juin 29. 2020

[Pepall, Pardu and Paciocco JJ.A.]

COUNSEL:

Kevin Sherkin and Allison Farley, for the appellant

Jacqueline L. King and Christopher Gaytan, for the respondent

Keywords: Torts, Knowing Assistance of Breach of Fiduciary Duty, Knowing Receipt of Trust Funds, Remedies, Tracing, Air Canada v. M & L Travel Ltd., [1993] 3 S.C.R. 787, Bikur Cholim Jewish Volunteer Services v. Penna Estate, 2009 ONCA 196, DBDC Spadina Ltd. v. Walton, 2019 SCC 30, R. v. Morrison, 2019 SCC 15, Sansregret v. The Queen , [1985] 1 S.C.R. 570, Citadel General Assurance Co. v. Lloyds Bank Canada , [1997] 2 S.C.R. 805, Gold v. Rosenberg, [1997] 3 S.C.R. 767, Paton Estate v. Ontario Lottery and Gaming Corporation (Fallsview Casino Resort and OLG Casino Brantford), 2016 ONCA 458, Air Canada v. British Columbia, [1989] 1 S.C.R. 1161, B.M.P. Global Distribution Inc. v. Bank of Nova Scotia , 2009 SCC 15, [2009] 1 S.C.R. 504, Wescom Solutions Inc. v. Minetto, 2019 ONCA 251

FACTS:

With the assistance of insider officers and others, EG spearheaded a massive fraud against a Paraguayan pension fund, Caja Paraguaya de Jubilaciones y Pensiones del Personal de Itaipu Binacional (“Cajubi”). As a result, Cajubi lost $12,460,930.

One of EG’s former business associates, AD, assisted in rerouting approximately $7.4 million of the money that Cajubi ultimately lost. AD filtered approximately $3 million of this money through a corporation, Catan Canada Inc. (“Catan”). His wife, LD, testified that she was the sole shareholder of Catan.

When Cajubi brought an action against multiple defendants in Canada, LD was added as a defendant. The trial judge granted judgment against her in the amount of $3 million jointly and severally with her husband and Catan, finding her to have been a knowing assister relating to the Cajubi money that was routed through Catan.

The trial judge found liability on the part of LD on the basis of knowing assistance in Catan’s breach of trust. Her husband, AD was one of the architects of the fraud perpetrated upon Cajubi and he actively and knowingly authorized and directed the dissipation of funds received by Catan that he knew or ought to have known came subject to a constructive trust in Cajubi’s favour. In LD’s case, the trial judge found that her passive acquiescence in her husband’s schemes went beyond mere trust and faith and crossed the line to wilful blindness. He found that she knew that her husband had filed for bankruptcy earlier that year and she knew generally what reverses had led him there. She continued to sign as needed cheques and authorizations for very large quantities of money to transit through her company without due inquiry and in circumstances where she ought to have been on inquiry. The trial judge found that she could not hide behind her own wilful blindness to avoid the consequences of facilitating her husband’s fraud.

LD alone appealed that portion of the decision.

ISSUES:

A. Did the trial judge err by applying a constructive knowledge standard in finding LD liable based on knowing assistance?

B. Did the trial judge make palpable and overriding errors in finding LD liable for knowing assistance?

C. Did the trial judge base LD’s liability alternatively on the doctrine of knowing receipt?

HOLDING:

Appeal allowed.

REASONING:

Majority (Paciocco J.A. and Pardu J.A.):

A. Yes. The trial judge misapplied the test for a finding of liability on the basis of knowing assistance of breach of fiduciary duty.

The doctrine of knowing assistance is a mechanism for imposing liability on strangers to a fiduciary relationship who participate in a breach of trust by the fiduciary. Strangers to a fiduciary relationship who are made liable on this basis are held responsible because of their “want of probity”, “meaning lack of honesty”.

The elements of knowing assistance in a fiduciary breach are: (1) a fiduciary duty; (2) a fraudulent and dishonest breach of the duty by the fiduciary; (3) actual knowledge by the stranger to the fiduciary relationship of both the fiduciary relationship and the fiduciary’s fraudulent and dishonest conduct; and (4) participation by or assistance of the stranger in the fiduciary’s fraudulent and dishonest conduct.

It is not enough for the stranger to know or suspect in some unspecified way that the fiduciary was up to no good. In this case, LD would be liable as a knowing assister only if she had “actual knowledge” that Catan held funds as trustee, and that she was participating or assisting Catan in fraudulent and dishonest conduct relating to those funds. However, the concept of “actual knowledge” is more expansive than the term “actual knowledge” denotes. “Actual knowledge” includes “recklessness or wilful blindness to the fiduciary relationship and the fiduciary’s fraudulent and dishonest conduct”. Wilfull blindness is “deliberate ignorance”, where the subject suspect the relevant facts but deliberately chooses not to inquire because they do not wish to know the truth. Wilful blindness is a subjective standard of fault that depends on the stranger’s actual state of mind. This distinguishes wilful blindness from objective standards of fault based on what the subject ought to have known, such as negligence.

There was evidence on the record that could have supported a finding of subjective knowledge or subjective suspicion on LD’s part. However, while the trial judge identified certain facts that LD knew, he made no finding as to whether she knew or suspected that the money transiting through her company was trust money that was being employed in a dishonest or fraudulent breach of trust. This was a critical omission. Without such findings, a proper determination of wilful blindness cannot be made. He spoke instead of how LD “ought to have been on inquiry”. Describing what someone ought to have known or done is the language of objective fault or constructive knowledge, not the language of subjective wilful blindness.

B. Yes. The trial judge committed a palpable error relating to his finding that LD continued to sign cheques and authorizations for very large quantities of money. However, there was no evidence that LD signed cheques after the Cajubi funds were deposited in the Catan account. Since this was the only finding the trial judge made that could show assistance by LD, a necessary condition to “wrongful assistance” liability, this error was overriding.

C. No. While the knowing receipt claim against LD was made, she not found liable for knowing receipt. There was no adjudication on the knowing receipt claim, even though it was pleaded and even though the trial judge’s findings of fact could have supported liability on that claim.

The legal test for knowing receipt therefore requires that: (1) the stranger receives trust property (2) for his or her own benefit or in his or her personal capacity, (3) with actual or constructive knowledge that the trust property is being misapplied. In addition to actual knowledge, including wilful blindness or recklessness, requirement (3) can be met where the recipient, having “knowledge of facts which would put a reasonable person on inquiry, actually fails to inquire as to the possible misapplication of the trust property”. Where liability is imposed, the “measure of the restitutionary recovery is the gain the [defendant] has made at the [plaintiff’s] expense”.

In the circumstances, the Court declined to impose liability on LD on the basis of knowing receipt. A new trial was ordered on the knowing receipt claim.

The Court commented that its conclusions did not affect the contingent tracing order that was imposed. A tracing order does not depend upon a finding of liability for knowing receipt. Liability in tracing flows from the fact of receipt, and the extent of liability is dependent on the amount received.

Dissent (Pepall J.A.):

Pepall J.A. would have dismissed LD’s appeal with costs.

The trial judge made a finding of wilful blindness on the correct subjective standard. While the trial judge’s reasons in the case under appeal would have benefitted from elaboration and more precision, the trial judge in this case applied the correct standard for a finding of wilful blindness. He noted that knowing receipt requires a finding that the stranger had actual or constructive knowledge of the breach of trust. In the next paragraph, he explained that knowing assistance requires a finding that the stranger had actual knowledge (which includes wilful blindness or recklessness) of the breach of trust. He specifically left “constructive knowledge” out of the explanation of knowing assistance, after including it in the explanation of knowing receipt the paragraph immediately before. Pepall J.A. therefore could not conclude that the trial judge’s finding of wilful blindness was grounded in an objective standard rather than on a subjective one.

Even if it were the case that the trial judge grounded his wilful blindness finding on an objective standard, the Court was permitted to review the record in order to determine if the finding of wilful blindness was open to the trial judge. In Wescom Solutions Inc. v. Minetto, 2019 ONCA 251, the trial judge mistakenly applied an objective standard for wilful blindness, but the Court nevertheless held that the trial judge’s error “in law in his articulation of the concept of wilful blindness” did not mean that the trial judge was wrong to conclude that the appellant was wilfully blind. The trial judge’s mischaracterization of wilful blindness was not fatal because he had made findings of fact that established that the appellant was wilfully blind on a subjective standard. The majority agreed that there was evidence on the record that could have supported a finding of subjective knowledge on Mrs. Duscio’s part.

Contrary to the majority’s determination, Pepall J.A. concluded that, read as a whole within the context of the entire record before him, it could not be said that the knowledge component needed to anchor a finding of wilful blindness by LD is absent from the trial judge’s reasons. Moreover, the trial judge’s conclusion was supported by the record. He was fully conversant with the detailed record, having presided over the trial for over three weeks and having trial managed the case beforehand. It was open to the trial judge to conclude that LD was wilfully blind. In addition to evidence of specific knowledge that LD did have, she and her husband also had a modest income, yet she received extensive benefits from the company of which she was the sole officer, director and shareholder, and maintained an opulent lifestyle. She permitted her company to be used, signed Catan’s documents, and accepted the substantial fruits of her efforts. The trial judge understood the requirements of wilful blindness, determined that they were met, and did not simply apply a constructive knowledge standard to LD’s conduct. Carelessness this was not.

Pepall J.A. also did not agree that the lack of evidence of LD signing cheques after Cajubi’s funds entered the Catan account was a basis to allow the appeal. That ground was not raised in the appellants’ notice of appeal. There was no question that LD knowingly permitted her company to be used for improper purposes.