Gregory Sidlofsky of our office represented a company that was deceived into loaning money to a company called Credifinance Securities Limited. After we were able to tie up part of the proceeds of the loan, Credifinance declared bankruptcy. In our efforts to recover what remained of the loan, we argued that a constructive trust ought to be imposed on $310,500 in the fraudster’s account that could be traced to the loan. The purpose of the constructive trust was to prevent the unjust enrichment of the bankrupt estate. This case went to Ontario’s Court of Appeal and a review of that decision is helpful to those facing a similar dilemma (FN1).

In order to understand this case there are some legal concepts that need be explained. Parliament has set up a process where creditors of a bankrupt are divided into different categories or classes. Secured creditors are in a higher class than unsecured creditors. Therefore secured creditors get paid first. Unsecured creditors share equally in the remaining assets of the bankrupt estate. In this case our office argued that sometimes, a strict application of the rules of the Bankruptcy and Insolvency Act (FN2) is unjust and the courts have jurisdiction to intervene with equitable remedies like a constructive trust (FN3).

A constructive trust can be imposed by the courts even if the parties never intended for there to be a trust. It is a kind of lien on property which judges can use to right an injustice when property or money has been wrongly taken. It is a corrective measure to deal with situations where someone may otherwise be unjustly enriched at the expense of an innocent party. (FN4).

Justice Marrocco found that our client was deceived by Georges Bennaroch and but for the deceit, our client would not have entered into any agreement with nor lent Credifinance $400,000, and Credifinance would not have had $310,500 in its bank account. The trustee took the position that even if there was a fraudulent misrepresentation by Credifiance, it would not allow our client to bypass the Bankruptcy and Insolvency Act because the trustee argued that there is no special status accorded to the victim of a fraud. In other words – victims of fraud are just like any other creditor. In this case, Justice Marroco disagreed. He imposed a constructive trust on the $310,500 remaining in Credifinance’s bank account that could be traced to the loan. Deloitte & Touch appealed Justice Marroco’s decision to the Ontario Court of Appeal.(FN5)

At the Ontario Court of Appeal, Mr. Sidlofsky of our office argued, on behalf of our client, that the fraud resulted in our client having a property interest in the remaining loan proceeds by way of constructive trust. A property interest would remove the $310,500 from the assets of the bankrupt estate. Deloite & Touche again argued that even if there was a fraudulent misrepresentation that induced our client to loan money to Credifinance, it would not allow our client to bypass the strict requirements of the Bankruptcy and Insolvency Act. The Ontario Court of Appeal dismissed the appeal and upheld Justice Marrocco’s decision.

There are a number of important conclusions we can draw from the Ontario Court of Appeal’s decision. There is no question that the remedy of constructive trust is expressly recognized in bankruptcy proceedings. Depending on the facts of the case, a constructive trust in bankruptcy proceedings can sometimes be used to remedy an injustice. Importantly, in this case the only creditors who were impacted by the court’s decision were the principal of Credifiance and his lawyers who were the main creditors of the bankrupt estate.

This decision does not mean that every victim of fraud can successfully obtain a constructive trust over money taken from him by the bankrupt. Imposing a constructive trust is discretionary and the court will consider all of the circumstances including who will be impacted by the constructive trust. But what is clear is that the remedy of constructive trust is a viable argument in bankruptcy cases that can, in appropriate circumstances, trump other creditor’s claims.

This short review of the case law should not be taken as legal advice. Based on my experience in dealing with these cases, they often turn on the specific facts. If you have a legal question relating to something similar, you are best advised to seek out competent legal counsel to determine your best course of action.

Charles B. Wagner is a partner at Wagner Sidlofsky LLP. This Toronto office is a boutique litigation law firm whose practice is focused on estate, commercial and tax litigation.

In Ontario, the Rules Of Civil Procedure (FN1) provide a road map on how litigation is to be conducted.  Izzie would set out the damages sought and the grounds for the law suit in his statement of claim.  Selila would set out her side of the story in a document called a statement of defence. Afterwards the parties would exchange affidavits of documents listing all of the documents relevant to the law suit.  The next step is depositions.  Each side would present a representative to be examined by the other side’s lawyers.   In the United States this is referred to as depositions.  In Ontario it’s called examinations for discovery.  In this fictional scenario there is a wrinkle because one of the parties does not live or carry on business in Ontario.

In our fictional case scenario Izzie would argue Selila’s lawyers should come to Tel Aviv to examine him because that is where he lives and where all his original documents are located.  Selila would argue that Izzie should come to Ontario where Selila carries on business and where the claim is proceeding.  What would the courts say?

Where a person to be examined resides outside of Ontario the court may determine the place of examination (FN2).  There is no hard and fast rule.  The general test is what is just and convenient to all parties.  Courts have a wide discretion, and there are no prima facie rights or burdens on either party.  That said, based on my experience and review of the case law Ontario courts have traditionally ordered the parties to come to Ontario to be examined in this jurisdiction (FN3).  Exceptions have been made where the person to be examined was impecunious and could not afford the trip (FN4), or was too unwell to travel (FN5).  However, in such circumstances the court may require the travelling costs to be paid, or a portion to be paid, by the party conducting the examination. So what happens if the court does not make someone come to Ontario to be examined?

Let’s look at Midland Resources Holding Ltd. v. Shtaif, (FN5). The plaintiff lived in Moscow, and had never lived in Toronto. Given his poor health the plaintiff did not travel. Here the plaintiff did not come to Ontario and the court allowed examinations to proceed by videoconferencing.  Examination by videoconferencing was a departure from the general rule.  Ordinarily Ontario courts order that the parties have to be examined in person (FN6).

This short review of the case law should not be taken as legal advice. Based on my experience in dealing with these cases, they often turn on the specific facts. If you have a legal question relating to something similar, you are best advised to seek out competent legal counsel to determine your best course of action.

Charles B. Wagner is a partner at Wagner Sidlofsky LLP. This Toronto office is a boutique litigation law firm whose practice is focussed on estate, commercial and tax litigation

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FN1.  RULES OF CIVIL PROCEDURE – R.R.O. 1990, Reg. 194.

FN2.  See Rule 34.07(1) which provides that where the person to be examined resides outside Ontario, the court may determine whether the examination is to take place in or outside Ontario and the time and place of the examination.  The court also has the authority to determine the amount of attendance money to be paid to the person to be examined. For factors considered see G.C.C. Ltd. v. Thunder Bay (1980), 16 C.P.C. 15 (Ont. Master); reversed on other grounds (1981), 32 O.R. (2d) 111, 20 C.P.C. 276 (Ont. H.C.)

FN3.  See Praendex Inc. v. Gump (1992), 8 C.P.C. (3d) 332 (Ont. Master), Agristor Credit Corp. Can. v. Rader (1989), 68 O.R. (2d) 281, 34 C.P.C. (2d) 30 (H.C.) Yaeger v. Lavooy (1980), 16 C.P.C. 224 (Ont. Co. Ct.).

FN4.  See Kohli v. Anand (1986), 54 O.R. (2d) 506, 18 C.P.C. (2d) 101 (Master)

FN5.  MidlandResourcesHoldingLtd. v. Shtaif 2009 CarswellOnt 7617 Ontario Superior Court of Justice [Commercial List].

FN6.   See Watson & McGowan, Ontario Civil Practice   Rules of Civil Procedure Case Law, Pleadings 34.07 — Case Law (Approx. 2 pages) and See  Master Dash comments in 1337194 Ontario Inc. v. Whiteley, 2004 CarswellOnt 2312 (Ont. Master).  He ordered  that discovery by video conferencing could be ordered under Rule 34.07(1)(f). In that case, he made the following statement, “While I agree that discovery by videoconference can be ordered under rule 34.07(1)(f) [as per Guarantee Co. of North America v. Nuytten (1997), 10 C.P.C. (4th) 251 (Ont. Master)] in my view it should be ordered rarely and only in exceptional circumstances against the wishes of the examining party particularly where as here credibility of the witness to be examined is a key issue…”

The courts take a number of factors into account when they consider a case like this. Is the restrictive covenant ambiguous?  Is it unreasonable?  In determining the unreasonableness of the prohibition to compete Ontario courts look at the geographic coverage of the restriction, the activity being restricted and how long the ex employee is forbidden to compete. It is also relevant the scope of the activity the ex employer seeks to restrict.  Furthermore, under the law of Ontario, the onus lies upon Izzie, the party trying to enforce the covenant, to prove that the clause in the contract is unambiguous and reasonable in the circumstances (FN1).

Selila’s lawyers might argue that her contract was invalid because the terms were unreasonable and far too broad.  It was unreasonable because three years is too long and to forbid her to open up a similar business in another country makes the restriction too wide.

Izzie would argue that his is an international business with contacts and clients in the United States and Canada.  He might say Selila understood the restrictions when she signed the agreement and agreed to them.  It was unambiguous and not unreasonable given the facts and circumstances of travel being an international business.

What would a court say?  Let’s take a look at the case of Esakov v. Skylink Holidays Ltd.(FN2)   The Applicant, Esakov, worked for Skylink Holidays Ltd. which promoted trips to Israel.  The parties signed an employment agreement which included non-compete clause saying that Esakov could not compete with company for three years in any similar business except for those businesses he had previously dealt with.  That list was included as a schedule to the agreement.  The court struck down the non compete clause because, in its view, the three years was unreasonable and the restriction on the type of work too far reaching.

It would be a mistake to read this article and look at it as legal advice. Based on my experience in dealing with these cases, they often turn on the specific facts. If you have a legal question relating to something similar, you are best advised to seek out competent legal counsel to determine your best course of action.

Charles B. Wagner is a partner at Wagner Sidlofsky LLP. This Toronto office is a boutique litigation law firm whose practice is focussed on estate, commercial and tax litigation.

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FN1.   For a full treatment of the issues canvassed in this article I refer you to these cases (KRG Insurance Brokers (Western) Inc. v. Shafron, 2009 CarswellBC 79 (S.C.C.), Mason v. Chem-Trend Ltd. Partnership 2010 CarswellOnt 6363, 2010 ONSC 4119, 84 C.C.E.L. (3d) 31, 1; 3DS Ventures Inc. v. 230 Cook Street Holdings Ltd., 2010 CarswellBC 1452, 2010 BCSC 846, [2010] B.C.W.L.D. 5739, [2010] B.C.W.L.D. 5868, [2010] B.C.W.L.D. 5869 (B.C. S.C. Jun 15, 2010); Culligan Canada Ltd. v. Fettes, [2010] 6 W.W.R. 420, 346 Sask. R. 100, 2009 CarswellSask 869, 477 W.A.C. 100, 2009 SKCA 144 (Sask. C.A. Dec 22, 2009); Mason v. Chem-Trend Ltd. Partnership, 2009 CarswellOnt 7895 (Ont. S.C.J. Dec 17, 2009); Globex Foreign Exchange Corp. v. Kelcher, 473 A.R. 219, 2009 CarswellAlta 1918, 2009 ABQB 471, [2010] A.W.L.D. 446, 16 Alta. L.R. (5th) 185 (Alta. Q.B. Sep 30, 2009); Hanna Collision Repair (1984) Ltd. v. Insurance Corp. of British Columbia, 2009 CarswellBC 2327, 2009 BCSC 1200, [2010] B.C.W.L.D. 535, [2010] B.C.W.L.D. 561, [2010] B.C.W.L.D. 565, [2009] B.C.J. No. 1758 (B.C. S.C. Sep 01, 2009); Altam Holdings Ltd. v. Lazette, 479 A.R. 89, 2009 CarswellAlta 1143, 2009 ABQB 458, [2009] A.W.L.D. 4244, 62 B.L.R. (4th) 215, 14 Alta. L.R. (5th) 146 (Alta. Q.B. Jul 29, 2009); Belron Canada Inc./Belron Canada inc. v. TCG International Inc., 2009 CarswellBC 1139, 2009 BCSC 596, [2009] B.C.W.L.D. 6796, [2009] B.C.W.L.D. 6798, [2009] B.C.W.L.D. 6871, [2009] B.C.W.L.D. 6921, [2009] B.C.W.L.D. 6922, [2009] B.C.W.L.D. 6923, [2009] B.C.W.L.D. 6924, [2009] B.C.W.L.D. 6928, [2009] B.C.W.L.D. 6929 (B.C. S.C. May 01, 2009); Exagon Marketing Inc. v Canpaco Inc., 2009 CarswellOnt 2305 (Ont. S.C.J. Mar 02, 2009)

FN2.   See Esakov v. Skylink Holidays Ltd. 2007 CarswellOnt 8694

Why do people incorporate companies?  One of the main ones is that generally, if a company does business, no employee or officer of the corporation is personally liable for any act done within the scope of their duties on behalf of the corporation.  Now there are some exceptions to that general rule that could result in personal liability even if the business is incorporated.  Let’s take one example where a careless mistake may prove very costly

Darren Convery had a nursery and garden business called “Maple Lane Nurseries and Landscape”.  After some time he and his wife incorporated the business.  For some time Darren had been doing business with Bernard Kobes of Kobes Nurseries Inc.   Darren told Kobes he planned to incorporate.  Business for Darren went bad and he owed Kobes $78,000.00 for supplies provided.  Darren said these supplies were purchased after the incorporation so the company owes the money.  Even though Darren told Kobes about the incorporation, Darren failed to document it on his cheques, letterhead and contracts.  Kobes Nurseries Inc. sued Darren Personally.  Since Darren told Kobes about the incorporation Darren should not be personally liable – right?  That’s not what Justice Lauwers of the Ontario Superior Court of Justice thought.

Let’s review the decision of the court in Kobes Nurseries Inc. v. Convery.   After the incorporation Darren still sent Kobes Nurseries Inc. cheques and faxes from Maple Lane Nurseries and Landscape.  The documents and cheques made  no mention of the company name or the fact that the business was incorporated.  The court found that while Darren told his suppliers that he planned to incorporate, that does not mean they understood that he did incorporate.    In the words of the judge, “I find that Mr. Convery did not bring home to the plaintiff the fact that the status under which he was carrying on business had changed from that of sole proprietorship to a corporation”. The case law suggests that if a person wants to escape personal liability on a contract he has a duty to make it clear to the person with whom he is contracting that he is negotiating on behalf of his corporation and not in his personal capacity.  Given the obligations set out in sections 6(2) of the Business Names Act and 10(10) of the Business Corporations Act, the court found Darren personally liable.

This short review of the caselaw should not be taken as legal advice. Based on my experience in dealing with these cases, they often turn on the specific facts. If there is a lesson to be learned from this story it is that failure to pay attention to details can be costly.  If you have a legal question relating to something similar, you are best advised to seek out competent legal counsel to determine your best course of action.

Charles B. Wagner is a partner at Wagner Sidlofsky LLP. This Toronto office is a boutique litigation law firm whose practice is focussed on estate, commercial and tax litigation.