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What Fraud Victims Should Know about Bankruptcy and the Assignments and Preferences Act

Investigation Counsel Fraud Recovery Lawyers

There are often multiple victims in investment fraud cases, and sometimes some victims, in their desperation for recovery, attempt to have their claims given preference over those of other victims. This blog tells the story of how the Courts may deal with victims seeking preference over other victims.

The Ponzi Scheme of Harry Snoek Jr.

The story of Harry Snoek Limited Partnership (Re), 2011 ONSC 6667 is known to me personally as the fraudster Harry Snoek Jr. attended church on Sundays with many of his victims and our family for years. It is a classic example of a cultural affinity fraud scheme where trust is blind.

In this case Harry Snoek Sr. was a respected land developer in the Dutch Canadian community. He obtained financing for many of his land acquisition ventures from members of his Dutch Church. Harry Snoek Sr. always paid interest on his loans as he promised. Harry Snoek Sr. documented many of loans from his fellow Dutch Canadians by way of promissory notes.

But Harry Snoek Sr. got old and developed Alzheimer’s disease. Harry Sr. brought his son, Harry Snoek Jr., into the business. Harry Jr. was known to many of the investors as they knew Harry Sr.’s family. The investors’ relationship of trust in Harry Sr. was transferred over to Harry Jr. without investigation by any of the investors. To quote the Court, “Sadly [Harry Jr.] did not share his father’s ethics, honesty or business acumen.”

While Harry Jr. made it appear to his investors that he was running his business as his father had, in reality Harry Jr. took a significant amount of the invested money abroad to Holland and used it to fund his own extravagant lifestyle and failed business ventures such as yacht purchases. To conceal and continue his fraud, Harry Snoek Jr. ran a Ponzi scheme, using new investor funds to pay off other investors and not using the funds as represented to investors.

As is the case in most Ponzi schemes, it eventually collapsed when new investor funds could not be obtained to keep pace with past investor demands for payment. When Harry Jr. began to default, some of his investors sought to obtain security for their loans. Later, when the defaults continued, some investors applied to the Court and had Harry Jr. assigned into bankruptcy.

The appointed trustee took control and liquidated all property formally controlled by Harry Snoek Jr. with the intention of making pro rata payments to investors. An investor named Blokhuis attempted to assert that security provided to him by Harry Jr. before the bankruptcy assignment meant that his investment should be paid out in full ahead of the pro rata payments to the unsecured investors. Of course other investors did not like this idea and aired their complaints to the trustee.

The Assignments and Preferences Act Motion

In response, the trustee brought a motion to the Court relying on the Assignments and Preferences Act for a determination of whether Blokhuis’s secured creditor claim was valid. The trustee took the position that Harry Jr., by virtue of operating a Ponzi scheme, was insolvent at the time he gave security to Blokhuis, and accordingly the security Harry Jr. provided to Blokhuis was never valid and constituted an improper assignment or preference. The trustee relied on the following provisions of Ontario’s Assignments and Preferences Act:

4(1)   Every gift, conveyance, assignment or transfer… made by a person who is insolvent, or unable to pay his or her debts, when he or she knows that he or she is on the eve of insolvency, with the intent to defeat, hinder, delay or prejudice creditors… is void as against the creditors injured, delayed or prejudiced.

The Court held that the trustee had to prove the date on which Harry Jr. knew he was insolvent, and then had to prove the date by which Harry Jr. granted security to Blokhuis with the intent to give Blokhuis preference over Harry Jr.’s other investors. If the trustee proved these facts, then the onus shifted to Blokhuis to show that Harry Jr. gave him security for new money being invested, or transferred new money for the purpose of securing a pre-existing unsecured debt.

The Court’s Findings of Fact

The Court found as fact that Harry Jr. knew he was insolvent in 2007, and that Blokhuis did not seek security until after when Harry Jr. was in fact operating as a Ponzi scheme. The Court further found that when Harry Jr. gave security to Blokhuis he was receiving demands for payment from other investors and was ignoring these demands, thus deliberately putting the interests of Blokhuis ahead of other investors.

Thus, the onus of proof shifted to Blokhuis to demonstrate that he had provided Harry Jr. new funds on which to pay for his secured interest. Blokhuis attempted to argue that his secured interest, which was security in a mortgage registered against certain property, had properly been obtained with the consent of Harry Jr., and without his knowledge of the Ponzi scheme.

The Court, however, found that the security documents had been backdated, and that when the security was obtained Blokhuis and Harry Jr. had not disclosed to the Court granting the security that other creditors had moved for a Mareva injunction to freeze all assets of Harry Jr. For these reasons the Court held that Blokhuis, with the consent of Harry Jr. had obtained an unlawful preference to other creditors, and the Court declared the security of Blokhuis void as an improper assignment or preference.

As a result, Blokhuis was ordered to pay the legal costs of the trustee and was held to be an unsecured creditor to be paid out on a pro rata basis with the other investors that he had tried to get ahead of. An appeal by Blokhuis was dismissed – see Harry Snoek Limited Partnership (Re), 2012 ONCA 765.

So What Ever Happened to Harry Snoek Jr.?

Harry Snoek Jr. would be considered a serious fraudster in terms of the quantum of the fraud – frauds over $1M attract minimum imprisonment if convictions are registered in the criminal courts. The Ontario Court held that in 2007 his land interests were worth $21.1M, while the value of the loans coming due in 2008 and 2008 was $35.1M. It is not clear what portion of the $14M deficiency Harry Jr. had misappropriated, or if the value was greater than the mere deficiency calculation, but there is little doubt that the amount is significant. This deficiency was calculated at a time when land values were increasing. Where did all the equity in these properties controlled by Harry Jr. go?

The last known information from those in our Dutch Canadian community is that Harry Snoek Jr. resides comfortably in Holland. As of the time of this blog no criminal charges are known to have ever brought against him notwithstanding the finding of the Ontario courts that he engaged in a Ponzi scheme. As of the time of this blog the unsecured investors were advised that they would be paid out approximately 50% of their lost investment – which was fortunate as the value of the land at issue continued to escalate during the term of the bankruptcy.

What is noteworthy is that the investors who signed up as claimants in the bankruptcy process gave away their private right to sue. As there are no civil or criminal actions as against Harry Jr., to a significant extent, other than the damage to his reputation, Harry Snoek Jr. is not much worse off for ware. As of the date of this blog it is unknown whether the bankruptcy process continues. But in any event some victims of Harry Jr. Ponzi’s scheme may reason that fraud pays.

To Bring Action or Make a Bankruptcy Claim?

Giving up the private right to sue a fraudster such as Harry Snoek Jr. is often a difficult decision for investors in cases like this. Investors have to weigh what they believe could be recovered in their own private litigation as against what could be recovered as part of a class-type action which in effect is what the bankruptcy process is.

Often investors will elect bankruptcy as they are not required to pay for the process – that is the payment of the trustee fees and the fees of their counsel are derived from the liquidation of the property recovered through bankruptcy process. If an investor chooses to bring his or her own private litigation, most often their lawyers will require them to fund the litigation and recovery process themselves, with the additional risk of knowing that the trustee is selling off the assets from which they would hope to recover from.

While often the option of not paying lawyers and trustees seems attractive at first, hard feelings and regret develop later when the bankruptcy process is complete. We have seen cases where, after the bankrupt is discharged, the bankrupt is earning a good living and again acquiring assets, the investor who recovered pennies on the dollar through the bankruptcy process sees the bankrupt fraudster living well, and the investor learns of the full recovery of exorbitant fees received by the trustee and their counsel from the estate of the bankrupt.

For these reasons we recommend that investors seek the advice of their own counsel before blindly filing claims as part of bankruptcy. There are scenarios where an investor may be better off suing privately and making a criminal and regulatory complaint. Civil judgments for fraud survive the discharge of a bankrupt, and sometimes recovery for a victim is better from garnishing income and from seizure of post-bankruptcy discharge assets from a fraudster.

Inquiries

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 welcome your inquiries.

 

 

Norman Groot

About Norman Groot

Based on my police experience and my experience thereafter as a litigator, I have joined forces with other lawyers with police experience and created the law firm Investigation Counsel Professional Corporation.

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