An Update on Fraud Recovery through the Criminal Process
On September 13, 2016, the Ontario Court of Appeal released its decision in R. v. Angelis, 2016 ONCA 675. The decision provides clarity for fraud victims who hope to obtain a recovery through the criminal justice system’s forfeiture of proceeds of crime provisions. This blog is Part II on our publication: What Fraud Victims Should Know About Criminal Forfeiture Orders.
We are often asked by fraud victims if the judgments that they obtain against fraudsters are worth anything more than wallpaper. There is good reason for fraud victims to ask this question, as often judgments for fraud are not collected on – or at least not easily. The reason they are not collected on is because there is insufficient leverage or pressure on the fraudster to pay.
Incarceration is the ultimate leverage for compliance with court orders in the administration of justice system. However, incarceration is not available to coerce a fraudster’s compliance with an order to pay damages from the civil justice system. This blog discusses debtor’s jail, and how it may be making a come back under the guise of forfeiture orders. Other forms of leverage to obtain recovery, such as media shaming, street justice and self-help are beyond the scope of this blog.
A Summary of the History of Debtor’s Jail in Canada
In Greenberg v. Nowack, 2016 ONSC 808, the story is told of how Justice Perell refused to incarcerate a sociopathic fraudster, Steven Nowack, for a rather simple act of contempt of court because he thought the fraud victims were using civil contempt as a form of debtor’s jail. Justice Perell used this case to provide us his version of the history of debtor’s jail in Canada:
[46] A person who deliberately and willfully breaches a court order, other than an order for payment of money, commits civil contempt of court: Chiang (Trustee of) v. Chiang (2009), 2009 ONCA 3 (CanLII), 93 O.R. (3d) 483 (C.A.) at para. 9, var’g (2007), 2007 CanLII 82789 (ON SC), 85 O.R. (3d) 425 (S.C.J.).
[47] The focus of the law of civil contempt is on the enforcement of court orders other than the payment of money. Under the express wording of rule 60.05, an order for the payment of money is excluded from the reach of a contempt order under rule 60.11: Forrest v. Lacroix Estate (2000), 2000 CanLII 5728 (ON CA), 48 O.R. (3d) 619 (Ont. C.A.).
[48] Where the alleged contempt is the failure to comply with a court order, a three-pronged test is applied: (1) Did the order clearly and unequivocally state what should and should not be done? (2) Did the person disobey the order deliberately and wilfully? (3) Was the contempt proven beyond a reasonable doubt?
[51] In my opinion, the Greenbergs’ contempt motion fails all three prongs of the test for contempt, and they have lost sight that the contempt power is not to be used as an instrument of coercion to secure the payment of debts or to vent their anger at the judgment debtor, however justified that anger might be.
[52] The administration of justice is long past using imprisonment as a coercive measure to compel debtors to pay their debts. The contempt power found in rule 60.11, upon which the Greenbergs rely explicitly, states that a contempt order is not available to enforce an order requiring a person to pay money. (See Rule 569 of the former Rules of Practice.) The contempt power is used to facilitate the judgment enforcement process not to return to the days of debtors prisons where persons were imprisoned simply because of an inability to pay their debts.
[53] The imprisonment of judgment debtors in aid of execution of judgment has a long and fascinating legal history in England and Canada. (See C.R.B. Dunlop, Creditor-Debtor Law in Canada (2nd ed.)(Toronto: Carswell, 1995); P. Oliver, Terror to Evil-Doers, Prisons and Punishments in Nineteenth-Century Ontario (Toronto: Published for the Osgoode Society for Canadian Legal History by University of Toronto Press, 1998).
[54] As explained by Professor Dunlop, by the procedure known as capias ad respondendum, which has roots back to the thirteenth century, the sheriff was commanded to take (“capias”); i.e. arrest the debtor, and take him to jail until the case went to judgment and then to keep the debtor there until the debt was paid. In England there were debtors prisons. In Upper Canada, the debtors were part of the general prison population. In his text, Professor Oliver notes that in 1836, 2,304 inmates, including six women, (48%) of a prison population of 4,726 inmates, were debtors and not convicts.
[55] Over the centuries, the law was reformed in England and Canada and a creditor’s rights to imprison a debtor disappeared, and those rights were replaced by an expansion of the remedies against the property – but not the person – of the judgment debtor. It was in this context of a law reform movement to replace the imprisonment of debtors with an effective enforcement mechanism that the contempt power found in rule 60.11 must be understood
We note here that the judgment of Justice Perell is under appeal for various reasons, including that the order that Mr. Nowack was in contempt of was not clear. Ironically, the order that was allegedly not clear was Justice Perell’s own order that required for Mr. Nowack to account to the victims of his fraud what he did with their money.
Interplay Between Criminal and Civil Fraud Recovery
While what Justice Perell referred to as debtor’s jail may no longer exist, the Ontario Court of Appeal has apparently brought it back in another form which we characterize as ‘fine-in-lieu-of-forfeiture” jail.
In R. v. Angelis, 2016 ONCA 675, released in September 2016, the story is told of another sociopathic fraudster who continued to commit his frauds even while on release from criminal charges for fraud. As mentioned above, we published a blog entitled What Fraud Victims Should Know About Criminal Forfeiture Orders previously on this case.
We often advise fraud victims that civil litigation should be the foundation of their fraud recovery efforts. The Court of Appeal supports our position:
[16] …It is also settled law that [criminal] restitution orders should not be used as a substitute for civil proceedings, and that these criminal law restitution orders do not displace the civil remedies necessary to ensure full compensation in circumstances where those civil remedies are more appropriate
One of the fundamental reasons for this is because the proceeds of fraud are often in the hands of third parties, requiring that knowing receipt, knowing assistance or conspiracy civil actions be brought against such third parties to obtain a recovery.
The trial judge’s decision in R. v. Angelis was overturned for various reasons. One statement of the trial judge that did not reflect reality was the proposition that:
The statutory purpose of restitution orders as preventing an accused from profiting from crime and providing a concurrent, rapid and inexpensive means of recovery for the victims of those crimes
While criminal restitution orders may be inexpensive to fraud victims in the sense that they are not paying lawyers to recover their money, restitution orders are most often not “rapid” and are often ineffective as the fraudster will not pay. That is one reason why fraud victims are advised to have “concurrent” civil recovery proceedings – as the criminal system often takes far longer to process justice than the civil system, and has a lower “conviction” rate due to the higher standard of proof required due to its option of incarcerating the fraudster – as opposed to simply making an order to pay.
The Status of Forfeiture Jail in Canada
What is critical to understand about the new forfeiture laws is that they are not part of the sentencing provisions under the Criminal Code, and not part of civil fraud recovery.
The forfeiture laws are part of Proceeds of Crime provisions of the Criminal Code. Sentencing provisions of the Criminal Code are designed to punish the offender, deter the offender and others from committing similar offences, and rehabilitate the offender. Proceeds of Crime provisions of the Criminal Code are designed to take the proceeds of crime away from the offender, and thereby deter future crime by demonstrating to us all that crime does not pay.
In R. v. Angelis, the Court of Appeal described the government’s objectives this way:
[33] Parliament also recognized that the forfeiture of proceeds of crime is not always practicable. Sometimes, proceeds can’t be found. They may be outside Canada; or in the hands of a third party. What was taken may have been substantially diminished in value, rendered worthless or commingled with other property that cannot be divided without difficulty. And so, Parliament enacted a provision, s. 462.37(3), to permit judges to impose a fine in lieu of forfeiture.
[36] Where an order of forfeiture is not possible or practicable, as for example where the proceeds have been used, transferred, transformed or cannot be located despite diligent efforts to do so, a sentencing judge may impose a fine in an amount equivalent to the value of the property in lieu of ordering forfeiture: Criminal Code, s. 462.37(3)….This provision ensures that the purpose of the legislation is not frustrated by destruction, dissipation or other removal out of reach of the property.
How the Proceeds of Crime provisions of the Criminal Code have become de facto a debtor’s prisons are taken from the following statements of the Court of Appeal in R. v. Angelis:
[67] No specific authority appears to have considered the interplay of the factors at work here: restitution, civil remedies and a fine in lieu of forfeiture.
[50] First, the imposition of a fine in lieu of forfeiture is not punishment imposed upon an offender: R. v. Khatchatourov, 2014 ONCA 464, 313 C.C.C. (3d) 94, at paras. 55-56. Nor is it part of the global sentence imposed upon an offender despite its inclusion in the definition of “sentence” in s. 673 of the Criminal Code for appeal purposes: Dritsas, at para. 56. Subsequent imprisonment for failure to pay the fine in lieu of forfeiture is an enforcement mechanism to encourage payment by those with the resources to do so: R. v. Bourque (2005), 193 C.C.C. (3d) 485 (Ont. C.A.), at para. 20; Khatchatourov, at para. 56.
[74] Second, the availability of civil remedies and restitution orders is a constant, especially where the underlying offence involves property or property rights. The ability of a victim to pursue civil remedies (successfully) as a factor militating in favour of refusing to impose a fine in lieu of forfeiture, despite satisfaction of the requirements for it, risks grounding the refusal on the invidious distinction between victims who are adequately resourced to pursue civil remedies and those who are not. Such a distinction was rejected in Craig and lacks purchase where the proceeds of the fine go to the state, not to the victim.
[75] Third, the availability of civil remedies as a basis to refuse ordering payment of a fine in lieu of forfeiture does not sit well with the jurisprudence that rejects the interdependent or totality approach to sentencing and forfeiture. The availability and likely success of civil proceedings for victims to recoup their losses has nothing to do with proceeds of crime legislation, the objective of which is to deal with proceeds separately from, and in addition to, the punishment for committing the crime, which includes restitution to its victims.
[18] The Crown conceded that any payments made pursuant to a fine in lieu of forfeiture should be credited to the restitution orders made by the trial judge.
We make these convoluted statements simple by stating that fines in lieu of forfeiture give fraudsters the option, after they complete their criminal sentence, to pay the “fine” or go to jail for a longer period of time. Mr. Angelis has the option of paying a $1M fine within five years, and if he fails to do so, he goes to jail for another five years.
We note above (see paragraph 50) that fines are to encourage payment by those “with the resources to do so”. Given that the Court has stated that Mr. Angelis does not have the resources to pay, and as it is unlikely that a fraudster can legitimately acquire $1M in five years, it seems Mr. Angelis may be heading back to jail – his tough luck.
However, if Mr. Angelis pays “the fine”, the proceeds of the fine are credited to the restitution order. As funds collected by way of restitution orders are designed to be provided to victims of fraud, the funds obtained from the “fine” should be transferred to a trust account in the Court used to hold funds for restitution to victims. Once designated as restitution funds, the funds should be paid to the victims of Mr. Angelis’ fraud.
De facto, Mr. Angelis has a choice – serve five years of jail or pay – which sounds a lot like the debtor’s jail that Justice Perell found offensive in the Nowack case. It appears to us that the forfeiture provisions may have brought back to Canada a limited form of debtor’s prison – a good thing in the minds of most fraud victims.
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At Investigation Counsel, we investigate and litigate fraud recovery cases. If you discover you are a victim of fraud, contact us to have your case assessed and a strategy for recovery mapped out before contacting police or alerting the fraudster. We also promote victim advocacy and academic discussion through various private and public professional associations and organizations. If you have an interest in the topics discussed herein, we encourage you to contact us.