In a decision released on August 21, 2023 in Sase Aggregate Ltd. v. Langdon, Ontario’s top court affirmed the decision below denying a defrauded company’s attempt to recover from the wife of a fraudulent former employee, Jamie Showers. The appellant, Sase Aggregate, owned and operated a gravel pit and, in 2021, it discovered that its pit manager, Showers, had defrauded the company of more than $2.1 million over the years. It brought an application to recover those funds, not from Showers, but from his wife – on the basis that the defrauded funds had been used to purchase and renovate a property she owned on Wagg Rd. in Uxbridge, Ontario (the “Wagg Property”).
In its application, Sase sought a constructive trust over the net proceeds from the sale of the property and alleged that Showers’ wife was liable based upon the doctrines of knowing receipt of Sase’s property, knowing assistance in Showers’ fraud and unjust enrichment. In response, the respondent denied any knowledge of the fraud or the use of proceeds of fraud – although she did admit that, in reviewing bank records, she had discovered that her husband made payments totalling $177,632.28 using Sase’s funds. On the original Superior Court application, the application judge concluded that Sase had not made out its claims. It was found that (1) The respondent had no actual or constructive knowledge of the fraud; (2) Sase was unable to trace the rest of its funds into the Wagg Rd. property; and (3) the respondent had used legitimate sources to buy and renovate the property. Thus, the application judge concluded that the net sale proceeds belonged to the respondent (minus the $177,632.38 the respondent received that she admitted belonged to Sase).
The Court of Appeal upheld this decision – but did express some concerns about the fact that the proceeding had been brought by way of application, a procedure ill-suited to determining issues between the parties because there were disputed facts and questions of credibility. In the words of the Court, “the documentary record provided an incomplete and thus unsatisfactory account of what happened to the fraudulently-obtained funds, and so it is impossible to know whether they might indirectly have made their way into the improvements of the Wagg Rd. Property.” However, it recognized that the result was driven by the choice of Sase to proceed on a paper record and saw no error in the decision of the court below to dismiss the application based on the record that was before it.
On the application below, Sase adduced evidence from bank records that were compelled under a Norwich Order that showed the flow of the more than $2.1 million in defrauded funds into corporate accounts for corporations for which both the fraudster and his wife were listed as directors. Sase’s owner deposed to all of this in an affidavit and further relied upon the coincidence between the timing of these deposits and the payments made to purchase and renovate the Wagg property to establish that the proceeds of fraud were being used. The respondent denied all of this and claimed that the Wagg Property was purchased and renovated with funds from legitimate sources, including an inheritance. She produced documents showing more than $1.6 million in legitimate receipts to support this.
The application was dismissed, except in respect of the $177,632.38 in Sase funds the respondent admitted to receiving. The application judge found there was not sufficient evidence to find a fiduciary relationship between Showers and Sase and dismissed all three claims, including the claim for unjust enrichment. In upholding this decision, the Court recognized that, while a fiduciary duty is needed to succeed in knowing assistance and knowing receipt, the finding of a fiduciary duty was not an essential element for unjust enrichment. However, this did not change the fact that Sase had not met its burden of proving that its money was used in the acquisition and improvement of the Wagg Property.
In dismissing Sase’s appeal, the Court found that, while there was little doubt that a fraud had occurred, the respondent herself was s stranger to the fraud and Sase had not proven that she was unjustly enriched or that it was entitled to a constructive trust over the Wagg Property. Merely showing that the timing of payments for the Wagg Property coincided with the the fraudster’s receipt of proceeds was not enough.
This case is a perfect example of the heavy burden to be met when trying to pursue “strangers to the fraud” – even where they are very closely related to the fraudster and it might on the surface appear that they benefitted from the fraud. Tracing the proceeds of fraud into third parties’ assets requires proof and mere coincidence will often not be enough to meet that burden of proof. This case is also a cautionary tale for parties and their counsel who may wish to use the seemingly more efficient application procedure to pursue a claim. Where there is any chance of credibility being at issue, affidavits on an application can be a poor substitute for live witnesses at a trial.