In Golden Oaks Enterprises Inc. v. Scott, 2022 ONCA 509, the Court of Appeal for Ontario dismissed an appeal (and allowed a cross-appeal in part) from multiple judgments in which the trustee in bankruptcy successfully argued that payments made by the bankrupt to certain of its investors should be set aside on the basis that the payments were part of a Ponzi scheme and therefore offended the provisions of the Bankruptcy and Insolvency Act, RSC 1985, c B-3 (the “BIA”) relating to payments at an undervalue. For the purposes of this article, the relevant issue was whether the claims were initiated by the trustee within the two-year limitation period specified by the Limitations Act, 2002, SO 2002, c 24, Sch B (the “Limitations Act”).
Golden Oaks Enterprises Inc. (“Golden Oaks”) operated in the Ottawa area between 2009 and 2013 and, although advertised as a rent-to-own business, it was promoted to certain individuals as a way to turn a quick profit by advancing funds for short periods of time in exchange for high interest promissory notes. In fact, the business was a so-called Ponzi scheme in that, when it ran into financial difficulty, money from new investors was used to pay existing investors. The scheme collapsed in 2013 whereupon both Golden Oaks and its principal (“Lacasse”) went into receivership and made assignments in bankruptcy a few weeks later.
Upon being appointed in 2015, the trustee in bankruptcy began 88 separate legal actions against corporate and individual creditors. The trustee settled 71 of them, but 17 actions proceeded against defendants who had received payments from Golden Oaks in 2012 and 2013 which included the targeted commission payments and interest on promissory notes. The theory of the actions was that, as a Ponzi scheme, Golden Oaks was, by definition, insolvent as it never had enough money to pay what it owed to legitimate creditors, and the commission and interest payments deprived those creditors of their share of the company’s remaining equity. The 17 actions were heard together in a summary trial at which judgment was granted requiring the defendants to repay monies in varying amounts on the basis that they knew, or ought to have known, that the returns promised and received were too good to be true.
One of the grounds advanced on appeal was that the trial judge erred in concluding that the claims were not discoverable within the meaning of s. 5(1)(a)(iv) of the Limitations Act until the trustee was appointed and had legal authority to bring the actions. The trial judge rejected the allegation that Golden Oaks must be imputed with Lacasse’s knowledge of the fraud based on the principle of corporate attribution or identification, which imposes liability on a corporation for the conduct of its directing mind where the actions of that person are performed within the scope of authority, were not done in fraud of the corporation, and by design or result were for the benefit of the corporation.
The Court of Appeal upheld the result in the actions below, holding that ifthe knowledge and fraudulent acts of Lacasse, as the principal of Golden Oaks, were attributed to the corporation, this would defeat the purpose of the transfer at undervalue provisions of the BIA, and would permit fraudsters to benefit from their actions, thereby undermining a fundamental tenet of insolvency law, that being, the policy of ensuring the equitable distribution of the bankrupt’s assets amongst creditors. There were therefore strong public policy grounds to resist permitting those who benefited from the usurious interest scheme perpetrated by Lacasse from avoiding liability through the application of the corporate attribution doctrine at the expense of Golden Oak’s other creditors.
Until this decision, it had been somewhat of an open question as to whether the discretion not to apply the corporate attribution principle was available in matters which involved a sole individual as the directing mind of a corporation. The Court of Appeal held that there was no principled basis upon which to decline to exercise the discretion in this case and, indeed, it was appropriate to exercise that discretion in the circumstances. This had obvious consequences for the limitations issue as, without the application of the corporate attribution doctrine, Golden Oaks lacked the requisite knowledge to bring action until the appointment of the trustee, with the result being the conclusion that the actions were brought in time and therefore were not statute-barred.