was ever viable. As of sometime in 2011, the company’s purpose was not to permit individuals without a sound financial track record to become home-owners. Its purpose was to attract funds to pay existing investors.
108No criminal charges have been laid to date against Lacasse or anyone else involved in Golden Oaks. This does not mean that this court should ignore the havoc wreaked by the scheme. The company’s bankruptcy has left many ordinary creditors unpaid. This would necessarily include many small contractors and suppliers who did business with Golden Oaks in the usual course. The list of creditors also includes the defendants themselves, all of whom stated, in their affidavits, that they were shocked to learn that they had been taken in by a fraud.
109The inherently fraudulent nature of Golden Oaks is relevant to various issues in this case. I will return to this later in these reasons.
B. Claims under the Bankruptcy and Insolvency Act
(1) Preferential payments
a. The Trustee’s claims under s. 95 of the BIA
110The Trustee advances claims under s. 95(1)(a) of the BIA in the Laframboise/MRL action, the Ho action, the Ho/Quang action, and the Scott action. It advances s. 95(1)(b) claims in all of the actions.
111Section 95(1) of the BIA allows a trustee in bankruptcy to attack payments made by an insolvent person prior to the bankruptcy on the basis that such payments amounted to unlawful preferences. Subsection 95(1)(a) deals with any payments made in the three-month period before the initial bankruptcy event. A payment by an insolvent person
in favour of a creditor who is dealing at arm’s length with the insolvent person … with a view to giving that creditor a preference over another creditor is void as against … the trustee if it is made … 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.
112A trustee in bankruptcy may accordingly seek to have any such payments set aside.
113If a payment made in the three months prior to the initial bankruptcy event has the effect of giving a creditor a preference, it is presumed to have been given “with a view” to doing so: s. 95(2) BIA. A creditor may, however, try to rebut this presumption.
114The “initial bankruptcy event,” in Golden Oaks’ case, is July 9, 2013—the date that Doyle Salewski was appointed as receiver. The date of the bankruptcy is July 26, 2013. Payments Golden Oaks made from April 9, 2013 to July 26, 2013 are therefore captured by ss. 95(1)(a). Golden Oaks allegedly made payments to Vincent Ho and MRL Telecom during this period.
115Under ss. 95(1)(b), a trustee in bankruptcy may seek to set aside payments made up to a year before the initial bankruptcy event, if they were made to creditors who were not dealing at arm’s length with the insolvent person. A payment made by an insolvent person:
In favour of a creditor who is not dealing at arm’s length with the insolvent person … that has the effect of giving that creditor a preference over another creditor is void against … the trustee if it is made … 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.
116As noted by the Alberta Court of Appeal in Piikani Nation v. Piikani Energy Corp., 2013 ABCA 293, 556 A.R. 200, at para. 16, intent to give a preference is no longer required under ss. 95(1)(b): “If a preference arises in fact between non-arm’s length parties, it is simply void as against the trustee.”
117The Trustee alleges that the defendants each received payments from Golden Oaks between July 9, 2012 and July 23, 2013 that were illegal preferences under s. 95(1)(b).
b. Have sufficient material facts been pled as required under rule 25.06(2)?
118The defendants argue that sufficient facts to support all of the material elements of the preference claims have not been pled in any of the actions except the Scott action and the Laframboise/MRL action.
119Pursuant to r. 25.06(2) of the Rules of Civil Procedure, “conclusions of law may be pleaded only if the material facts supporting them are pleaded.” The defendants rely on Flow Films v. Global Wealth Trade Corp., 2011 ONSC 1185, 198 A.C.W.S. (3d) 24, at para. 9 for the proposition that, where a plaintiff alleges a statutory breach, both the section relied upon and that the facts giving rise to the alleged breach must be pleaded.
(i) The Ho action
120The defendants argue that, in the statement of claim originally filed in the Ho action, the Trustee did not allege the timing of payments which it claimed were void, the existence of a preference in fact or, in the case of the claims under ss. 95(1)(b), that the parties were not at arm’s length. Although the statement of claim was later amended, this took place more than two years after the date that Doyle Salewski was appointed. As a result, the defendants say that the preference claims against Ho must be dismissed.
121I reject this argument. On my review of the original statement of claim in the Ho action, the material elements of the preference claim against him were pleaded.
122In the Ho action, the Trustee alleges that Ho was the vice-president of Golden Oaks and sold promissory notes to investors on its behalf. It claims that Ho received a total of $265,975.95 from the company in 2012 and 2013 in the form of commissions and other payments. The Trustee claims that some of these payments were illegal s. 95(1) preferences and unjustly enriched Ho at the expense of other investors and stakeholders in Golden Oaks. It also alleges that Ho engaged in a civil conspiracy with Lacasse directed at innocent third party investors.
123In my view, facts supporting the material elements of a preference claim against Ho were pleaded in the original statement of claim issued on July 23, 2015. Some of these facts are set out in the section of the pleading addressing the civil conspiracy claim. In determining whether the pleading passes muster under rule 25.06(2), however, it must be read in its entirety.
124At paragraph 20, the plaintiffs allege that either Golden Oaks or Lacasse made $23,500 in payments to Ho between April 9 and June 7, 2013, and that these payments occurred within ninety days of the initial bankruptcy event. The date of the initial bankruptcy event is alleged at paragraph 10. At paragraph 23, the plaintiffs allege that a total of $252,475.95 in payments were made in the twelve-month period preceding this date.
125It is true that the statement of claim does not allege the timing of each of the payments that make up the total of the s. 95(1)(b) claim. However, the defendants have not submitted any case law that indicates that this is strictly necessary nor do I find that the BIA explicitly requires this. I find, reading the statement of claim as a whole, that the allegation of the total amount transferred to Ho during this period meets the requirements of rule 25.06(2).
126The statement of claim in the Ho action alleges, repeatedly, that the payments were preferences and that they put Ho in a better position than that of other, non-preferred creditors (referred to in the pleading as “Investors”).
127Ho’s participation in the Golden Oaks investment scheme is set out at length. At paras. 27 to 30, the plaintiffs allege that, in setting up a scheme whereby he received payments generated by the Investors, Ho positioned himself “in a situation favourable and preferable to that of the Investors.” I find that these allegations, if proved, would show that payments were made to Ho “with a view” to preferring him and that they had the effect of preferring him by putting him in a better position than other creditors.
128Finally, paragraph 21 of the statement of claim asserts that Ho was not dealing at arm’s length with Golden Oaks. This is based on allegations that he was the vice-president of the company, he participated in “the planning, promotion and proliferation of the Golden Oaks scheme,” he was Lacasse’s trusted advisor” and “enjoyed unfettered access” to Golden Oaks’ offices and to the books, records and banking information of both Golden Oaks and Lacasse, he attended staff meetings and directed some company staff, and he knew that Golden Oaks was insolvent as early as July 2012.
129The primary purpose of rule 25.06(2) is to permit the defendant to know the case it has to meet. Based on the statement of defence filed by Ho, he understood perfectly well that the Trustee was making preference claims against him under s. 95(1), and had sufficient notice of the case against him to defend himself.
130The amendments to the statement of claim in September 2017 did not add any new, material elements to the preference claims. The total amount of the claim was adjusted, and a distinction was made between amounts received as unlawful commissions in the twelve months prior to July 9, 2013 ($12,500) and other preference payments ($229,975.95). Some details regarding how payments were made in June 2013 were added at paragraph 20. None of these new details were strictly required to meet the pleading requirements for a s. 95(1) preference claim.
(ii) The Ho/Quang action
131On my review of the original statement of claim in the Ho/Quang action, the material elements of the preference claims against him were adequately pleaded. By contrast, the preference claim against Quang in the Ho/Quang action, even as amended, does not set out all of the required material facts to support a preference claim against her. The preference claim against Quang must therefore be struck.
132In the Ho/Quang action, the Trustee seeks the return of either $81,541.70 allegedly paid to Ho, to his spouse May Quang, and to another investor, Xianpeng Wang, in the year preceding Golden Oaks’ placement in receivership. Relief is claimed pursuant to ss. 95(1)(b) BIA and based on unjust enrichment. Ho and Wang allegedly made joint investments in Golden Oaks and filed a joint proof of claim in the bankruptcy process. Pursuant to this joint filing, Wang assigned his rights to Quang. Wang is not named as a defendant in the Ho/Quang action.
133I will deal first with the preference claim against Quang.
134The statement of claim, whether in its original form or as amended, does not allege that Ho or Wang received any payments from Golden Oaks in the three months prior to July 9, 2013. The only preference claim is pursuant to ss. 95(1)(b). To establish this claim against Quang, The Trustee would have to establish that the payments it seeks to set aside were made “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.”
135The statement of claim is completely silent with respect to any relationship between Wang and Golden Oaks, or between Quang and Golden Oaks, or any knowledge either of them might have had of its operations. There is no allegation that either Wang or Quang was not dealing at arm’s length with the company when they received payments.
136In light of this, the preference claim against Quang must be struck.
137On the other hand, I find that the original statement of claim in the Ho/Quang action, as issued on July 23, 2015, contained the material elements to support a s. 95(1) preference claim against Ho.
138Paragraph 19 sets out the dates on which $31,041.70 in payments were made to Ho: between October 17, 2012 and February 17, 2013. The Trustee alleges, at paragraph 18, that Golden Oaks made further payments to Ho and Quang in the amount of $34,500.
139At paragraph 17 of the statement of claim, the Trustee alleges that Ho was not dealing at arm’s length with Golden Oaks at the material time, for the same reasons alleged in the Ho action.
140I agree with the defendants that the statement of claim in the Ho/Quang action does not explicitly allege that the payments made to these defendants had the effect of giving them a preference over another creditor. As I mentioned earlier, however, the entire theory of the case is that defendants such as Ho were parties to a scheme which resulted in them obtaining benefits that other creditors did not. Reading the pleading as a whole, there are sufficient material facts alleged that, if accepted, would give rise to the conclusion that the payments at issue did put Ho in a preferred position. The payments are characterized as preferences at paras. 1(b). At paragraph 22 of the statement of claim, the Trustee alleges that:
Ho knew, or ought to have known, that at all material times Golden Oaks was operating at a massive loss. The Defendants Ho and Wang made investments in Golden Oaks at usurious rates of interest and knew, or ought to have known, that a business of this nature could not withstand payments of these excessive rates of interest. As stated herein, only 3% of the monies deposited into Golden Oaks bank accounts actually came from operations and in excess of 96% of the monies deposited came from investor funds and promissory notes. The usurious interest paid by Golden Oaks to Ho and Wang was wholly obtained through the investments of other investors into Golden Oaks and not from the day to day business operations of Golden Oaks.
141At paragraph 23, the Trustee alleges that interest paid by Golden Oaks to Ho was “misappropriated monies of stakeholders which should be returned to the Plaintiff, representing the interests of all stakeholders.”
142Although these allegations are made in the section of statement of claim dealing with usurious interest, they necessarily imply that any payments made to Ho, to his knowledge, benefitted him at the expense of other creditors and investors.
143I therefore conclude that the material elements of a s.95(1)(b) preference claim are pleaded against Ho.
(iii) The other Superior Court actions
144In their opening statement at trial, plaintiff’s counsel said that the Trustee was only pursuing s. 95(1)(b) arguments against four defendants. A few days later, plaintiff’s counsel advised that this was an error, and that s. 95(1)(b) claims were being pursued against all defendants.
145The Trustee’s written submissions on this point also reflect some uncertainty. The argument addressing preferences to creditors dealing at non-arm’s length states that the Trustee is advancing “certain specific 95(1)(b) claims against certain Defendants as set out at Schedule “B”.” This Schedule refers only to the Scott, MRL/Laframboise, Ho, and Ho/Quang actions. Later in its written argument, however, the Trustee argues that all defendants received unlawful preferences.
146Based the correction provided by the plaintiff’s counsel at trial, I understand that it wishes to pursue preference claims against all defendants. I will deal first with the remaining Superior Court actions then with the Small Claims Court actions.
147The defendants argue that material facts in support of s. 95(1)(b) preference claims were not alleged in the statements of claim originally issued in the Nguyen, Leduc, and Lalonde actions on July 23, 2015. Although the pleadings were amended in September 2017, they still do not meet the requirements of r. 25.06(2). Even if they did, the amendments would then have introduced a new cause of action more than two years after the Trustee was appointed. The defendants accordingly maintain that the actions should be struck.
148The Trustee argues that the pleadings contain the material allegations to support s. 95(1)(b) preference claims. It makes various arguments on the limitations issue which I will not detail here. It also contends that the sufficiency of the pleadings was addressed by my colleague Kershman J. in his decision on earlier motions, and that this issue may therefore not be revisited.
149I will deal first with the Nguyen action, then the Leduc and Lalonde actions.
150The Nguyen action is pleaded on the basis of unjust enrichment. The statement of claim does not allege that Nguyen was dealing not at arm’s length with Golden Oaks when he was paid interest on promissory notes issued to him, nor does it allege any facts that, if proved, would allow a court to make such a finding. The statement of claim furthermore does not allege that these payments were made in the 12 months prior to July 9, 2013, or that they resulted in a preference to Nguyen. The original statement of claim referred to the BIA in the context of a claim for costs on a substantial-indemnity basis at paragraph 1(c). At paragraph 20, the plaintiff reiterated that it was relying on the BIA without referring to any specific section numbers or types of claims.
151When the statement of claim was amended in September 2017, paragraph 20 was amended. It now reads as follows, with the underlined amendments:
The Trustee pleads and relies upon all applicable provisions of the Bankruptcy and Insolvency Act including, without limitation, the provisions of sections 30, 95, 96 and 137 and 178 of the Bankruptcy and Insolvency Act and s. 347 of the Criminal Code (Canada), and the Plaintiff states that the transactions set out herein are void as against the Plaintiff as being transfers at undervalue because Golden Oaks received no valuable consideration, and/or as preferences.
152Simply referring to a section number of a statute does not meet the pleading requirement in the Rules. Material facts triggering the application of a given statutory provision must be alleged as well. There are no facts alleged at paragraph 20. It is a conclusion of law unsupported by any allegations of material fact—the very thing prohibited by r. 25.06(2).
153The Trustee argues that, on the evidence, the payments of usurious interest to Nguyen and the other defendants lacked any aura of commercial legitimacy, and that non-arm’s length dealings could be inferred on this basis. I cannot consider this argument because the deficiencies in the pleadings preclude any consideration of a cause of action for unlawful preferences under s. 95(1) BIA against Nguyen.
154Given my conclusion on this point, I do not need to consider, for the moment, the parties’ arguments on the limitations issue. However, I must address the Trustee’s argument that the sufficiency of the pleadings has already been addressed by my colleague Kershman J. and that, as a result, issue estoppel debars me any further argument or conclusion on this point.
155As noted in my review of the facts, Kershman J. issued a decision on June 16, 2015 authorizing the Trustee to take these actions. A year later, he heard a motion by the defendants seeking to strike the claims for repayment of usurious interest and unlawful commissions, as well as a cross-motion by the Trustee seeking leave to amend some of the statements of claim.
156In Kershman J.’s August 22, 2016 decision on these motions, the only amendment mentioned specifically with respect to the Nguyen claim involved paragraph 19 of the statement of claim in that action. The amendment expanded on the elements of the plaintiff’s unjust enrichment claim. Kershman J. allowed this amendment, finding that sufficient material facts had been pleaded to support such a claim in the original statement of claim.
157Near the end of his reasons on the cross-motion, Kershman J. added that:
In certain cases, specific BIA sections have not been pleaded. The Court finds that the balance of the pleadings are clear and sufficient. The existing pleadings allow the Defendants to know the case they must meet. The Court will allow those pleadings dealing with the BIA to be amended to include the section numbers where they have not been included.
158This passage was presumably the basis for the amendments to paragraph 20 of the statement of claim in the Nguyen action. I say “presumably” because the plaintiff added more than just section numbers. It did so even though the order based on Kershman J.’s decision granted it leave only to amend its statements of claim as set out in its notice of motion and “to include section numbers for the Ontario Securities Act and the Bankruptcy and Insolvency Act where they have not been included.”
159Having reviewed the decision and the order, I cannot conclude that Kershman J. intended to address the addition of a possible s. 95(1)(b) preference claim against Nguyen. He makes no references to such a claim in his discussion of the plaintiff’s cross-motion to amend or in the order based on his decision.
160I accordingly reject the issue estoppel argument raised by the plaintiff.
161Any s. 95(1) preference claim against Nguyen is dismissed
162The analysis I have just conducted in the Nguyen action applies equally to the Leduc and Lalonde actions. No material facts have been pleaded to support a preference claim in either statement of claim. Kershman J. granted leave to amend a paragraph expanding on the unjust enrichment claim (paragraph 19 in both the Leduc pleading and the Lalonde pleading) and to add BIA section numbers. Paragraph 20 of the amended statements of claim in Leduc and Lalonde reproduces exactly the same language as paragraph 20 in the Nguyen action.
163A s. 95(1) preference claim has not been adequately pleaded in the Leduc action or the Lalonde action. These preference claims are therefore dismissed.
(iv) The Small Claims Court actions
164In each of the Small Claims Court actions, the Trustee seeks an order directing the defendant to return or repay “all usurious interest received from Golden Oaks and Lacasse … on the basis of unjust enrichment.” The statements of claim in these actions contain identical allegations save and except for the amount claimed and the identification of the defendants in each case. These allegations are the same allegations found in the statements of claim in the Nguyen, Leduc, and Lalonde actions.
165The statements of claim were all amended in September 2017 to add a paragraph referring to specific BIA sections, including s. 95, and stating that the transactions “set out herein are void as against the Plaintiff as being transfers at undervalue because Golden Oaks received no valuable consideration, and/or as preferences.” No material facts in support of BIA claims are alleged.
166I conclude that no s. 95(1) preference claims have been adequately pleaded in any of the Small Claims Court actions. Any such claims are therefore dismissed.
c. Are the claims time-barred?
167The Scott, Ho, Ho/Quang, and Laframboise/MRL actions were all filed on or prior to July 23, 2015 or the second anniversary of Golden Oaks’ bankruptcy. Given my conclusion that the original statements of claim contained the material elements for the s. 95(1) claims, these claims are not time barred.
d. Have claims under s. 95(1) been proved against any of the defendants?
(i) The preference claims against Vincent Ho
168I will first review the evidence regarding Ho’s involvement with Golden Oaks and Lacasse, then determine whether the Trustee has proved the required elements of the preference claims against him under ss. 95(1)(a) and 95(1)(b).
Ho’s involvement with Golden Oaks and Lacasse
169The evidence regarding Ho’s involvement in Golden Oaks consists of Collins’ affidavit sworn April 27, 2018 and Pierre’s affidavit sworn April 26, 2018. Ho did not produce an affidavit, although he was examined by the Trustee. He did not admit to the Trustee’s allegations about the payments he received from Golden Oaks and was unrepresented at trial.
170I accept the Trustee’s evidence with respect to Ho’s dealings with Golden Oaks. The results of Doyle Salewski’s investigation of Golden Oaks’ interactions with him are detailed and documented as meticulously as the paper trail permits. The portion of Collins’ affidavit dealing with Ho’s involvement with Golden Oaks and Lacasse is 28 pages long. She attaches records documenting, among other things, transfers of money between him, the company, and Lacasse; his employment with Golden Oaks; and his correspondence with Lacasse. Collins also refers to Ho’s testimony at two examinations by Doyle, and to portions of Lacasse’s December 1st, 2015 affidavit in which he mentions his dealings with Ho.
171Collins reviews Ho’s employment with Golden Oaks over two years, from June 2011 to June 2013. For most of this time, Ho’s primary focus was recruiting new investors. Based on the Trustee’s investigation, Ho worked closely with Lacasse, knew that Lacasse needed investor funds to operate, and knew that investor funds were used to pay other investors. I accept her evidence on these points as reliable.
172Pierre’s evidence is also credible. His affidavit supports and supplements Collins’ evidence regarding Ho’s involvement with Golden Oaks. Like Collins, Pierre expresses the view that Ho “had access to Lacasse that few other individuals had. He was representing Golden Oaks in public, selling promissory note investments and was conversant with the Golden Oaks “model”. He was also aware when Golden Oaks began to have financial difficulties.” All of these statements are supported by contemporaneous records.
173Vincent Ho, also known as Randy Ho, started working for Golden Oaks on June 1, 2011. He and his wife May Quang met Lacasse when they sold their house to the company. Ho was initially hired as Vice-President of Acquisitions, earning an annual salary of $55,000, which was increased to $60,000 about a year later. From September 2011 to February 2013, Golden Oaks also made monthly payments of $787.59 to rent a Mercedes Benz for Ho’s use.
174Ho was first hired to look for houses for the Rent2Own program. Towards the end of 2011, he became responsible for finding new investors and persuading existing investors to lend Golden Oaks more money. Ho had no formal education in finance but, while working for the company, also acted as a “mobile mortgage representative” for TD Bank.
175In his December 1st, 2015 affidavit, Lacasse said that Ho had used the title of Vice President, but then ceased to do it at Lacasse’s request. The evidence of Collins and Pierre shows, however, that Lacasse repeatedly described Ho as a vice-president in meetings and in correspondence in 2013. I do not in any event regard the title as critical to the preference claim against him.
176Ho recruited at least fourteen investors in Golden Oaks. He focused primarily on recruiting within the Chinese-Canadian community in Ottawa, but also recruited investors elsewhere. Ho would occasionally travel to Toronto to meet with potential investors and was reimbursed $15,000 by Golden Oaks for expenses for a trip to China.
177At his examination, Ho testified that he would follow up on calls from potential investors who visited the company’s office. He attended networking events and social events to recruit investors. He initially stated that he was always accompanied by Lacasse, but later admitted that he sometimes met with investors on his own. In his affidavit, Pierre produces text messages exchanged between Lacasse and Ho in March and April 2013 that show that Ho was communicating with investors on Golden Oaks’ behalf.
178In his examination, Ho testified that he would persuade investors to loan money to Golden Oaks by telling them they could earn interest of twenty to thirty percent, instead of the two or three percent interest rates offered by banks. When they asked how this was possible, he would describe the Rent2Own concept.
179In her affidavit, Collins states that, based on Doyle Salewski’s review, most of the investments and loans associated with Ho were not documented on the books and records of Golden Oaks. According to Lacasse’s affidavit evidence, Ho:
brought in lenders who preferred to deal in cash only. If Vincent Ho received cash from lenders, he would often keep some cash to pay his lenders or keep some for himself as either salary or commission and gave the remainder of the cash to me. He would often then advise me of this transaction after it had taken place.
180Ho used his own bank account for many transactions on behalf of Golden Oaks. He would deposit funds received from investors in his account and then transfer it to the company. Interest paid to investors was also funneled through his personal account. Ho explained during his examination that Lacasse would write cheques from a Golden Oaks account to Ho, Ho would deposit the cheque into his personal account, and then withdraw cash from this account to pay interest owed to Golden Oaks’ investors. He said that he did this because the investors preferred to receive cash payments. During his examination, Ho admitted that he had personally received hundreds of thousands of dollars from Golden Oaks to repay investors.
181To offset taxes on money transferred to him instead of to the company’s investors, Ho would keep a portion of the transfers for himself. Ho’s evidence at his examination indicates that investors agreed to let him pocket a portion of the interest owed to them in return for making the payments in cash and therefore shielding them from paying tax on the interest paid to them.
182Ho did not cooperate in providing his banking information to the Trustee. He told Doyle Salewski that he had only two personal accounts, then delayed about a year after his examination before providing his consent for his bank’s release of information to the Trustee. The Trustee eventually identified eight bank accounts in his name. Collins stated that she believes he has other accounts as well, “as large sums of money are unaccounted for”.
183The correspondence between Ho and Lacasse shows that Ho was aware of Lacasse’s need for large sums of money to cover shortfalls in Golden Oaks’ books. On January 10, 2013, in response to Lacasse’s message that he needed $100,000, Ho said he could get it in a month. Lacasse said he needed it “now.” Five days later, Lacasse texted Ho that he needed $50,000 that day and asked, “can u get it”.3 He asked Ho for a further $30,000 on January 17, 2013.
184On February 22, 2013, Ho and Lacasse exchanged texts about Ho’s attempts to persuade an investor to advance more funds. Lacasse said that he would contact him. Ho replied: “I know u needed the money Badly but just make sure we can pay him back in 4 month otherwise he will cash out all his money just Careful.” On March 12, 2013, Ho texted Lacasse that people were starting to ask questions about why the company needed money so badly if it was doing so well. Ho told Lacasse that he had provided an explanation and would “try harder for sure.”
185These messages indicate not only that Ho knew Golden Oaks was in financial difficulty but that he was aware that the entire scheme could collapse if certain investors demanded a return of the funds they had already provided.
186During his examination, Ho denied that he discussed the interest rates payable on promissory notes with Lacasse or that he calculated the effective annual interest rates on short term notes. Given that Ho was working for TD Bank as a mortgage specialist, I do not accept that he was unaware of the interest rates promised to investors. As he acknowledged in his examination, the promise of high rates of interest was the focus of his pitch to potential investors.
187Futhermore, on the basis of texts exchanged by Lacasse to Ho on January 24, 2013, I find that Ho set the terms of some promissory notes issued by Golden Oaks. Ho told Lacasse that he really needed to finalize a contract that night because he was meeting a client the next morning. Lacasse replied that he was in Toronto, and that Ho should send him “name amount profit and how long.”
188Ho was also involved in offering investors commissions for any investors that they, in turn, were able to recruit. This kind of “referral on referral” arrangement is a hallmark of a pyramid or Ponzi scheme.
189I find that Ho knew that new funds received from investors were being used to pay amounts owed to other investors. This was explicitly mentioned in a text on May 18, 2013 from Ho to Lacasse. He wrote:
Hey I just got back from an investor that Harry referral [sic] they might be invest some money in the next few day if they does Harry could use that money to pay of [sic] the 47k that was due on May 14 from the Toronto investor… .
190According to Collins, Ho received four payments totaling $23,500 from Golden Oaks between April 10, 2013 and June 7, 2013. He received payments totaling $242,475.95 between July 16, 2012 and March 13, 2013. He and Wang jointly received another $37,041.70 between October 9, 2012 and February 17, 2013. This last amount includes $6000 of interest paid on promissory notes issued to Ho and Wang.
191Collins says that Ho’s spouse, Quang, also received $34,500 in payments. As I have already concluded that the Trustee has not pleaded the elements of a preference claim against her, these payments cannot be recovered in this action. I will also not consider $10,000 allegedly paid by Golden Oaks solely to Wang, as he has not been named as a defendant in the action.
192Finally, one of Golden Oaks’ creditors, Tom Wolff, told the Trustee that he loaned a total of $180,000 to Golden Oaks between April 5 and June 1, 2012, secured by three promissory notes. He said he gave this money, in cash, to Ho. Wolff has never received any interest on the money nor has he received the capital back. Collins could not find any record indicating that this money was transferred to the company. Even if Golden Oaks has a claim against Ho for this money, the payments from Wolff were made prior to July 9, 2012, and therefore cannot be subject to a preference claim under ss. 95(1)(b).
Claim against Ho under s. 95(1)(a)
193To establish a preference claim under s. 95(1)(a), the Trustee must prove that Ho received payments from Golden Oaks in the three months prior to July 9, 2013, that Golden Oaks was insolvent at the time, and that payments were made with a view to giving Ho a preference over other creditors and did in fact do so.
194Based on my earlier finding that Golden Oaks was a Ponzi scheme, it was insolvent when it made payments to Ho and these payments were, by definition, in furtherance of a fraud. Lacasse made payments to Ho, knowing that the company did not have enough funds to pay amounts owed to other investors. In these circumstances I find that the payments were made with a view to giving a preference to Ho and that they did in fact result in a preference to him.
195I accept Collins’ evidence that Ho received four payments totaling $23,500 from Golden Oaks between April 10, 2013 and June 7, 2013.
196I conclude that these transfers are void as against the Trustee and this money must be returned to the company’s Estate.
Claim against Ho under s. 95(1)(b)
197All but one of the requisite elements of a s. 95(1)(b) claim against Ho have clearly been proved. He received payments from Golden Oaks totaling $242,475.95 in the twelve months prior to July 9, 2013. He received another $37,041.70 jointly with Quang during this same period. The company was insolvent when it made these payments, and they gave Ho a preference over other creditors.
198The only question left to resolve is whether Ho was dealing at arm’s length with Golden Oaks when the payments were made. If he was, then the transactions are not void as against the Trustee.
When is a creditor “not dealing at arm’s length” with an insolvent person pursuant to ss. 95(1)(b) of the BIA?
199The BIA does not define “dealing at arm’s length” nor does it set out an exhaustive list of the circumstances when parties are not dealing at arm’s length. It does define “related persons,” but finding that two persons are related does not necessarily mean those same parties are not dealing at arm’s length.
200Under ss. 4(2) and 4(3) BIA, persons are related if they are a family member; that is, they are related through blood, marriage, common-law partnership, or adoption. Broadly speaking, a company is related to a person or another company based on some element of common control, an ownership interest, or a family relationship with person with some control or an ownership interest.
201Section 4(4) states that it is “a question of fact whether persons not related to one another were at a particular time dealing with each other at arm’s length.” Persons who are related are deemed not to be dealing with each other at arm’s length for the purposes of ss. 95(1)(b) and 96(1)(b). This presumption may, however, be rebutted.
202In short, two parties are related persons may still be dealing at arm’s length, or not, depending on the facts of the case. The definition of related persons in the BIA, and the presumption at s. 4(4), provide some guidance as to the kind of relationship that could give rise to non-arm’s length dealing. But this relationship is not the only factor that a court must consider.
203Overall, in determining whether parties’ dealings were at arm’s length, I must assess whether they reflect “ordinary commercial dealing between parties acting in their separate interests”: McLarty v. R., 2008 SCC 26, [2008] 2 S.C.R. 79, at para. 43. Although McLarty is an income tax case, this same test applies in cases pursuant to ss. 95(1)(b) of the BIA: see Piikani, at paras. 22-27, cited by the Ontario Court of Appeal in Montor Business Corporation v. Goldfinger, 2016 ONCA 406, [2016] W.D.F.L. 3770, at para. 68.
204Ordinary commercial dealing means that the parties are acting pursuant to “generally accepted commercial incentives such as bargaining and negotiation in an adversarial format and the maximizing of a party’s economic self-interest”: National Telecommunications v. Stalt, 2018 ONSC 1101, 291 A.C.W.S. (3d) 24, at para. 41. In a non-arm’s length relationship, there is “no incentive for the transferor to maximize the consideration for the property being transferred in negotiations with the transferee”: Juhasz (Trustee of) v. Cordeiro, 2015 ONSC 1781, [2015] O.J. No. 1654, at para. 41. Instead, the economic self-interest of the transferor is, or is likely to be, displaced by other “non-economic considerations.”
205In Crawford & Co. v. Minister of National Revenue, [1999] T.C.J. No. 850, at para. 43, Justice Porter aptly compared an arm’s length transaction to the kind of bargain that might be struck between strangers at a marketplace. To determine whether a transaction was at arm’s length, the court should consider whether the parties showed “the same kind of independence of thought and purpose, the same kind of adverse economic interest and same kind of bona fide negotiating” that you might expect to find in that marketplace. If so, the parties were dealing at arm’s length. If these hallmarks are absent, they were not.
206The defendants argue that the bar to establish a non-arm’s length relationship is very high. They contend that I would have to find that a common mind directed the bargaining of both parties to the transaction, or that the parties acted in concert without separate interests, or that there was de facto control of one party by the other. These were criteria identified as relevant by the Supreme Court in McLarty, and they were noted by the Court of Appeal in Goldfinger.
207I agree with the defendants that this analytical framework is a useful starting point. In assessing whether or not the parties were dealing at arm’s length, however, I must ultimately determine, by reviewing all of the relevant evidence, whether they show an independence of thought and purpose, and the adverse economic interest and bona fide negotiating that characterizes ordinary commercial transactions.
208The Court of Appeal’s decision in Goldfinger illustrates this. In that case, Goldfinger had put up funds for a real estate scheme promoted by a friend, Kimel. When the relationship broke down, Goldfinger threatened to sue to recover his money. He and Kimel negotiated a settlement of Goldfinger’s claim, in return for which Kimel’s companies paid Goldfinger $2.5 million. After the companies went bankrupt, the trustee applied unsuccessfully to have this transaction set aside.
209The Court of Appeal upheld the trial judge’s conclusion that Goldfinder and Kimel were dealing at arm’s length when the payment was made (at paras. 69-70):
There was no common mind directing [the parties]. They were adverse in interest and on the verge of litigation. The evidence also fails to suggest that they were acting in concert. … Goldfinger was never involved in the operations of the companies, had little information about their operations or finances, discovered Kimel had misled him and then threatened to sue. As mentioned, although Goldfinger and Kimel decided on the amount Goldfinger would be paid, the overall structure and details of the settlement were negotiated with the assistance of counsel.
210This passage illustrates the fact-driven nature of the Court’s analysis. Goldfinger’s lack of involvement and lack of knowledge, Kimel’s false representations, the deterioration of their relationship, and their retainer of separate legal counsel, were all relevant facts. The Court of Appeal agreed that the totality of the evidence was consistent with dealings between parties acting in their own self-interest and inconsistent with dealings where parties were acting in concert.
Was Ho a creditor not dealing at arm’s length with Golden Oaks when he received the payments?
211I conclude that Ho was not dealing at arm’s length with Golden Oaks when he received payments totalling $279,517.65, including payments made jointly to Wang, between July 16, 2012 and March 13, 2013.
212Ho was a senior employee of Golden Oaks during this entire period. Acting at Lacasse’s direction, Ho solicited funds from investors on false pretenses. He and the company were engaged in a common venture directed by Lacasse. Ho sometimes acted independently, but always in furtherance of the scheme developed by Lacasse.
213Ho and Golden Oaks were not adverse in interest. They shared the same interest, that is, persuading investors to lend the company more money so that existing investors could be paid. Ho was fully aware that the company was insolvent and that more funding was needed to keep the Ponzi scheme going. He helped Lacasse deceive potential investors and actual investors. He also arranged to allow some investors to evade taxes by hiding cash payments made to them in return for some of the interest they otherwise would have been paid if transfers had been made directly to them by Golden Oaks.
214Some of the payments that Golden Oaks made to Ho were commission payments. Some were payments of interest on promissory notes. Some were amounts that were owed to investors that Ho decided to keep for himself. There is no evidence regarding the justification of some payments. Ho liked to deal in cash and did not keep reliable accounting records. Golden Oaks’ records are likewise in disarray.
215Ho undoubtedly acted in his own self-interest when he kept portions of the funds he received from Golden Oaks. His stated justification for doing so was the personal tax liability he would incur by acquiescing to these investors’ requests for cash payments. Lacasse did not object to this practice. The existence of some measure of self-interest does not mean that Ho’s interests were adverse to Golden Oaks’ interests. Ho, Lacasse, and Golden Oaks did not bargain as strangers “with independence of thought and purpose.”
216This situation contrasts sharply with the situation in Goldfinger. Unlike the recipient of payments in that case, Ho was deeply involved in the operations of Golden Oaks and, through Lacasse, had access to information about its operations and finances. He never had a falling out with Lacasse or engaged in bargaining with him over commissions or other payments.
217Citing Piikani, the defendants argue that a key employee of an insolvent company is not necessarily acting at non-arm’s length with it. The thrust of the Alberta Court of Appeal’s decision is that payments made to a director or key employee are not circumstances that, by themselves, permit a court to infer non-arm’s length dealings. A judge must have evidence about the circumstances of the payments consistent with a finding of non-arm’s length dealings. This respects the conceptual distinction made in the BIA between “related persons” and “dealing not at arm’s length.” A legal or family relationship does not in itself entail a finding of non-arm’s length dealing. It does also not preclude such a finding.
218In Piikani, the only evidence with respect to the payments was from the two individuals who received them. Their evidence was consistent with a finding of arm’s length dealings.
219In the case at bar, there is credible, uncontradicted evidence from Collins and Pierre that Ho received payments from Golden Oaks in the context of a common purpose, directed by Lacasse, to defraud investors. This is completely inconsistent with arm’s length dealings.
220Since I have found that Ho received the payments while not dealing at arm’s length with Golden Oaks, and the other criteria with respect to s. 95(1)(b) are met, I conclude that the payments of $279,517.65 made by Golden Oaks to Ho and to Ho and Wang jointly between July 16, 2012 and March 13, 2013 are void and that this money must be returned to the company’s estate.
(ii) The preference claims against Marc Laframboise and MRL Telecom
221I will once again begin by reviewing the evidence with respect to these defendants, then consider whether preference claims against them are made out.
Laframboise’s involvement with Lacasse and Golden Oaks
222Collins’ April 2018 affidavit sets out Laframboise’s involvement with Lacasse and Golden Oaks. Laframboise swore a responding affidavit on July 3, 2018, to which Collins replied briefly in her August 2018 affidavit. In her evidence, Collins referred to correspondence between Laframboise and Lacasse at various times, promissory notes that Golden Oaks issued to him and MRL, Laframboise’s testimony at his examination by the Trustee, and other relevant records. In his 2018 affidavit, Pierre also summarized Laframboise’s evidence at his examination and referred to his correspondence with Lacasse.
223As already mentioned, Collins, Pierre, and Laframboise were each cross-examined at trial on their affidavits.
224Laframboise is an electronic engineer with a degree in business administration. Until 2010, he worked as a telecommunications consultant and also managed his own rental properties. In 2010, Laframboise was injured in a motor vehicle accident. He has since supported himself solely through his real estate investments.
225Laframboise and Lacasse first met in 2007 through an organization called the Real Estate Investment Network. They travelled together to Toronto, Edmonton, and Atlanta to attend training sessions together. In 2008, they set up a platform called Golden Oak Creative Home Solutions (“GOCHS”). It promoted a “Golden Wealth Building Program” that would allow investors to become rich through strategic investments in real estate. Laframboise registered the domain name “go-chs.com.” On the website at this address, Laframboise was identified as the President of GOCHS and Lacasse as Vice-President of Sales and Property Acquisitions. They promoted themselves as experts at identifying undervalued properties and skilled managers who provided “quality housing for our valued tenants while delivering superior returns for our investors.” The go-chs.com website remained active until the end of 2012.
226In their evidence, Lacasse and Laframboise both stated that they never made any investments together, and that their business relationship ceased in 2010. There is no evidence that GOCHS ever had active operations. Laframboise testified that he explored the possibility of doing business with Lacasse but was unsatisfied with the quality of the information he received about proposed investments.
227The evidence indicates, however, that Laframboise and Lacasse continued to work together after Golden Oaks was founded. Laframboise apparently overcame his reservations about Lacasse’s business and ultimately invested significantly in it.
228On May 31, 2009, Golden Oaks issued an invoice to Laframboise for his property management of three properties between January and May. It issued two other invoices the same day to MRL, for labour and for management services with respect to another property. The total value of the three invoices was about $4,000. On October 31, 2009, Golden Oaks issued a further five invoices totaling about $5,200 to Laframboise and MRL for similar services.
229In the meantime, on October 27, 2009, Laframboise sent Lacasse a list of roughly $7,200 in “Real Estate training and research expenses” incurred in September and October. According to the accompanying email, Lacasse had requested the list. The expenses included flight, hotel, and meal costs for training courses that both Lacasse and Laframboise had attended. Laframboise proposed that Lacasse compare them to his own expenses and let Laframboise know how much he wished to contribute. He noted that there was “no rush” for Lacasse to pay him back; in his words, “it can wait that we have a few deals going.”
230On August 25, 2010, Golden Oaks issued a cheque for $10,000 to Laframboise. According to a note on the company’s banking file, this payment was a “management fee for helping while [Lacasse] not well”.
231In his examination, Laframboise denied that Lacasse ever provided any management services to Laframboise. He stated that the invoices issued by Golden Oaks for these services were just a way for Lacasse to keep track of the money he owed to Laframboise.4 Laframboise likewise never provided management services to Golden Oaks. The 2010 payment of $10,000 was mostly to cover Lacasse’s share of the training expenses that Laframboise had paid, on his behalf, in 2009.
232By Laframboise’s own admission, in 2009 he paid Golden Oaks about $9,200 based on invoices for services that he never provided. In 2010, he received $10,000 back. He denied that this was a management fee, despite the record on Golden Oaks’ books, but admitted that part of the payment was for “management coaching.”
233Laframboise apparently raised no objection to the false invoices apparently issued by Golden Oaks. Although the amounts of the transactions in 2009 and 2010 were not large, this attitude shows a casual lack of concern about a fraudulent invoicing scheme. This affects the weight I can give to his evidence.
234Laframboise’s explanation for the $10,000 also does not add up. If the $10,000 was to reimburse the training expenses in September and October 2009, why was Golden Oaks issuing invoices to Laframboise and MRL four months earlier? Laframboise also provided no explanation for why Lacasse had Golden Oaks issue invoices for $9200 in 2009 when, by Laframboise’s own calculations in his October 2009 email, he had only incurred training expenses of roughly $7200.
235When asked in cross-examination why he accepted $10,000 when this overstated Lacasse’s debt to him, Laframboise was unable to explain the basis for this payment. He said that Lacasse was grateful that Laframboise had assisted him and so paid an amount in addition to the $7000 in training expenses incurred in 2009. Given however Golden Oaks’ invoicing of Laframboise in 2009 of amounts of almost $10,000, this explanation leaves something to be desired.
236On March 9, 2012, Laframboise became the 44th investor in Golden Oaks when he loaned the company $15,000 for one week. This loan was secured by a promissory note that promised him $2000 in interest. He was repaid principal and interest on March 28, 2012. Collins calculates that, when the interest paid is calculated on an annual rate and takes into account compound interest, the effective annual interest rate on the loan was almost 67,000%. I accept this evidence, and Collins’ other interest calculations.
237MRL loaned Golden Oaks a further $50,000 for a three-week term on August 22, 2012. This loan was once again secured by a promissory note. The capital and interest of $13,000 was repaid, not to MRL but to Laframboise, on September 11, 2012. The effective annual rate of interest was roughly 175%, less eye-popping but still almost three times the criminal interest rate.
238Lacasse approached Laframboise about a further $100,000 loan in late August 2012. In emails they exchanged at the time, Laframboise stated that he needed collateral. Lacasse had offered assignments on contracts related to property held by Golden Oaks, but Laframboise told him there was not enough equity in them to cover the proposed loan. He demanded additional security and an assurance that no other creditor would be given an interest in the same property. The deal reached apparently satisfied Laframboise since he loaned an additional $100,000 to Golden Oaks on August 30, 2012. The loan was repayable in two weeks with $4000 interest. The effective annual rate of interest was again 177%.
239On September 12, 2012, Lacasse sent Laframboise an email seeking an extension on the repayment of the $100,000 loan to October 1st. He asked Laframboise to let him know what he wanted for the extension. The next day, Lacasse offered Laframboise an additional $6000 in interest in return for a two-week extension. Laframboise responded, “Sounds reasonable to me.” These new terms brought the effective annual rate of interest on the loan to 196%.
240In his affidavit, Laframboise denied that he negotiated any of the terms of the investments that he and MRL made with Golden Oaks. This is patently false given his demands in his correspondence with Lacasse in August and September 2012.
241On October 6, 2012, Laframboise advanced yet another $50,000 to Golden Oaks. This was a three-week term loan with interest of $3000. It was secured by a promissory note and an assignment of rights in a property owned by the company. This loan once again had an effective annual rate of interest of 175%.
242On October 29, 2012, Laframboise received a transfer of $163,000 from Golden Oaks. This was the return of the $150,000 he had loaned to the company, plus interest of $10,000 on the August loan, and an additional $3000 on the October loan.
243On January 3, 2012, Laframboise sent an email to Lacasse attaching a sample lease agreement. He said that he had been getting many inquiries about rent-to-own units and suggested that “Maybe we can do something together for these people.” He invited Lacasse to contact him if he was still searching for short-term funding. Three days later, Laframboise sent Lacasse another message attaching seven inquiries to his website, “gorentfree.ca.” He told Lacasse that these might be “good leads” and asked Lacasse to let him know if any of them qualified for a property so that they might “work together on it.”
244On cross-examination, Laframboise denied that he had any interest in doing any deals with Lacasse. He said that he referred the inquiries to his website to Lacasse because he did not have time to deal with rent-to-own arrangements. This explanation is at odds with the contents of his January 3, 2012 email. I do not accept it.
245On January 13, 2013, MRL loaned $200,000 to Golden Oaks. This was a loan with a six-week term, for which MRL was supposed to receive $24,000 on February 15, 2013. It was secured by assignments of all contracts related to four properties owned by Golden Oaks. The effective annual rate of interest was 167%.
246On March 15, 2013, having received no repayment on the loan or response to his queries about it, Laframboise sent an email to Lacasse saying he was getting “quite concerned” and asking for at least $100,000 immediately. On March 21, Laframboise threatened to sue Lacasse. Lacasse responded that “I don’t have anything right now but will … soon and it’s all yours.”
247On April 29, 2013, Lacasse advised Laframboise that he would get about $130,000 of his outstanding loan from the sale of one of Golden Oaks’ properties. On May 13, 2013, following this sale, MRL received a payment of $77,451.11. In her affidavit, Collins characterized this as an “off-book transaction,” presumably because it went through Golden Oaks’ solicitors instead of through the company directly.
248On May 1st, 2013, Laframboise send Lacasse an email stating that the payment would take care of his current obligations and cover the $68,000 in interest which had accumulated over 17 weeks. This left a balance of $190,549 with interest continuing to run at 2% per week.
249In the bankruptcy proceeding, MRL has filed a claim for $200,000, the amount of the loan it made to Golden Oaks January 2013.
Claim against Laframboise and MRL under s. 95(1)(a)
250MRL Telecom admits that it received a payment of $77,451.11 from Golden Oaks on May 1st, 2013. If I find that the Trustee properly pleaded a s. 95(1)(a) preference claim against it, it concedes that it is liable to return this payment. I have so found and therefore conclude that MRL is liable to repay $77,451.11 to Golden Oaks’ estate.
251The Trustee asks that I find Laframboise jointly and severally liable to return this payment. Laframboise argues that he should not be found personally liable to return a payment made to MRL for two reasons.
252First, Laframboise contends that section 95 simply does not permit a trustee to proceed against anyone other than the creditor who received the payment. Section 96 explicitly allows a trustee to seek repayment of a preference not only by the creditor, but by any other person who is privy to the transfer. A privy is defined as “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”: s. 96(3) BIA. Section 95 does not refer to privies. It simply states that a preferential payment in favour of a creditor during the three months prior to an initial bankruptcy event is void.
253An individual illegitimately using a corporation to evade personal liability—the basis for piercing the corporate veil—might also qualify as a privy under section 96. I am not convinced, however, that Parliament’s failure to give the trustee an express right to seek repayment from privies in section 95 confers personal immunity to corporate owners for acts of a corporation they control. This would limit this right of recovery for no apparent reason, in a way that is inconsistent with general principles of commercial law.
254Courts pierce the corporate veil to prevent a controlling individual from misusing a corporation as a shield against personal liability. I find nothing in the language of the BIA, whether in section 95 or elsewhere, that prohibits a trustee from asking a court to pierce the corporate veil. The underlying rationale for doing so is consistent with the rationale for voiding preferential payments generally. In either case, the court is assessing whether a transaction has been carried out for the purpose of defeating claims by good faith creditors.
255Second, Laframboise argues that the Trustee has failed to plead or establish the existence of conduct sufficient to pierce the corporate veil.
256The Ontario Court of Appeal has stated that “the courts will disregard the separate legal personality of a corporate entity where it is completely dominated and controlled and being used as a shield for fraudulent or improper conduct”: Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co. (1996), 1996 CanLII 7979 (ON SC), 28 O.R. 423, aff’d [1997] O.J. No. 3754 (C.A.). The decision to pierce the corporate veil will, however, depend on context: 642947 Ontario Ltd. v. Fleisher, 2001 CanLII 8623 (ON CA), 56 O.R. (3d) 417 (C.A.). It may be appropriate to find the owners of a company personally liable not only when the corporation was created for an illegal, fraudulent, or improper purpose, but if “those in control expressly direct a wrongful thing to be done”: Fleisher, at para. 68. This more flexible approach follows Wilson J.’s observation that the law on piercing the corporate veil “follows no consistent principle … [t]he best that can be said is that the ‘separate legal entities’ principle is not enforced when it would yield a result ‘too flagrantly opposed to justice, convenience, or the interests of the Revenue’”: Kosmopoulos v. Constitution Insurance Co., 1987 CanLII 75 (SCC), [1987] 1 S.C.R. 2, at p. 10.
257The defendants argue that a claim that an officer or director of a company is personally liable for corporate acts attracts a more stringent review at the pleadings stage. In Politeknik Metal san ve Tic A.S. v. AAE Holdings Ltd., 2015 BCCA 318, 78 B.C.L.R. (5th) 228, at para. 36, for example, the B.C. Court of Appeal held that a pleading that the corporate veil should be pierced must contain both an allegation that the company was the individual defendant’s alter ego and an allegation of conduct akin to fraud.
258The Court of Appeal’s critical finding in Politeknik is that a pleading must contain sufficient allegations of material facts that, if proved, would support the legal conclusions that the plaintiff wants the court to reach. This is the same requirement imposed on every statement of claim under r. 26.04(2) in Ontario. The Trustee must therefore have alleged facts in the Laframboise/MRL pleadings that, if proved, would meet the test for piercing the corporate veil under Ontario law.
259In its amended statement of claim in the Laframboise/MRL action, the Trustee makes the following allegations with respect to the relationship between Laframboise, MRL, and Golden Oaks:
Laframboise is the sole director and controlling mind of MRL.
Through MRL, Laframboise made at least one short term investment in Golden Oaks, in January 2013. A promissory note was issued to MRL. It stated that the loan was secured an assignment in one of Golden Oaks’ residential properties in Ottawa on Deauville Crescent.
On May 1, 2013, Golden Oaks made a payment of $77,451.11 to MRL from the sale proceeds of Deauville Crescent. Only one other short-term investor in Golden Oaks was paid out in this way, indicating a “close business relationship”.
260This is in addition to allegations about Laframboise’s relationship with and dealings with Golden Oaks and Lacasse.
261In my view, the amended statement of claim contains sufficient material facts which, if proved, could allow me to pierce the corporate veil and find Laframboise personally liable for the amounts that MRL must pay to the Estate. The Trustee alleges that MRL received a preferential payment in the context of a Ponzi scheme and that this payment was at the direction of Laframboise, its sole director, who was intimately involved in the scheme. This amounts to an allegation that Laframboise controlled MRL and “expressly direct[ed] a wrongful thing to be done.” The Trustee’s failure to use expressions like “fraud” and “alter ego” in its pleading is not a fatal defect, nor is its failure to specify how it would prove that Laframboise controlled MRL absolutely.
262Although this means that the s. 95(1)(a) claim against Laframboise is adequately pled, I conclude that the evidence falls short of proving Laframboise’s complete control of MRL or that he directed MRL to commit a wrongful act to shield himself from personal liability.
263Neither Collins nor Doyle’s affidavits supply any information about MRL beyond the fact that Laframboise is its sole director, that it was invoiced for management services by Golden Oaks in 2009, and that it signed a promissory note with the company in relation to a $200,000 loan in January 2013. The evidence does not establish why Laframboise involved MRL in his dealings with Golden Oaks. The Trustee asks me to infer that Laframboise must have known that Golden Oaks was a Ponzi scheme. Laframboise in fact indicated, through his email exchanges with Lacasse in late August 2012, that he had strong reservations about further investment and that he required meaningful collateral before loaning Golden Oaks any more money. But even if I accepted that Laframboise strongly suspected or even knew about true nature of Golden Oaks’ business, this alone would not be an appropriate basis for me to pierce the corporate veil. Without knowing anything about MRL’s purpose and activities, I cannot conclude that Laframboise funneled the 2013 loan to and payment from Golden Oaks for an improper purpose.
264I accordingly conclude that the s. 95(1)(a) claim succeeds against MRL but not against Laframboise personally.
Claims against Laframboise and MRL under s. 95(1)(b)
265Golden Oaks made payments to Laframboise during the period captured by s. 95(1)(b). I conclude however that Laframboise was dealing at arm’s length with the company at the time.
266In my view, both Laframboise and Lacasse have downplayed the true extent of their dealings after 2010. Their joint venture, GOCHS, anticipated many features of the Golden Oaks scheme, such as the extravagant promises of wealth through investment in real estate, and the allure of “getting what you want by helping others get what they want.” The GOCHS website remained live until at least the end of 2011. After Golden Oaks was founded, Laframboise actively continued to seek opportunities to work with Lacasse. They had an arrangement in 2009 and 2010 with respect to shared expenses. Laframboise referred potential business to Lacasse. He invested significant amounts of his own money into Golden Oaks in 2012.
267Given these findings, I reject Laframboise’s evidence that he had no ongoing relationship with Lacasse when he and MRL received payments in 2012 and 2013. I have already explained why I find his explanation of payments made and received in 2009 and 2010 implausible and incomplete. His denial of any negotiation with Lacasse about the terms of promissory loans was squarely contradicted by contemporaneous emails. On the whole, I did not find Laframboise to be a particularly credible witness and put little weight on his evidence.
268The existence of a relationship does not, however, automatically mean that parties were not dealing at arm’s length. As already noted in my analysis of the claim against Vincent Ho, the Trustee must prove that Golden Oaks and Laframboise’s dealings did not involve generally accepted commercial incentives such as bargaining and negotiation in an adversarial format and the maximizing of a party’s economic self-interest.
269In the emails exchanged with Lacasse in late August 2012, Laframboise was clearly bargaining exclusively in his own self-interest. He did not trust Lacasse’s assurances but did his own investigation of the property being offered as collateral. He insisted on getting information showing the company’s remaining equity in the property and asked for assignments of contracts in other properties as well, and an undertaking from Lacasse that he would not offer rights in the same property to anyone else. A few months later, when Golden Oaks failed to repay any part of the January 2013 loan, Laframboise threatened to sue.
270In October 2009 and again in January 2013, Laframboise sent Lacasse emails suggesting that they might work together on projects in future. There was however no evidence that they were doing so in 2012. There is also no evidence that Laframboise was involved in Golden Oaks in 2012 as anything other than a creditor or investor.
271In light of the evidence of Laframboise’s self-interested bargaining, and the lack of any evidence of a common project, the claim under s. 95(1)(b) against Laframboise is not made out.
(iii) The preference claims against Lorne Scott
272I will once again begin by reviewing the evidence with respect to Scott’s involvement with Lacasse and Golden Oaks, then consider whether preference claims against him have been proved.
Scott’s involvement with Lacasse and Golden Oaks
273Scott is a real estate agent. He has an undergraduate degree in law from Carleton University and a law clerk’s diploma from Algonquin College. Scott swore two affidavits, the first on February 6, 2018, and a second on July 23, 2018. He was also cross-examined at length during trial.
274Based on his affidavits, Scott first met Lacasse in February 2012, at which time he signed a referral agreement with him. According to Scott’s affidavits, he had nothing further to do with Lacasse until August 2012. He then introduced Lacasse to a few potential investors, but had no real insight into the investment opportunities associated with Golden Oaks. Scott stated in his affidavits that he “never made representations about the rent-to-own program or any other aspect of Golden Oak’s business since I was not involved.” He said that his only interest was as a real estate agent on a few transactions for the company. He eventually received some consulting fees from Golden Oaks and invited guests to hockey games in Lacasse’s suite, but had no insider knowledge of the company. He personally invested $105,000 in the company, and was shocked to learn, after the bankruptcy, that Lacasse’s activities had been fraudulent.
275The Trustee’s evidence regarding Scott paints a very different picture. Collins and Pierre produced emails and texts sent by Scott in 2012 and 2013 showing that he promoted Golden Oaks heavily and was directly involved in obtaining a significant amount of investment for the company. Although he did not receive a regular salary, Scott was paid thousands of dollars in commissions from Golden Oaks. He acknowledged that, as of December 2012, Golden Oaks was a Ponzi scheme. Despite this, he continued to recruit investors, including work colleagues, on its behalf.
276Scott was not in any way a credible witness. His account of his involvement with Lacasse and Golden Oaks in his affidavits was manifestly untrue. It was contradicted by many contemporaneous documents, in particular his own emails and texts with Lacasse. Scott’s denial of any suspicion of fraudulent activities was also contradicted directly by a message he sent to Kristine Bourque in December 2012. In cross-examination, Scott admitted that he lied to Lacasse and others at various times. In swearing his affidavits, I also find that he lied to the court.
277Accordingly, whenever there is a conflict in the evidence of Scott and the evidence of Collins, Pierre or Bourque, I prefer their evidence over his.
Scott’s initial involvement with Golden Oaks and his signature of the Referral Agreement
278Scott became involved in Golden Oaks in late 2011 when Steeves, a fellow real estate agent, set up a meeting with Lacasse. At the meeting, Lacasse told Scott about the Rent2Own program and said he would pay a commission for any investor that Scott introduced to Golden Oaks.
279On February 13, 2012, Scott signed a letter of intent (the “Referral Agreement”) with Golden Oaks. In this Referral Agreement, Scott agreed to promote the Rent2Own program to potential investors, although the actual negotiation of any investment agreements was the responsibility of Golden Oaks. For every referral of a potential investor who subsequently invested in Golden Oaks, Scott would receive a fee of 8% of the total investment. He would also receive an 8% fee for any subsequent investment by the investor, and a fee based on 7% of any investment value “contributed from a referral of a referral, and a referral of a referral, from a referral, etc., and so on.”
280Based on this evidence alone, Scott’s very first involvement with Golden Oaks was not as a real estate agent. Well before he was ever asked to represent the company in any real estate deal, he agreed to promote it as an investment opportunity. He did so notwithstanding his denial, in his affidavits, of any knowledge or interest in this area.
Scott’s recruitment of investors in 2012
281In his affidavits, Scott denied that he referred anyone to Golden Oaks for months following his first meeting with Lacasse. In fact, he denied even seeing or hearing from Lacasse for several months after signing the Referral Agreement. Scott stated that his first referral was in September 2012, when he introduced a family friend, Dr. Ihor Birka, to Lacasse.
282The evidence shows, on the contrary, that Scott began promoting Golden Oaks and referring investors to Lacasse right after he signed the Referral Agreement. The evidence also shows that Scott had already become familiar with the range of investment options offered by the company, and that he was willing to provide advice on how best to convince potential investors to the table.
283On February 18, 2012, Scott sent Lacasse an email entitled “BIRKA APPEARS READY”. I am setting out this email in its entirety since it is illustrative of Scott’s knowledge and involvement:
Hi JC,
Sorry to bother you again today!
FYI...... I just received a call from Dr. Birka. He appears very interested, and potentially ready to invest.
I told him about the variety of investments you seem to have available, and specifically mentioned the one we talked about, which was on your desk in your office, when I was there on Monday, with Chris! (the shorter-term ones)
The one I am speaking about, that seemed to peak [sic] his interest the most, was the secured $50,000 investment, which provided a return of $17,500, over 16 months.
Dr. Birka has told me that he reviewed his "investor emails" from you and did not find that offering. He has informed me that should it be secured, and he is on title, or put on the 2nd mortgage kind of thing, he would be ready to sign on the dotted line.
Between us, I believe if you follow through on your offerings, paid monthly, etc, etc, and it goes as smoothly as you suggest, this could be the beginning of a very prosperous relationship between the 2 of you!
Dr. Birka is a close family friend, as you know, but when it comes to business, he can be a hard ass. When he sees something he likes, and it makes sense, he will go full boat. But he also expects his dance partner, to be just as keen and aggressive.
Good luck and see you on Wednesday!
Lorne [Emphasis added.]
284On February 25, 2012, Scott sent another email to Lacasse. He wrote that he had reviewed all of Lacasses’ emails to Birka and was confident that, assuming there were no “hiccups,” Lacasse had “hit the jackpot.” Scott added that he had already forwarded material on Golden Oaks to another potential investor, Dr. Materna, who would listen to advice from both Scott and Birka. Scott concluded that “THIS IS GOING TO BE GREAT FOR EVERYONE FOR A LONG TIME TO COME!”
285When shown this email in cross-examination, Scott said that he did not actually know Materna. He denied that he had lied to Lacasse but admitted that he was “not telling the truth” when he told him, in a subsequent email, that he had spoken directly with Materna. This is one of many examples of Scott’s cavalier attitude towards the truth in his communications.
286The following day, February 26, 2012, Scott sent a further email to Lacasse about Birka’s potential investment in Golden Oaks. He thanked Lacasse for copying him on his correspondence, as this assisted Scott in his direct discussions with Birka. Scott said that he had just got off the phone with him and expected that, by the weekend, “this should all be finalized.”
287Scott and Lacasse exchanged further emails on March 3 and 4, 2012 with respect to Birka’s request for further information about Golden Oaks’ company information and property portfolio, apparently on the advice of his banking advisor. Scott remained confident that Birka would invest. He expressed regret that he had not met Lacasse earlier and stated that he looked forward to introducing him to as many people who might “be interested in your product, and/or that can help in some way.”
288Based on an August 24, 2012 email from Birka to Lacasse, copied to Scott, Birka had by then already invested significant funds in Golden Oaks. On September 11, 2012, Scott was emailing Lacasse to share complaints expressed by Birka that “he has not gotten whatever 2nd mortgages were promised with his latest investments, and furthermore, that the additional 50K short term, which has now expired, and has been reinvested long term, has nothing attached either! Additionally, he told me he does not have any paperwork whatsoever related to these either. (ie promissory notes, etc).”
289The tone and content of these emails is completely inconsistent with Scott’s account of his involvement with Golden Oaks and the investments by Birka. He knew about the different types of investment that Birka might make, and their specific terms, and had talked to Lacasse and Steeves about them. He gave Lacasse insight into what might attract Birka and how best to persuade him to advance money to the company. Scott’s next contact with Lacasse after signing the Referral Agreement was not six months later, as stated in his affidavits. He was in contact with him repeatedly, by email and in person, as of February 2012.
290Furthermore, Scott’s detailed description, in his sworn affidavits, of a dinner at a local restaurant with Birka and Lacasse in September 2012 appears to be a wholesale invention. Scott stated that he introduced Birka to Lacasse and Steeves at this time, as Birka was in Ottawa to visit his daughter. He said that Lacasse gave a presentation on Golden Oaks during the dinner, and Birka made his first investment shortly thereafter.
291In light of the gross inconsistencies between Scott’s affidavit evidence and credible evidence at trial, I give no weight to any of Scott’s testimony, unless it is corroborated by other evidence that I do accept.
292Beyond Birka, Scott promoted investment in Golden Oaks extensively from February 2012 onward.
293For instance, in a February 26, 2012 email, Scott told Lacasse that he had promoted investment in Golden Oaks to two real estate clients. He said that he had told one of them, Ravi Verma, that “a secured, guaranteed return of 15-20%, or more, paid monthly, with advanced post-dated cheques, is a pretty damn attractive investment” and that he had “touched on the issue” of using some of Verma’s down payment for a house to invest in the company. Scott gave Lacasse Verma’s email address but suggested that a better approach would be a lunch or meeting at Golden Oaks’ offices.
294Three days later, Scott sent an email to Verma himself. He told him he had passed on his email address to Lacasse and encouraged him to think about using some of the down payment on his house to invest in the Rent2Own program. He told Verma that he himself had “invested plenty” in Golden Oaks, “as well as a slew of friends, family, and clients.” This last statement was, at that point, a fabrication. But the email again shows Scott’s willingness to sell the scheme to his contacts.
295The email also shows, again, that Scott’s affidavit evidence is simply not credible. In his July 3, 2018 affidavit, Scott denied that he attempted to solicit investment in Golden Oaks in the email to Verma. He says he was following up on Verma’s request for his opinion on real estate investment and opportunities, and “answering my friend’s questions about how Golden Oaks worked and whether I thought it was worthwhile.” This evidence is squarely contradicted in second sentence of the email, which reads:
I am not too sure if you and/or Jeremy, dabble in to the world of investing yet, but if so, this one is worth a listen.
296Scott was not responding to a friend’s request for advice about investing; he was introducing the topic, for the purpose of trying to convince him to make a loan to Golden Oaks. Later in the email, Scott acknowledged that he had no idea if Verma was even “remotely interested” in making any investment, as he knew he had “other priorities right now.” He nonetheless repeatedly urged Verma to consider using his savings to invest in Rent2Own because it offered a “much better than the average investment” and “good, secured, guaranteed” returns.
297Scott often promoted Golden Oaks at concerts and hockey games, which he attended with clients and contacts. On April 15, 2012, he wrote to Lacasse proposing they attend a concert with Harold Marcotte and his spouse, their daughter, her boyfriend, and Scott’s parents. On cross-examination, Scott denied that he was introducing the Marcottes as investors. He maintained that Marcotte had a house that he might sell to Golden Oaks. This is not credible. In the email, Scott emphasized that Marcotte “loved” Lacasse’s model and product but needed reassurance. In fact, the Marcottes later signed a promissory note with Golden Oaks. At trial, Scott admitted that he attended at least eight other concerts between May 2012 and April 2013 in connection with Golden Oak and at the company’s expense.
298In her supplementary affidavit signed September 14, 2018, Collins identified the investors whom Scott recruited directly from February 2012 onward. Many of them were Scott’s friends or colleagues. She produced other emails from Scott promoting investment in Golden Oaks. They are consistent with the tone of the Birka and Verma emails. These investors in turn recruited other investors.
299At trial, Scott denied that he had introduced everyone in his business network to Lacasse. He maintained that he introduced only a few “key people” to him but acknowledged that Lacasse’s network may have expanded “drastically” as his efforts. The sharp increase in the number of and value of promissory notes issued by Golden Oaks corresponds to Scott’s signing of the Referral Agreement.
300Scott also denied that anyone who invested in the company did so because of him. I do not believe this. There are many examples of how Scott actively and enthusiastically promoted the Rent2Own scheme as an investment opportunity. His attempt to deny any responsibility for his role in it is frankly outrageous.
Scott’s involvement in Golden Oaks’ operations
301Scott testified that he never represented himself as a Golden Oaks employee or agent, or functioned as an employee or agent. The evidence shows otherwise. Although he did not receive a salary, by mid to late 2012 he was involved in the company’s operations and regularly represented it or acted on its behalf.
302Emails in June 2012 show that an email address at the company was set up for Scott, and business cards were ordered indicating that he was a “Real Estate Consultant” for Rent2Own. At trial, Scott denied that he was ever provided with business cards. In a September 6, 2012 email, however, Scott acknowledged receiving the cards, writing that “They look great!” I conclude that Scott received Rent2Own business cards and do not believe that he refrained from using them. In October 2012, Scott asked Lacasse to approve similar business cards for Harold Marcotte, a Golden Oaks investor whom he had recruited.
303Emails from Golden Oaks’ receptionist about staff meetings from late 2012 forward were sent to Scott. At trial, Scott admitted that he “quite possibly” was supposed to or did attend staff meetings but said that he was not required to do so. His attendance at meetings was in fact recorded by Lacasse. His name appeared on Golden Oaks’ internal staff directory.
304Scott admitted on cross-examination that he was involved in getting radio advertising for Golden Oaks in Fall 2012. In an email in September 2012, he negotiated the placement of the company’s advertising on buses and benches in the downtown core. He was also involved in purely administrative tasks, such as sorting out the logistics of an “RRSP meeting” with existing and potential investors at a local golf club.
305In December 2012, Scott recruited Bourque, another Ottawa real estate agent, to join Royal Lepage to work on real estate deals for Golden Oaks. This relationship proved to be short-lived, as Bourque expressed concerns about the company. I will review Bourque’s evidence in further depth shortly. For now, I will simply say that Scott’s hiring of Bourque is another example of his work on Golden Oaks’ behalf.
306Finally, from February 2012 forward, Scott actively represented himself as a member of the Golden Oaks team, and Lacasse as a partner or close affiliate. For example, on January 12, 2013, Scott expressed concern to Lacasse that he was not copied on emails sent to potential investors. He wrote that three people had texted to ask him if he was “still part of R2O, as they did not see my name! I assured them I was.” He added that some people “look to me to try and get “inside scoops”.” In his November 2018 affidavit, Lacasse himself characterized Scott as his business partner. I would not go this far, based on the evidence before me. The evidence does however indicate that other investors viewed Scott as an insider because of his knowledge of the company and his access to Lacasse. It also shows that he was anxious to maintain this impression.
307When asked about some of these activities on cross-examination, Scott said that he was simply acting as an “excellent” real estate agent and that he exaggerated his role in his communications. I do not accept this evidence. Although he continued to work at Royal Lepage, I find that he was also actively involved in Golden Oaks’ operations.
308Scott’s efforts for Golden Oaks are reflected in the monetary benefits he received, or was entitled to receive, for his involvement. In the year after signing the Referral Agreement, Collins calculates that Scott received $84,700 in referral payments from Golden Oaks. He also claimed, at the time of the receivership, that he was owed another $45,000 in unpaid commission. Taking all these figures together, Scott was entitled to approximately $130,000 from Golden Oaks for his promotional activities on its behalf between February 2012 and March 2013.
309Scott received other consideration for his involvement with Golden Oaks. As a real estate agent, he regularly acted for Golden Oaks in his real estate transactions. He also attended concerts and hockey games on the company’s behalf and at its expense. These were occasions where Scott and Lacasse recruited new investors and convinced existing investors to sign further promissory agreements. He was reimbursed for other expenses on the company’s behalf, which the Trustee is not claiming in the action against him.
Scott’s knowledge of the Golden Oaks’ scheme
310Scott testified at trial that the promissory notes had “nothing to do with him.” Although a sample promissory note was attached to the investor packages circulated by Lacasse to Scott’s contacts, he denied that he paid any attention to the terms. He was interested only in the company’s real estate activities.
311I do not believe this. Scott’s denial of any knowledge of the terms of the promissory notes is contradicted by the emails he sent to Birka, Verma, and other potential investors, and by his admissions at trial and his discussions with Bourque in December 2012.
312Scott’s submissions are also inconsistent with Lacasse’s evidence about his role. In his December 1st, 2015 affidavit, Lacasse attached his notes from a December 1st, 2012 staff meeting at Golden Oaks, which Scott attended. The notes reflect that, at this meeting, Lacasse told Scott that “You only have one job finding investors that’s it nothing else.” I find, on this and the whole of the evidence, that recruiting investors was by far the greatest focus of Scott’s efforts for Golden Oaks.
313Scott testified at trial that he understood that Golden Oaks was a “multi-level marketing plan”. In his view, this was different than a pyramid scheme because he was not required to put any money up to become involved. Even if I accepted Scott’s proposed conceptual distinction between multi-level marketing plan and a pyramid scheme, I find that he did provide consideration for the promise of referral fees or commissions through his introductions to potential investors, and through his promotion of Golden Oaks.
314I furthermore find that Scott was keenly aware of the implications of the “referral on referral” agreement he had signed with Golden Oaks.
315In a February 24, 2012 email, Scott floated the idea of arranging for Lacasse to give a presentation about Golden Oaks to between 200 and 400 real estate agents at Royal Lepage, who in turn could reach out to potential investors. In return for arranging this, Scott wanted to be paid for referring every agent in the Royal Lepage network. He wrote: “I am not a greedy man and know that each agent would need something attractive for themselves, to promote your company.” He suggested that the agents could each be offered 7% referral of their investors’ contribution, while he would get 5% of each investors’ contribution.
316On May 12, 2012, in an email to Lacasse, however, Scott acknowledged that the “referral on referral” arrangement required an ongoing stream of new investment. In the email, he summarized a discussion he had had with a mortgage broker about the benefits and risks of the commission structure:
[W]e need a good understanding, that works, and allows us all to continue to go forward. Eventually, paying you, and then paying you, and oh, needing to pay you, because this person came in with funds, with [sic] bleed the well dry. And without a good running well, there is no water for anyone.
317Scott realized that he could make a great deal of money, but “referral on referral” arrangement had the inherent weakness of every pyramid scheme – without ever-increasing amounts of investment, the structure collapses on itself.
318In early December 2012, Scott and Bourque, the real estate agent he was hiring to assist with Golden Oaks’ transactions, had dinner with Eric Landriault, a lawyer whom Scott had recruited as an investor. Landriault told them that, if Golden Oaks was a Ponzi or a fraud, anyone who was recruiting new investors could be liable. Bourque stated in her September 3, 2013 affidavit that the word “Ponzi” was mentioned several times during their conversation.
319I 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.]
320When asked about this text at trial, Scott said that he had some concerns after his discussion with Bourque and Landriault. He said that he subsequently confronted Lacasse and asked him whether Golden Oaks’ operations were legal. Lacasse pointed out that wife and children were working for the company and said he would never harm his family. He also reassured Scott that banks were still lending him money based on the company’s financial performance, and that Golden Oaks had a solid real estate portfolio.
321Scott’s evidence on this point is undermined by a text exchange he had with Lacasse on December 30, 2012. After he pressed Lacasse for payment of commissions owed to him, Lacasse responded by asking him if he could wait a week, adding that he had been “wiped out” by a decision by a single investor to cash a cheque early. Lacasse reassured Scott that he had receivables from tenants and equity in some of the company’s properties, but admitted he had no cash flow unless he received further money from investors. This is again a textbook indication of a Ponzi scheme, in that the only “profits” are new investments and they are used to pay existing investors.
322Bourque also stated, in her affidavit, that she and Scott continued to discuss their concerns about Golden Oaks in the early months of 2013. She stated that the term “Ponzi scheme” came up repeatedly.
323During her cross-examination at trial, Bourque admitted that she began to seek a role in real estate deals with Golden Oaks in September or October 2012, rather than early January 2013, as she stated in her affidavit. There is however no evidence that Bourque’s involvement with Golden Oaks went beyond acting as a real estate agent. She testified that, whatever her hesitations about the commission structure offered by the company, she was not hired to promote it as an investment vehicle. She viewed its real estate dealings as legitimate. She also trusted Scott.
324Despite Bourque’s attempts to minimize the extent of her own efforts to get work from Golden Oaks in her affidavit, I accept her account of her discussion with Scott and Landriault in early December 2012. It is entirely consistent with Scott’s message to her on December 7. I also accept that she and Scott had further discussions about the possibility that the company was running a Ponzi scheme. In his testimony, Scott implied that she might have a motive to lie, because he fired her in mid-January 2013. Defence counsel also pointed to an email she sent to Lacasse in February 2013 complaining that she had not been used as an agent on a sale even though she had done all of the work in preparation for it. In my view, neither her termination nor her desire to get a commission on a real estate deal make her evidence inherently unreliable.
Scott’s continued solicitation of investors in 2013
325Despite the discussions he had with Bourque and Landriault in December 2012, Scott continued to refer potential investors to Golden Oaks in 2013. He introduced his manager, Brian Sukkau, to Lacasse and, on December 31st, 2012, Sukkau lent the company $50,000 for a three-month term, repayable with $15,000 in interest. On cross-examination, Scott admitted that he did not warn Sukkau about his concerns about Golden Oaks. On January 3, 2013, Scott texted Lacasse saying that three more investors had each agreed to advance $50,000. At trial, he said this was likely lying to Lacasse when he said this. In a later email that day, however, Scott told Lacasse that he had paid the referring investor a portion of the commission that Lacasse had paid to him.
326On January 14, 2013, Scott emailed Lacasse saying: “I’m looking today to secure some cash for you. I am again meeting Paul, Ernie, and Joe, to discuss opportunities.” At trial, Scott said that this message was just a way to let Lacasse know that he was thinking about him, so he would not be tempted to let another real estate agent represent Golden Oaks in Scott’s absence. This denial is belied by a further message that Scott sent to Lacasse two days later, saying that he would show “Ernie” materials to demonstrate “our aggressiveness and progress this month … [h]e’s due next week btw.” On cross-examination, Scott denied that this referred to a promissory note that was coming due. The evidence shows, however, that the defendants Ernest Toste and Joe Messa had a $100,000 loan that came due on January 26, 2013, on which they were paid $20,000 interest. I reject Scott’s denial that his text referred to this loan and find that this is further evidence of Scott’s ongoing role in the Ponzi scheme.
327On January 23, 2013, Scott texted Lacasse to let him know that he was having lunch with another prospective investor, Bill Goodwin, and asked him to send information about the “latest offerings.” Scott admitted at trial that this referred to promissory notes. Later that day, Scott confirmed that Goodwin had made a $50,000 investment.
328Collins’ supplementary affidavit of September 2018 provides many other examples of messages from Scott to Lacasse in early 2013 in which he mentioned the active solicitation of further investment in Golden Oaks from existing and new investors. I accept this evidence. It shows that Scott was heavily involved in the promotion of the company and that he acted as its representative throughout this period.
Scott’s investments in Golden Oaks
329According to Scott, he and Golden Oaks entered into a three-year loan agreement on December 1st, 2012. Scott loaned the company $15,000 in cash and $40,000 in unpaid referral payments. In return, he received 36 post-dated cheques for $1,375 each, beginning December 1st, 2012. This amounts to annual interest at 30%. In her affidavit, Collins noted that there was no banking record showing the deposit of $15,000 on this date, and no actual promissory note has ever been found. There were however notes on a Golden Oaks ledger indicating that Scott provided this money in cash.
330Further support for the existence of the loan is found in emails in May and July 2012, where Scott refers to waiving the payment of referral fees in order to invest in the company. Scott also cashed four sequentially-numbered cheques from Golden Oaks for $1,375 apiece between December 1st, 2012 and March 1st, 2013, each with the subject line “Return on investment.” On February 26, 2013, he was issued a further post-dated cheque dated November 1st, 2015 in the amount of $55,000 with the subject line “capital repayment.”
331Finally, on March 31st, Scott texted Lacasse saying “Cashing my 1375$ monthly interest chq, on the 1st of each month, re: long term 55K investment I have with you, should go thru tomorrow?”. Lacasse replied: “Don’t cash I’ll give u the 1375, I want to make sure u don’t have trouble.” Golden Oaks’ banking records reflect a withdrawal of $1,375 by Lacasse on April 2, the same day that he texted Scott that he had cash for him and Scott replied that he would come by shortly to pick it up.
332On the strength of this evidence, I find that Scott and Golden Oaks entered a loan agreement, as described by Scott, on December 1st, 2012. Although Scott was paid a total of $6,873 in interest, the capital amount of the loan was not due and had not been repaid to him when the company went into receivership.
333Scott claims that he made a second, interest-free loan of $35,000 to Lacasse on December 1st, 2012. There is again no record of any loan agreement. During his examination, Scott said that Lacasse asked for this money for two weeks to pay for an upcoming Christmas party. He received $25,000 back on January 3, 2013, as part of a larger cheque for $46,500 from Golden Oaks for referral fees. Scott received the remaining $10,000 on March 14, 2013 by way of a certified cheque.
334I find the account of this loan curious. Based on the evidence at trial, it was out of character for Scott to have agreed to loan a significant amount of money to Lacasse for no consideration. There is also no indication of how Scott would have had access to this amount of cash, having just advanced another $15,000 as part of his promissory note agreement with Golden Oaks. In light of the evidence of repayment, however, I accept that Scott made this second loan.
335Finally, on February 6, 2013, Scott made a further short-term loan of $50,000 to Golden Oaks. According to the promissory note signed by the parties (which was misdated January 5, 2013), the loan was repayable in one month with $4,000 interest. It was later secured by registered charges on properties granted in Scott’s favour by Lacasse on April 19, 2013. Neither the capital nor the interest had been repaid, however, when Golden Oaks went into receivership.
336Scott argues that his own investments in Golden Oaks show that he did not have meaningful insight into the company’s financial situation. He, like other investors, believed Lacasse’s claims that the company had significant equity through its real estate holdings and receivables.
337In my view, Scott’s loans are not inconsistent with his knowledge, or at least very strong suspicion, that Golden Oaks was a pyramid or Ponzi scheme. His first two loans were made prior to his discussions with Bourque. In early or mid-December, Scott confronted Lacasse and was reassured. On January 3, 2013, he received a cheque for $46,500, which included the repayment of most of the $35,000 short-term loan he had made to the company on December 1st. He had also begun receiving monthly interest payments on his long-term loan. It was at this point that Scott agreed to provide another loan to Golden Oaks, on a short-term basis, in return for a substantial profit.5
338Whatever his misgivings about the referral structure, I conclude that, on February 6, 2013, Scott believed that he would get his money back. His belief was based on the recent repayment by the company of past loans, the ongoing interest payments on his long-term loan, and his close relationship with Lacasse. His confidence was not entirely misplaced, since he was given a registered, second mortgage on some Golden Oaks properties on April 19, 2013 to secure repayment of this loan. This put him in a much better position than the vast majority of the company’s creditors.
339There is also some evidence that, in early 2013, Scott believed that a mortgage company had extended a significant new line of credit to Golden Oaks. The second agreed statement of facts submitted by the parties at trial sets out the evidence of Arman Patel, an investor in Golden Oaks who was introduced to Lacasse by Scott in October 2012. According to Patel, Scott told him in early 2013 that Magenta Mortgage Corporation had granted Golden Oaks a $5 million blanket mortgage and showed him a letter from Magenta to that effect. Asked about this evidence at trial, Scott said he did not recall this discussion with Patel and that he never received financial information from Lacasse. Nevertheless, he did not deny the accuracy of Patel’s recollection.
Scott’s involvement with Golden Oaks from February 2013 to its receivership
340Beginning in February 2013, Scott once again became concerned about the company’s financial situation. Throughout the months of March and April, Scott’s text messages to Lacasse and others trace Golden Oaks’ collapse as Lacasse ran out of cash to pay the company’s short-term and long-term debts.
341On February 19, Scott sent an email to Patrick Brunette, a Golden Oaks employee (and Lacasse’s nephew), regarding the referral payments owed to him. He noted that he had a tax bill due and that, as a result, would forego the opportunity to earn a high rate of interest in favour of getting the money already owed to him for referral fees. On March 4, Scott sent a further email pressing for payment of the commissions owed to him.
342On March 5, 2013, Scott attempted to cash a cheque he had received from Golden Oaks for the repayment of his $50,000 loan a month earlier. This cheque bounced. Lacasse sent Scott a text apologizing and reassuring him that he would be paid shortly with a bonus. Scott did not attempt to cash a second cheque he had received, dated the same day, for the payment of $4000 interest on the loan.
343In reaction to the NSF cheque, Scott told Lacasse that the bounced cheque resulted in all of his accounts being frozen. At trial, he admitted that this was a lie. He also lied to Lacasse in April when he told him that he had been called by the Ottawa Real Estate Board in response to complaints about Lacasse by other agents and brokers. During his testimony, Scott showed no remorse with respect to his many falsehoods to Lacasse and others. He said that such misrepresentations are understood to be common practice amongst real estate agents. I do not accept this explanation.
344On March 13, 2013, Scott sent an email to another investor who had been receiving commissions, advising him that going forward all referral fees would go through him, and the fees would be calculated at a lower rate than they had been previously. He explained that “to be quite blunt, the amount of referral fee's [sic] were starting to add up that Golden Oaks were paying out and were taking away potential monies that Golden Oaks was able to use to make a potential profit.”
345Throughout the month of March, Scott sent Lacasse text messages warning him that various investors were unhappy that their cheques were bouncing. He was getting multiple calls every day about this. These messages once again show that investors in the company acted on the assumption that Scott represented it, and that he had access to Lacasse. These messages also show that Scott was regularly working from or using Golden Oaks’ offices.
346On March 8, 2013, Scott messaged Lacasse telling him that: “I have not told 1 person, “R2O is going down!” Not 1!” On March 22, 2013, Scott messaged Lacasse that Sukkau wanted to get his money out of Golden Oaks but reassured him that “I have not said a word to him about anything!”
347At trial, Scott said that, by this time, he was very worried because he, his friends, and his father had all invested in Golden Oaks. Lacasse had again told him that everything was okay, and that Golden Oaks had $3 million in debts but $5 million in equity. At around this time, according to Lacasse, he and Scott had a “ruckus” and he asked him not to come to the Golden Oaks offices unless he had a specific business reason to do so. He also testified, however, that Scott was “often” at the company’s offices and interacted regularly with its staff.
348On March 26, 2013, Scott asked Lacasse for a list of Golden Oaks properties eligible for second mortgages. Lacasse responded by identifying four properties with a remaining total equity of about $200,000. Since this was not enough to satisfy the repayments then due to Lacasse, Birka, and Moe Abdulkader, a third investor, Lacasse suggested that their agreements would have to be renegotiated. Lacasse also told Scott to stop “causing problems.”
349In response, on March 28, 2013, Scott send a long email to Lacasse, complaining about the calls he was getting every day from many people, including investors and ordinary creditors. Lacasse had agreed to grant a second mortgage on the four properties to Scott, Birka, and Abdulkader in return for extended repayment terms. But Lacasse had reacted angrily to a further plan proposed by Birka whereby Golden Oaks would offer a similar deal to other creditors. Scott stressed that he was still loyal to Lacasse but needed help managing the situation.
350Lacasse testified that he was unsure about whether he would keep Scott on the team following this message. Despite this, on April 19, 2013, Lacasse registered second mortgages in some of the company’s property to Scott, Birk, and Abdulkader. Scott received 50% of the mortgage interest, while the other two investors obtained 25% apiece.
351Scott testified that he was puzzled at the time as to Lacasse was so upset that Birka had let other investors know he had been granted a second mortgage interest. Scott’s evidence on this point is completely disingenuous and implausible. Scott knew very well that cheques from Golden Oaks had been bouncing since early March. Lacasse had not even been able to identify enough equity in the company’s properties to cover its short-term debt to Scott, Birka, and Abdulkader.
352On cross-examination, Scott testified that he himself was “totally against” the Birka plan, as he believed that Golden Oaks was just in a temporary cash crunch. In my opinion, Scott was in favour of whatever furthered his interests. He certainly did not object to being granted collateral for the money owed to him; in fact, he pressured Lacasse to provide him with a second mortgage interest. This did not suggest confidence in Golden Oaks’ liquidity. Scott’s reassurance to Lacasse that he did not say a word to anyone shows that he was concealing information from investors, including colleagues and family members.
The s. 95(1)(b) preference claims against Scott
353The Trustee seeks repayment to the company’s estate of amounts paid to Scott between September 24, 2012 and April 2, 2013, on the basis that they were unlawful preferences under s. 95(1)(b) BIA. The total amount of these payments is $72,575.
354The payments are admitted. The only question is, once again, whether the defendant and Golden Oaks were dealing at arm’s length when they were made.
355Having reviewed the evidence on the parties’ relationship, I conclude that they were not dealing at arm’s length.
356Scott argued that he had no control over the company and no meaningful insight into its finances. He also relied on an exchange of text messages between Scott and Lacasse on February 9, 2013. Lacasse texted him that “I need to ultimately do whats [sic] best for my business,” to which Scott replied, “you are right.”
357As noted earlier, de facto control of one party by another is only one of the circumstances that grounds a finding of a non-arm’s length relationship. Parties are also not at arm’s length where they act in concert without separate interests, or where there is a common mind directing the bargaining of both parties to a transaction. Overall, I must consider all of the evidence with respect to the parties’ dealings to determine whether they demonstrated independence of thought and purpose, and the adverse economic interest and good faith negotiating that characterizes ordinary commercial transactions. Returning to the marketplace analogy, did Scott and Golden Oaks behave like two strangers reaching a bargain in their individual self-interest, or did they conduct themselves as parties to a common enterprise?
358The evidence shows that, from February 2012, Scott was heavily engaged in the promotion of investment in Golden Oaks. He believed that Lacasse had “hit the jackpot” and that the Golden Oaks scheme was going to be “great for everyone for a long time to come.” His efforts to attract investors were unrelenting, even after he realized that the company was in all likelihood a Ponzi scheme.
359Scott devoted himself to the recruitment of investors because he recognized, almost from the outset, that continued funding was necessary to the scheme’s survival. Every new investment was also in his own interest, since he received a commission from every successful referral of an investor, any rolled-over investment, or any “referral of a referral”. But Scott’s long-term profits were contingent on the success of the Golden Oaks scheme as a whole. To use his words, if one day investors stopped coming, “the whole house of cards would collapse.”
360I accept that Scott did not have detailed insight into Golden Oaks’ finances. He seems to have believed, at least until sometime in February or March 2013, that the company had significantly more equity in its properties than it actually did. However, he was under no illusions about the company’s liquidity from late 2012 onwards. At the beginning of December 2012, Lacasse asked Scott for a $35,000 loan to cover expenses over the holiday season. In his message to Bourque a few days later, Scott acknowledged that additional investors were Golden Oaks’ only source of revenue.
361Despite this, Scott continued to promote Golden Oaks to existing and potential investors. When they complained to him about bounced cheques, he hid the extent of the company’s problems. He continued to reassure Lacasse, right up to the end, that he was loyal to the company’s interests. This loyalty was reflected in his conduct.
362Read in its entirety, the text exchange on February 9, 2013 does not support Scott’s contention that he and Lacasse were each acting independently and primarily in their own self-interest. The exchange began with Scott reproaching Lacasse for using another real estate agent for a company transaction on which Scott and Bourque had both worked. He pointed out that he was out of town networking with potential investors on Golden Oaks’ behalf. In Scott’s own words, “I am always representing Golden Oaks”. In response, Lacasse wrote that he needed to “ultimately do whats [sic] best for my business but also what’s appropriate at the moment … I though [sic] u believed in me.” Scott replied: “Sir I do believe in you!!! And you are right you have to do what is right for your business. I am sorry if I hurt you with my comments. It was not my intention. But the good news sir---I got you more money. That shows you I believe in you!”
363Far from showing that Scott and Golden Oaks were each working in their own self-interest, this exchange shows that they were acting in concert, under Lacasse’s direction, to ensure the continued operation of the Ponzi scheme. Scott continued to solicit further investment for the company. The exchange does not suggest that Scott was in a position to demand or negotiate anything, or that he was trying to do so. He was taking instructions from Lacasse. To the extent that he showed any independence of thought, he was rebuked by Lacasse. In response, Scott apologized.
364Scott’s pressuring of Lacasse in March 2013 to provide him with a second mortgage interest in Golden Oaks’ properties is not inconsistent with the conclusion that they were working on a common enterprise. Like Ho, Scott was not adverse in interest to Golden Oaks. Unlike Laframboise, he never threatened to sue Lacasse. Although he told him he was meeting with the Ottawa Real Estate Board, this was untrue. Lacasse’s granting of a registered security interest to Scott furthermore occurred after Golden Oaks’ last payment to Scott on April 2, 2013.
365I accordingly conclude that Scott was not dealing at arm’s length from Golden Oaks from at least August 2012.
366I accept the Trustee’s evidence regarding the payments from Golden Oaks and received by Scott between September 24, 2012 and April 2, 2013. Golden Oaks was insolvent during this entire period.
367Since I have found that Scott received the payments while not dealing at arm’s length with Golden Oaks when the payments were made, and the other criteria with respect to s. 95(1)(b) are met, I conclude that Scott must repay $72,575 to the company’s estate.
(2) Transfers at undervalue
a. The statutory scheme under s. 96 of the BIA
368Section 96(1) of the BIA allows a trustee to apply to set aside transfers at undervalue. Transfer at undervalue are those made in the five years prior to the bankruptcy where a debtor received consideration for property or services below their fair market value. The person who received the transfer, or any other person privy to the transfer, may be ordered to pay to the estate the difference between the fair market value of the goods or services and the amount that the debtor actually received. The criteria for voiding a transfer at undervalue depend on the timing of the transfer, whether the person who received it was dealing at arm’s length with the debtor, whether the debtor was insolvent at the time of the transfer, and whether, in making the transfer, the debtor intended to defraud, defeat, or delay a creditor.
b. Have sufficient material facts been pled as required under rule 25.06(2)?
369The transfer at undervalue claims in the actions suffer from fatal pleading deficiencies.
370There are no material facts pled in support of these claims in any of the statements of claim in the Small Claims Court actions, or in the Nguyen, Leduc, and Lalonde actions in the Superior Court. The claims under s. 96 of the BIA against these defendants must therefore be dismissed.
371This leaves for consideration the s. 96 claims in the Ho, Ho/Quang, Scott, and Laframboise/MRL actions.
372The statements of claim in these actions contain more detailed allegations against these defendants, and they assert the Trustee’s reliance on s. 96 of the BIA. None of them, however, contains any allegations of fact that, if proved, would show that the defendants received transfers in excess of the fair market value of the goods or services they provided in exchange. The plaintiff alleges that each of these defendants (aside from Quang) had an ongoing relationship with Golden Oaks and Lacasse and provided services to them. However, there is no allegation that the services provided by these defendants had a lower value than the payments they received from Golden Oaks. The plaintiff simply asserts, in the penultimate paragraph of each statement of claim, that the transactions described in the claim are “void as against the Plaintiff as being transfers at undervalue because Golden Oaks received no valuable consideration.”
373A reasonable person reading these statements of claim would not think that the Trustee was making a s. 96 claim. In fact, none of the defendants even refer to a cause of action under s. 96 in their statements of defence, which otherwise comprehensively address claims made.
374I conclude that no s. 96 claim has been properly pleaded against any defendant, and that any such claims must therefore be dismissed.
c. Are the claims time-barred?
375Given my conclusion on the pleadings issue, I do not need to address this question.
d. Have the claims been proved against any of the defendants?
376Likewise, given my conclusion on the pleadings issue, I do not need to address this question.
C. Unjust enrichment claims
377In each of the actions, the Trustee seeks, on the basis of unjust enrichment, repayment of money that Golden Oaks paid to the defendants as usurious interest or commission payments.
(1) In what capacity is the Trustee making the claims?
378In bringing the unjust enrichment claims, the Trustee contends that he is not stepping into the shoes of Golden Oaks, but rather bringing an action in relation to the company’s property for the benefit of its creditors, as permitted under s. 30(1)(d) of the BIA. The Trustee argues that this provision implies a capacity to assert equitable causes of action that the bankrupt could not have asserted. It further contends that Golden Oaks could not have sued the defendants for unjust enrichment.
379The defendants disagree. They say that the unjust enrichment claims are claims that Golden Oaks could have brought at any point prior to the receivership and bankruptcy. As the successor in interest to these causes of action, the Trustee has no greater or lesser rights than the bankrupt corporation.
380The source of the Trustee’s authority to act has consequences for the defendants’ limitation defence and the analysis of enrichment and deprivation.
381In his August 22, 2016 reasons dealing with the defendants’ motion to strike, Kershman J. accepted the Trustee’s position on this point. The Court of Appeal held, however that he did not make a binding determination on the limitations issue: Salewski v. Lalonde, 2017 ONCA 515, at para. 31. The Court’s reasons also imply that he could not, in the circumstances, make a binding determination on the Trustee’s capacity to bring the unjust enrichment claims.
382Since Kershman J.’s decision does not give rise to issue estoppel concerning the capacity in which the Trustee brings these claims, I must make my own determination on this issue.
383In Ridel v. Goldberg, 2019 ONCA 636, a decision issued after Kershman J. rendered his judgement and, in fact, after the actions at bar were argued, the Court of Appeal described the claims that a trustee in bankruptcy may make:
On bankruptcy, the property of the bankrupt vests in the trustee: BIA, s. 71. The bankrupt’s property includes any cause of action the bankrupt may have: BIA, s. 2… . The trustee, with the permission of the inspectors, is empowered to bring, institute or defend any action relating to the property of the bankrupt: BIA, s. 30(1)(d). The trustee in bankruptcy may also have a range of other claims that can be asserted in its name, such as claims to set aside transfers at undervalue: BIA, s. 96. Thus, a trustee is entitled to assert both claims that previously belonged to the bankrupt and claims that arise by virtue of the bankruptcy. [Citations omitted.]
384This passage does not directly address the question of whether a trustee could advance equitable and common law claims, which the bankrupt corporation itself did not have, on behalf of the creditors of the bankrupt.
385The Trustee cites the B.C. Supreme Court’s decision in Boale, as well as this court’s decision in Mancini (Trustee of) v. Falconi (1994), 1994 CanLII 7237 (ON SC), 17 O.R. (3d) 512 as authority for the proposition that a trustee has the authority, under s. 30 of the BIA, to bring an action to set aside a transaction that the bankrupt could not set aside. It also argues that Kershman J.’s reasoning is persuasive, even if his decision on this point was not final.
386A trustee in bankruptcy has a multifaceted role that transcends its role as a mere successor in interest to the bankrupt: Lefebvre, Re, 2004 SCC 63, [2004] 3 S.C.R. 326, at paras. 34-38. The BIA is remedial legislation that should be interpreted in a way that best fulfills its purposes. Its purpose includes making the assets of a bankrupt available for distribution to creditors through the trustee’s exercise of legal, statutory, and equitable remedies. I agree that it would be contrary to these purposes “to foreclose a trustee in bankruptcy from bringing an action for the benefit of the estate simply because the action involves the setting aside of transactions which the bankrupt could not set aside or involves a claim for damages based upon the conspiracy of the bankrupt and others to defeat the creditors of the bankrupt estate”: Mancini, at para. 23, rev’d in part [1995] O.J. No. 2207.
387Accordingly, I see no reason why, in appropriate circumstances, a trustee could not make claims at common law or in equity not specifically conferred to it by the BIA or provincial statutes if in fact the bankrupt could not have made those claims. I do not read the passage in Ridel just cited as foreclosing this possibility.
388The question is whether, in bringing these unjust enrichment claims, the Trustee is doing so in a capacity other than its capacity as successor in interest to Golden Oaks.
389In Boale, the B.C. Supreme Court considered whether a trustee seeking to set aside transactions by a bankrupt corporation was acting for the benefit of its creditors. Weatherill J. agreed that a trustee may pursue actions against third parties based on equitable causes of action. He concluded, however, that the claim for unjust enrichment was being brought on behalf of the bankrupt corporation, because it was the entity that had suffered a deprivation.
390There are many examples in Canadian law of a party who, having made payments pursuant to a contract, later seeks to recover them on the basis that the agreement, or at least the provision by virtue of which the payments were made, is unenforceable. Transport North American Express Inc. v. New Solutions Financial Corp., 2004 SCC 7, [2004] 1 S.C.R. 249 and Pacific National Investments v. Victoria, 2004 SCC 75, [2004] 3 S.C.R. 575, two Supreme Court of Canada decisions highly relevant to the Trustee’s claims here, are examples of this.
391The Trustee in this case is seeking to recover payments made by Golden Oaks because it says that they were made to the deprivation of the company and the enrichment of the defendants. This is a cause of action that belonged to the company. In advancing the unjust enrichment claims, the Trustee is therefore seeking to exercise a cause of action that Golden Oaks had prior to the receivership and bankruptcy.
392The Trustee argues that Golden Oaks could not have sued the defendants for unjust enrichment because it was controlled by Lacasse, who was using it for a Ponzi scheme. This confuses the issue of corporate control with the issue of a corporation’s legal rights.
393Lacasse’s control of the company and his fraudulent conduct have implications for the discoverability of the unjust enrichment claims by Golden Oaks. But the issue here is not whether Golden Oaks would have acted on its rights to sue for unjust enrichment, but whether it could have done so from a legal standpoint.
394Prior to the receivership, Golden Oaks would not have sued the defendants to recover the payments it had made to the defendants for unjust enrichment. This was not because the company lacked the capacity to do so, but because it was solely controlled by Lacasse. If, however, Lacasse had sold his shares in Golden Oaks to another person prior to the receivership, or appointed other directors, the new owners or directors could have caused the company to sue the defendants just as the Trustee now has. The company could have advanced the same allegations that are now being advanced: the payments enriched the defendants at the corporation’s expense, and there was no juristic reason for this because the payments were based on illegal contracts issued at Lacasse’s direction.
395In Den Haag Capital, LLC v. Correia, 2010 ONSC 5339, [2010] O.J. No. 4316, another unjust enrichment action arising from the ashes of a collapsed Ponzi scheme, the court dealt briefly with the defendant’s argument that a corporation could not advance equitable claims because it had committed the illegal acts giving rise to the claims. Control of the plaintiff company had changed hands after the fraudulent conduct of its former manager was discovered. Pepall J. noted that the defence of ex turpi causa non oritur action, otherwise known as the “clean hands” defence, was limited to instances where it was necessary to limit the plaintiff’s recovery to maintain the integrity of the legal system: para. 50. Applying this principle, the judge found that the defence was unavailable because the plaintiff was “clearly representing the interests of the net loser investors.” Although the Trustee’s claim in this case is broader than the claims by the plaintiff in Den Haag, the decision illustrates how a company whose directing mind has used it to operate a Ponzi scheme may, following a change of control, make the same types of equitable claims that are being made here.
396I therefore conclude that the Trustee is asserting the unjust enrichment claims against the defendants as a successor in interest to Golden Oaks.
(2) Are the claims time-barred?
397The defendants argue that, if Golden Oaks had the ability to make the unjust enrichment claims before it went into receivership, then the claims are time-barred.
398The claims are subject to a two-year limitation period: see Limitations Act, 2002, S.O. 2002, c. 24, Sched. B, s. 4. Golden Oaks made the payments in question between June 6, 2011 and April 3, 2013.6 It is presumed to have known about the matters giving rise to the claims when it made the payments, unless proved otherwise, pursuant to s. 5(2). As a successor in interest, the Trustee is imputed with this same knowledge under s. 12. Despite this, the Trustee did not begin any of the actions until June 2015.
399For the reasons that follow, however, I find that the claims are not time-barred. Although Golden Oaks had the legal capacity to sue the defendants, it would not have been legally appropriate for it to do so prior to receivership because it was entirely controlled by Lacasse. Once the company went into bankruptcy, it continued to be inappropriate for the Trustee to bring the actions in the name of the company’s estate until the investigation of the circumstances of the bankruptcy was complete and the court authorized the issuance of the actions.
a. When did the person with the claims know about them?
400Section 5(1)(a) the Limitations Act 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.
401The first question I must therefore consider is when the person with the claim knew of the facts giving rise to the unjust enrichment claims.
402Section 12(1) of the Limitations Act provides that:
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:
The day the predecessor first knew or ought to have known of those matters.
The day the person claiming first knew or ought to have known of them.
403When 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).
404In Ridel, the Court considered this issue in the context of a claim by minority shareholders in a bankrupt company called “e3m”. The claim was against Goldberg, the company’s director, for alleged wrongdoing prior to the bankruptcy. The shareholders began proceedings after being assigned the right to do so by the trustee in bankruptcy pursuant to s. 38 of the BIA.
405At para. 55 of Ridel, the Court held that, further to s. 12(1), the claim was discoverable on the date that e3m knew about the matters giving rise to it:
[T]he predecessor, for the purpose of the s. 12 analysis, is not the trustee in bankruptcy of e3m, but e3m itself. This is not a claim that arose on the bankruptcy, but a claim that vested in the trustee on e3m’s bankruptcy, and then was assigned to the appellants. It is a claim that, subject to discoverability under s. 5(1)(a), e3m could have made itself against its director, Goldberg, prior to the bankruptcy. Accordingly, the two-year limitation period began to run against e3m in respect of the claim against Goldberg on the earlier of when e3m first knew or ought reasonably to have known of the matters set out in s. 5(1)(a)… .
406Similarly, in the present case, the Trustee is bringing the unjust enrichment claims as the successor in interest to Golden Oaks. It is therefore deemed to have had knowledge of them when the company did—or reasonably could have—discovered them.
407The question I must address, therefore, is when Golden Oaks discovered the claims or reasonably ought to have discovered them.
408The 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 CanLII 32 (SCC), [1985] 1 S.C.R. 662.
409In 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.
410The 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.
411The 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 CanLII 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.
412In 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.
413As 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.
b. Was a legal proceeding appropriate prior to the bankruptcy?
414Determining that the plaintiff had knowledge of an injury, claim, and loss, and that it was caused by the defendants, is not the end of the analysis: Gillham v. Lake of Bays (Township), 2018 ONCA 667, 27 C.P.C. (8th) 167, at para. 33. Further to s. 5(1)(a)(iv) of the Limitations Act, I must also consider whether Golden Oaks knew, or reasonably ought to have known that, “having regard to the nature of the injury, loss or damage, a proceeding would be an appropriate means to seek to remedy it.” Appropriate means “legally appropriate”; s. 5(1)(a)(iv) does not allow a claimant to wait to gain a tactical advantage: Federation Insurance Co. of Canada v. Markel Insurance Co. of Canada, 2012 ONCA 218, 109 O.R. (3d) 652, at para. 34.
415The Court of Appeal has repeatedly recognized that the addition of the appropriate means test to the discoverability analysis has brought about a significant change in the law of limitations. Where a judge fails to consider whether a plaintiff knew or ought to have known that litigation was appropriate, this constitutes an error of law.
416The determination of whether legal proceedings were appropriate is fact-specific. Under s. 5(1)(b) of the Limitations Act, in determining when a claim ought to have been discovered, the court must consider what a reasonable person “with the abilities and the circumstances of the person with the claim ought to have known.” The Court of Appeal has emphasized that the claimant’s specific abilities and circumstances must be taken into account in determining when a proceeding became “appropriate means” for the purpose of s. 5(1)(a)(iv): 407 ETR Concession Company Limited v. Day, 2016 ONCA 709, 133 O.R. (3d) 762, leave to appeal refused, [2016] S.C.CA. No. 509, at para. 44.
417The Court of Appeal stressed this point again in Ridel. It noted that, to date, there have been two circumstances where s. 5(1)(a)(iv) had been held to delay discoverability. The first is where a defendant, typically one with some level of expertise, has undertaken to repair a problem before an action is brought. The second is a statutory or other alternative non-judicial process has been or must be invoked for determination of a dispute. Appropriateness must however be assessed on the facts of each case, and case law applying s. 5(1)(a)(iv) is “of limited assistance”: Ridel at para. 71, citing Brown v. Baum, 2016 ONCA 325, 397 D.L.R. (4th) 161, at para. 21.
418This brings me back to the facts of Ridel, which provide a useful contrast to the circumstances in this case.
419In Ridel, as noted, minority shareholders of e3m sued the company’s former director and majority shareholder Goldberg for his alleged misdoings prior to the company’s bankruptcy. The shareholders argued that their claim was not discoverable before the bankruptcy because it would not have been appropriate for them to take any proceedings in the company’s name so long as it was controlled by Goldberg. At para. 69, the Court of Appeal held that it did not need to consider this argument because, prior to the bankruptcy, Goldberg did not in fact have absolute control of the company nor were the shareholders unaware of what he was doing. The shareholders had the knowledge and practical ability to take proceedings on the company’s behalf, but instead decided to take no action pending the resolution of other ongoing litigation:
[T]he shareholders could have assumed control of e3m’s board of directors and caused e3m to make a claim against Goldberg, or they could have commenced a derivative action on e3m’s behalf. That the shareholders opted instead to pursue the appeal was an informed choice that … did not halt the limitations clock.
420This reasoning implies that, in a case where a claimant lacked any ability to take action to enforce a company’s claim against a director prior to the bankruptcy, and therefore could not opt to pursue alternative means of redress, this could arguably “halt the limitations clock.”
421In my view, a proceeding was not a legally appropriate means for Golden Oaks so long as it was controlled solely by Lacasse. Lacasse was the only corporate officer and director. There is no evidence that anyone had the means to challenge his control of the company. There was no legal or practical route, as there was in Ridel, for the initiation of legal proceedings in the name of Golden Oaks by anyone other than Lacasse. Lacasse had no motivation to begin lawsuits on the company’s behalf. On the contrary, bringing the actions would end the arrangement from which he was profiting personally and would expose the fraudulent Ponzi scheme that he had orchestrated.
422Given its “abilities and circumstances” while controlled solely by Lacasse, legal proceedings by Golden Oaks, against individuals to whom Lacasse had caused the company to pay usurious interest and commission amounts, were not just inappropriate but impossible. The claims were therefore not discoverable by Golden Oaks until the receivership on July 9, 2013, at the earliest.
423This finding does not create an exception to or undermine the corporate identification doctrine. The doctrine’s purpose is to determine when the knowledge of a person directing a company to commit unlawful acts should be imputed to the corporation where that knowledge alone is sufficient to establish the company’s shared liability for the acts. The doctrine in this case means that Golden Oaks is imputed with the knowledge that it had made payments of usurious interest and potentially unlawful commissions to the defendants to its detriment and to the defendants’ enrichment.
424But the introduction of the “appropriate means” criterion in the discoverability analysis means that knowledge of potential claims is not always enough, by itself, to begin the running of the limitations period. As the Court of Appeal has repeatedly recognized, the new criterion “can have the effect … of postponing the start date of the two-year limitation period beyond the date when a plaintiff knows it has incurred a loss because of the defendant’s actions”: 407 ETR, at para. 33; Presidential MSH Corporation v. Marr Foster & Co. LLP, 2017 ONCA 325, 135 O.R. (3d) 321, at para. 17; Gillham, at para. 35. Although Golden Oaks may have known, through Lacasse, about its dealings with the defendants, it did not and could not have known that it would be legally appropriate for it to sue them to recover its losses so long as it was directed by Lacasse.
425The defendants argue that rejection of their defence would carve out a novel limitations regime in the event of bankruptcy absent specific provisions to this effect in the Limitations Act. This, they argue, would be contrary to the legislator’s intent.
426I agree that receivership and bankruptcy do not automatically reset the limitations clock. The Court of Appeals’ decision in Ridel demonstrates as much. The delay in the running of limitations in the case at bar, however, arises not from the vesting of rights in the Trustee, but from Lacasse’s sole control of the company up to that point. When the company became insolvent, he ceased to have unfettered control over it. This is what triggered the possibility that the company could make the unjust enrichment claims and therefore rendered such claims discoverable under s. 5(1)(a)(iv). Had Lacasse sold the company prior to the receivership, or appointed other directors, the unjust enrichment claims might also have become discoverable at that point.
427The defendants have also argued that the Trustee cannot have more rights than had Golden Oaks. This is correct insofar as the Trustee’s claims are pursuant to rights vested in the Trustee under s. 71 of the [BIA](https://www.canlii