ONTARIO – Corporations – Unjust enrichment – Without a benefit that enriched the defendant, and which can be restored to the plaintiff in specie or in money, no recovery lies for unjust enrichment. 

ONTARIO – Pleadings – Where fraud is alleged and there are issues of credibility, proceeding by way of action with oral testimony is the preferable path.

Sase Aggregate Ltd. v Langdon
2023 ONCA 554 (CanLII)
ONCA (van Rensburg, Miller and Nordheimer JJ.A)

The Appellant (“Sase”) bought a gravel pit from Mr. Showers (“Showers”) in 2012 and hired Showers as the pit’s general manager. In 2020, Sase discovered that Showers had defrauded it of more than $2.1 M. Sase terminated Shower’s employment. Sase then brought an application for recovery against the Respondent Langdon, who was Shower’s spouse. Sase sought an order imposing a constructive trust over the net sale proceeds of Langdon’s Property. The Property was purchased in 2019 for $800,000 and sold in September 2021 for $2,318,424.19. Sase relied upon the legal doctrines of knowing receipt, knowing assistance and unjust enrichment.

The Respondent maintained that she arranged for the funds for the purchase and renovation of the Property from legitimate sources. She later admitted that she learned that her husband made payments towards the purchase and renovation in the amount of $177,632.38 using Sase’s funds.

The Application Judge held that except for the $177,632.38, Sase did not make out the causes of action pled because: 1) Langdon had no knowledge of the fraud; 2) Sase was unable to trace its funds into the Property; and 3) Langdon used legitimate sources to buy and renovate the Property. (para. 4)

The Plaintiff appealed the decision, alleging that the Application Judge erred when they did not impose a constructive trust over the net sale proceeds based on their findings that:

1. A constructive trust depends upon the existence of a fiduciary relationship;
2. There was insufficient evidence to establish that Showers owed the Sase a fiduciary duty;
3. Sase had not properly traced the funds; and
4. Langdon did not receive Sase’s property or benefit from the fraud committed by her spouse. (para. 5)

The ONCA dismissed the appeal even though the record disclosed that the Sase was defrauded by the pit manager and that the movement of monies had indicators consistent with money laundering. (para. 6) The ONCA noted that the application process was not suited to a fraud case where there were disputed facts, credibility issues, no oral evidence, and the documentary record was incomplete in respect of tracing. (para. 6)

Background

Showers issued fake invoices to two customers (A & B) and deposited the corresponding payments, which exceeed $2 million, into two bank accounts in the names of two companies, Complete Property Maintenance Ltd. (“Complete”) & 2117039 Ontario Ltd. (“039”) that were incorporated by the pit manager, Showers (para. 9)

Sase obtained a Norwich order in March 2021 in relation to BNS bank accounts in the name of the pit manager’s companies, Complete and 039 and joint accounts of Summer and Langdon. The bank accounts revealed that the Sase’s money was transferred to 039’s bank account, then to the joint bank accounts and then to an unidentified bank account, usually on the same day. (para. 13)

Sase registered a caution on title to the Property upon learning it was subject to an Agreement of Purchase and Sale. The sale proceeds were held in a trust account pending the outcome of this litigation.

The Application Judge held that Sase had not traced the alleged “stolen” funds into the Property and that there was insufficient evidence to establish the claims of “knowing assistance”, “knowing receipt” or “unjust enrichment” at Sase’s expense (para. 27) The Judge accepted Langdon’s evidence that she had no involvement with 039 and that she had no knowledge that she was an officer or director of 039 or of the tracing of the funds used to purchase and renovate the Property. Langdon gave evidence that she had funded the purchase and renovation with an inheritance, repayment of a loan, and the net sale proceeds of another property. The Judge found that $1,642,725.00 of the funds related to the Property was funded from independent sources. (paras. 31–32)

The Judge also accepted that Langdon did know anything about her spouse’s alleged improper actions. Based on the documentary evidence, the Judge did not find a fiduciary relationship between the pit manager and Sase and therefore held that the doctrines of knowing receipt and knowing assistance could not be established. (paras. 33–35)

ONCA Analysis of the rRelevant Alleged Errors

Does the Imposition of a Constructive Trust Depend Upon Finding a Fiduciary Relationship?

The ONCA confirmed that the finding of a fiduciary relationship or breach of trust is required to prove knowing assistance or knowing receipt of funds but that such a finding is not an essential element for unjust enrichment. (para. 40) The ONCA found that the Application Judge did not misstate the law or require a finding of fiduciary duty or trust relationship before she could impose a constructive trust. (para.41)

The elements of unjust enrichment are:

1. A benefit to the defendant;
2. A corresponding detriment to the plaintiff; and
3. The absence of any juristic reason for the defendant to retain the benefit. (para. 41)

The ONCA held that the Application Judge did not err when it did not impose a constructive trust on the sale proceeds because Sase did not establish that the funds were used to purchase or renovate the Property. (paras. 42 and 45)

The ONCA rejected Sase’s argument that the Application Judge should have imposed a constructive trust once Sase proved that the shift manager deposited cheques payable to Sase into his corporate bank accounts and then transferred the funds into pit manager’s joint bank accounts with the Respondent as it would “offend the principle of good conscience” (as set out in Soulos v Korkontzilas 1997 CanLII 246 (SCC) if the funds were not returned to Sase.(para. 43)

The ONCA held that there was no question that a fraud occurred; however, it noted that Sase did not bring a legal action against the fraudster and instead sued his spouse who was a stranger to the fraud. ( para.45)

The ONCA held that Sase failed to prove that Langdon was “availing herself” of “what had been obtained by the fraud of another” because Sase did not establish that Landgon used the funds to purchase or renovate the Property in its tracing exercise. (para.50)

Must a Tracing Analysis Follow the Funds Through As Many Steps Or Transfers As Necessary To Arrive At The Conclusion That They Are The Same funds?

The ONCA referred to B.M.P. Global Distribution Inc. v. Bank of Nova Scotia, 2007 BCCA 52, 278 D.L.R. (4th) 501, rev’d on other grounds 2009 SCC 15, [2009] 1 S.C.R. 504 (“B.M.P.”), which describes tracing as follows:

Tracing is an identification process. The common law rule is that the claimant must demonstrate that the assets being sought in the hands of the recipient are either the very assets in which the claimant asserts a proprietary right or a substitute for them. (para. 56)

The ONCA held that Sase’s tracing was incomplete becuase Sase could only trace the taken funds to the joint accounts and not to the unidentified account into which they were eventually transferred. The ONCA also noted that Sase sought a constructive trust over the Property or its proceeds rather than the bank accounts that no longer had the funds on deposit. On the evidence, the Application Judge was correct that she could not impose a constructive trust upon the Property’s sale proceeds.(paras. 59-60)

Did the Defendant Receive a Benefit From the Fraud Perpetrated by Her Husband?

The ONCA found that the evidence did not establish that Langdon received a benefit becuase Sase did not prove that its money ended in the Property. Further, the Application Judge accepted Langdon’s evidence that she had nothing to do with one of the joint accounts that her husband transferred funds into, that she rarely used the other joint account, and that there was evidence that the monies were transferred from the joint accounts to an unknown destination. The ONCA referenced Peel (Regional Municipality) v. Canada; Peel (Regional Municipality v. Ontario, 1992 CanLII 21 (SCC), [1992] 3 S.C.R. 762, at p. 789, where the SCC held that “without a benefit which has enriched the defendant and which can be restored to the donor in specie or by money, no recovery lies for unjust enrichment”. (para. 68)