The Supreme Court of Canada rules on “knowing assistance” in the context of fraudulent schemes

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Publication May 2019

In its short oral decision, the Supreme Court of Canada has confirmed that actual knowledge is required to establish “knowing assistance” in the context of complex civil fraud. A less stringent standard, adopted by the majority of the Ontario Court of Appeal, was rejected. 

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

The Bernstein group invested approximately $111 million with the Waltons, respecting 31 projects. For each project, the Berstein group entered into an equal shareholding agreement with the Waltons in a specific-project corporation (the “Schedule B Companies.” The DeJong group invested approximately $4 million with the Waltons. It also entered into equal shareholder agreements with the Waltons in specific-project corporations (the “Schedule C Companies”). By the end of the fraudulent scheme, the bulk of the funds, including Bernstein group funds, ended up making their way into the Schedule C Companies in which the DeJong group were 50% shareholders.

Following an Ontario Court of Appeal decision (reported at 2018 ONCA 60 and discussed in our previous update), the unsuccessful DeJong group appealed to the Supreme Court of Canada against the finding in favour of the Bernstein group. In a two-paragraph decision, the Supreme Court overturned the majority judgment of the Ontario Court of Appeal, substituting in its place the dissenting reasons of Justice van Rensburg. 

Lower court decisions

The Bernstein group and the DeJong group were defrauded investors, all of whom had been victims of the Waltons’ fraud. In 2016, the Ontario Superior Court of Justice found the Waltons had committed civil fraud and made fraudulent misrepresentations that caused the Bernstein group to invest funds, which the Waltons improperly distributed from the Schedule B Companies into a variety of other companies, including the Schedule C Companies, held 50% by the DeJong group. As such, the Bernstein group claimed against the DeJong group respecting its 50% interest in the Schedule C Companies, alleging “knowing receipt” and “knowing assistance” in the Waltons’ breach of fiduciary duty. 

At first instance, the Bernstein group’s application was dismissed. On appeal, a majority of the Ontario Court of Appeal concluded that, although knowing receipt had not been made out, knowing assistance in breach of a fiduciary duty was established on the evidence. Central to this finding was the majority’s application of Canadian Dredge and Dock Company Ltd. v R and the criteria set out in that decision for attributing the fraudulent actions of a directing mind to a corporation. Holding that the criteria could be applied less stringently in civil contexts (as opposed to criminal), the majority of the Ontario Court of Appeal held that the criteria had been satisfied in this case. 

In dissent, Justice van Rensburg held that the Bernstein group claims had not been made out. In reaching this conclusion, Justice van Rensburg made three essential findings: 

  • The “net transfer analysis,” upon which the Bernstein group’s argument was based, was insufficient to demonstrate which funds, if any, had been transferred to any of the Schedule C Companies; 
  • Since the Bernstein group could not demonstrate which of its funds ended up in which, if any, of the Schedule C Companies, knowing receipt could not be made out; and 
  • The limited transfer of funds between the Schedule C Companies and the “clearing house” company, Rose & Thistle Group Ltd., was insufficient to constitute knowing assistance.

Of further importance to Justice van Rensburg’s conclusion was the fact the DeJong group had equally been victims of the Waltons’ fraud. Noting the equitable nature of claims for knowing assistance in the breach of fiduciary duty, Justice van Rensburg held that the court should not allow an award of damages to be issued against parties equally victimized by a fraudulent scheme. This was particularly so in this case, given the dubious nature of the evidence relied upon.

Supreme Court of Canada decision

In the Supreme Court of Canada’s brief oral decision (2019 SCC 30), a unanimous court allowed the DeJong group’s appeal. In so doing, the court adopted the dissenting reasons of Justice van Rensburg in their entirety. 

In addition, the court took the opportunity to clarify its comments in Deloitte & Touche v Livent Inc. (Receiver of) on the application of the criteria in Canadian Dredge. The court disagreed with the majority of the Ontario Court of Appeal, which had stated a “flexible” application of the Canadian Dredge criteria should be applied for attributing individual wrongdoing to a corporation. Overruling this interpretation, the Supreme Court explained that, “[E]ven where those criteria are satisfied, courts retain the discretion to refrain from applying [corporate attribution] where, in the circumstances of the case, it would not be in the public interest to do so’” (emphasis in original). The Supreme Court confirmed that the minimal criteria set out in Canadian Dredge must always be met.

Judging that this case represented such a circumstance, the Supreme Court held that the appeal should be allowed.

Take-away

This Supreme Court of Canada decision provides clarity on the scope of knowing assistance in complex fraud cases. All the requirements in Canadian Dredge must be satisfied to establish knowing assistance, and the court will be mindful of the equities of the circumstances of the fraud. The bar is not as low as suggested by the majority of the Ontario Court of Appeal and the court must find actual knowledge of and participation in the fraudulent scheme in order to ground liability.


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