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What Fraud Victims Should Know About Fraud at Equity Part II – Why Defining Fraud is Important

Investigation Counsel Fraud Recovery Lawyers

 

In March 2015, we published a blog post entitled Why Defining Fraud is Important to Fraud Victims. We now provide an update to that earlier publication following the May 2017 release of the decision in Lee v. Transamerica Life Canada, 2017 BCSC 843 .

 

Why Pleading Civil Fraud Is Important

As we reported in our prior blog post, pleading fraud in civil cases — as opposed to negligence or breach of contract — is often more difficult (and expensive) to prove and creates the risk of an adverse cost order against the victim if they cannot prove their case. Adverse cost awards tend to be higher in fraud to reflect the stigma associated with alleging someone is a fraudster —meaning the allegation of fraud should not be made lightly.

That said, where there are sufficient grounds to plead fraud there are important reasons why it is advantageous to do so. Some reasons we cited in our prior blog post were:

 

  1. a judgment in fraud survives a fraudster’s assignment into bankruptcy;
  2. a judgment in fraud may pierce a corporate veil used by a fraudster;
  3. a judgment in fraud grants the victim access to a wider array of remedies; and
  4. a claim in fraud grants access to a wider array of defendants.

 

A Simple Definition of Fraud

We start with the simple definition. It is often said that fraud is simply theft by lies. Theft by violence is robbery, theft by stealth is … theft (sometimes called conversion), and theft by lies is fraud.

Most people who have been the victim of fraud, however, also know that fraud can be theft by omissions or concealment, because sometimes what you are not told is just as important as the deceit used by a fraudster to obtain your property.

This seemingly simple definition, however, has been the subject of dispute in the civil, criminal, and regulatory contexts, as demonstrated in the recent decision in Lee v. Transamerica Life Canada, 2017 BCSC 843, and the other case we discuss in this blog post.

 

What is Civil Fraud? 

Lee v. Transamerica Life Canada was a class action case. The court reported:

Knowing full well that the courts have often been reluctant to certify misrepresentation claims as class actions, the plaintiffs in this case made a deliberate strategic decision not to expressly plead fraudulent misrepresentation as a cause of action.

They say Bruno Appliance (a Supreme Court of Canada decision) does not lay down an exhaustive definition of civil fraud. Rather, they claim that fraud can simply comprise “deprivation of another’s property by dishonest means”, something that can occur without false representations or deceit. Thus, the plaintiffs have framed their pleadings to allege a cause of action founded on this non-misrepresentation (omission) based form of fraud.

The Court in Lee v. Transamerica was referring to Bruno Appliance and Furniture, Inc. v. Hryniak, 2014 SCC 8 (CanLII),  in which the Supreme Court of Canada summarized the four elements of the tort of civil fraud, at para. 21, as:

 

  1. a false representation made by the defendant;
  2. some level of knowledge of the falsehood of the misrepresentation on the part of the defendant (whether through knowledge or recklessness);
  3. the false representation caused the plaintiff to act; and
  4. the plaintiff’s actions resulted in a loss.

 

The definition of fraud in Bruno Appliance does not include reference to fraud by omission or concealment. In Lee v. Transamerica Life Canada, the defendants submitted that the Bruno Appliance definition of civil fraud is exhaustive, and that by failing to expressly plead reliance on misrepresentation as a cause of their losses, the plaintiffs had failed to plead any proper cause of action at all. In our view, either the Court in Lee v. Transamerica Life Canada, got it wrong, or the concept of fraud at equity was not adequately considered, as explained herein.

 

Rejection of ‘Dishonest Means’ as an Element of Civil Fraud?

In 2010, a motions judge hearing the Bruno Appliance case granted summary judgment to Bruno Appliance against Hryniak in the sum of $1 million USD. Those damages had been sought based on an allegation of fraud as part of a larger scheme. The Court accepted the definition of fraud as stated in Kerr on the Law of Fraud and Mistake:

All surprise, trick, cunning … and other unfair way that is used to cheat any one is considered fraud. Fraud in all cases implies a willful act on the part of any one, whereby another is sought to be deprived, by illegal or inequitable means, of what he is entitled to.

However, Hryniak’s 2011 appeal to a five-member panel of the Ontario Court of Appeal succeeded (2011 ONCA 764 (CanLII) http://canlii.ca/t/fp510). The judgment was set aside, and Bruno’s motion for summary judgment was dismissed. The Court of Appeal stated:

169      What is not clear on the record is whether Hryniak made any statement that induced Bruno to invest with him. The motion judge did not address this important element of a cause of action in civil fraud. As we read his reasons, he concluded that because Hryniak had dishonestly converted Bruno’s money to his own use, Hryniak was liable to Bruno in fraud. In other words, fraud was made out because Hryniak deprived Bruno of his money and did so in a dishonest way.

 

170      The notion of deprivation underlies both the tort of conversion and civil fraud: see Philip H. Osborne, The Law of Torts, 4th ed. (Toronto: Irwin Law, 2011), at pp. 308-309.  But proof of civil fraud requires proof of some additional elements; depriving the plaintiff of his goods is not enough. Fraud requires a false statement knowingly made that induces the victim to act to the victim’s detriment.

 

The Supreme Court of Canada agreed with the Ontario Court of Appeal and dismissed the appeal. After defining the constituent elements of civil fraud (set out above), the Court ultimately found there was a genuine issue to be tried, being whether Hryniak had actually perpetrated the fraud:

 

24        As noted by the Court of Appeal, and following the analysis [of the components of fraud], civil fraud requires a finding that Hryniak made a misrepresentation which induced Bruno Appliance to invest. The motion judge neither identified the need for a misrepresentation, nor found that Hryniak made one.

28        While the motion judge found that Hryniak was aware of the falseness of the representations and exercised “full dominion and control” over Bruno Appliance’s funds (para. 169), as noted by the Court of Appeal, this finding would support liability in conversion, but is not sufficient to establish fraud.

 

29        While I agree with the motion judge that the evidence clearly demonstrates that Hryniak was aware of the fraud, and may in fact have benefited from the fraud, whether Hryniak perpetrated the fraud by inducing Bruno Appliance to contribute US$1 million to a non-existent investment scheme is a genuine issue requiring a trial.

 

The Court in Lee v. Transamerica Life Canada followed the Supreme Court of Canada decision, and held that while fraudulent activities in the civil context (i.e. “civil fraud”) can occur in innumerable ways, the cause of action recognized in Canada is the tort of deceit, also referred to as the tort of fraud or fraudulent misrepresentation, has limited application.

The Court held that ‘civil fraud’ requires that the fraudster knowingly made a false statement to induce the victim to act to his or her detriment. The Court, however, did not consider whether omissions or concealment by a fraudster in the absence of a misrepresentation are insufficient to make out the tort. There was also no reference to the criminal concept of “dishonest means.”

 

Civil Fraud Includes Fraud by Omission and ‘Dishonest Means’

Often fraudsters get agitated when criminal cases are referred to in order to define fraud in their civil or administrative actions. However, civil and administrative courts routinely define fraud by making reference to criminal cases. For example, in the investment fraud case of Siegel et al v. Hibbert et al, 2012 ONSC 2767  , the civil court held:

Criminal fraud requires proof of:

(a) a “dishonest” act involving deceit, falsehood or “other fraudulent means” which (b) causes detriment or deprivation to the victim.

 

In a civil action there need not be a false representation; it is sufficient if there is a fraudulent (“dishonest”) meansHarland v. Fancsali, [1993] O.J. No. 961.

Likewise, the Ontario Securities Commission (the administrative tribunal that governs those involved in the investment industry), has relied upon the same case law from the criminal and civil courts: Re Marlon Gary Hibbert (2012), 35 O.S.C.B. 8583.

The recent criminal fraud case of R. v. Fontana, 2016 ONSC 7076, focused in part on fraud by omission as “dishonest means”. The Court relied on what a “reasonable person” would consider to be “dishonest conduct.” Citing R. v. Zlatic, [1993] 2 SCR 29, (“Zlatic”) the Court held:

Dishonest conduct can be defined as conduct “which ordinary, decent people would feel [… was …] at variance with straightforward or honourable dealings”. At its heart, the dishonesty of “other fraudulent means” connotes the wrongful use of something in which another person has an interest, in a manner that the interest of the other person is put at risk or extinguished.

The Court then rhetorically asked:

Would ordinary decent people consider Ms. Fontana’s actions in accepting the money for the establishment of a restaurant, and then using it for personal expenses and gambling, dishonest conduct?

Would the ordinary decent person consider the depleting of the loan proceeds by nearly $80,000 within five months of the loan being made, the actions of an honest person where none of the monies went into the restaurant business?

Would the ordinary decent person consider the use of the loan proceeds for a $9,000 payment for a BMW within seven weeks of receiving the loan proceeds, the actions of an honest person?

The Court held that not only did Ms. Fontana have an obligation to accurately advise what she was using the money for, she also had an obligation to advise her lender, Ms. Post, if she ever changed her intention. The Court held:

I also infer from Fontana’s statement [that she would use the money to create a restaurant] that she knew she had an obligation to keep Ms. Post apprised of how things developed so that Ms. Post knew how her money was spent. Ms. Fontana never advised Ms. Post of how she was spending the money.  When Ms. Fontana failed in her efforts to set up a restaurant and began using the money for personal purposes, she did so dishonestly.

To use the words of the Supreme Court in Zlatic, the ordinary individual would have little difficulty concluding that Fontana’s actions were dishonest.  Her initial actions may have been honest; but they became dishonest very soon after she accepted the money and she became frustrated in her efforts to set up a restaurant.

It is for this reason that we are of the view that the Court in Lee v. Transamerica Life Canada took too narrow a view in defining civil fraud. What policy reason could there be to define fraud far more narrowly as a civil tort as opposed to a criminal offence?

 

Pleading “Equitable Fraud” Fills the Gap

The decision of Vitacea Company Ltd. et al. v. The Winning Combination Inc. et al, 2016 MBQB 180 addressed the issue of “equitable fraud” to fill the gap left by the definition of conventional “civil fraud” and what we refer to as “dishonest means”. The Court in Vitacea held:

The rule of equity shall prevail over a rule of common law [where it fails] … Equity will not allow A to suffer a loss, nor will it allow B to escape liability for his wrongdoing by virtue of the fact that he has made a fraudulent statement to C, but not A. Equitable fraud will hold the wrongdoer liable to account to A for the proceeds of this fraudulent sale.

The Court in Vitacea adopted the ruling of the Supreme Court of Canada in Guerin v. The Queen1984 CanLII 25 (SCC), [1984] 2 S.C.R. 335 at 356.

What is covered by equitable fraud is conduct which, having regard to some special relationship between the two parties concerned, is an unconscionable thing for the one to do towards the other.

Fraud or the equivalent of fraud refers not to the tort of deceit or strict fraud in the legal sense, but rather to the broader category of equitable fraud or constructive fraud ….  

Fraud in this wider sense refers to transactions falling short of deceit but where the Court is of the opinion that it is unconscientious for a person to avail himself of the advantage obtained” (p. 37).  

Fraud in the “wider sense” of a ground for equitable relief “is so infinite in its varieties that the Courts have not attempted to define it”, but “all kinds of unfair dealing and unconscionable conduct in matters of contract come within its ken”: McMaster University v. Wilchar Construction Ltd. (1971), 1971 CanLII 594 (ON SC), 22 D.L.R. (3d) 9 (Ont. H.C.), at p. 19. See also Montreal Trust Co. v. Maley (1992), 1992 CanLII 8264 (SK CA), 99 D.L.R. (4th) 257 (Sask. C.A.), per Wakeling J.A.; Alampi v. Swartz (1964), 1964 CanLII 303 (ON CA), 43 D.L.R. (2d) 11 (Ont. C.A.); Stepps Investments Ltd. v. Security Capital Corp. (1976), 1976 CanLII 648 (ON SC), 73 D.L.R. (3d) 351 (Ont. H.C.), per Grange J. (as he then was), at pp. 362-63; and Waddams, [The Law of Contracts, 4th ed. (Toronto: Canada Law Book, 1999], at para. 342.

 

The Court in Vitacea held that equitable fraud may exist as between commercial parties whose relationship is governed by contract.

 

Criminal Fraud Convictions as a Basis for Civil Fraud Liability

The absurdity of limiting ‘civil fraud’ to only spoken or written misrepresentations is demonstrated by the case of Deposit Insurance Corp. of Ontario v. Malette, 2014 ONSC 2845. In Deposit Insurance the defendant Malette plead guilty to the criminal offence of Fraud Over $5,000, but the trial judge at sentencing held that “restitution in these circumstances was unrealistic”. With no recourse for recovery through the criminal courts, the victim Deposit Insurance then brought a civil action, and sought summary judgment for fraud relying on the criminal conviction.

The defendant Malette of course did not want to pay back the loss he caused his victim, and found some lawyer to argue that his conduct did not constitute “civil fraud” because he was found criminally liable only for fraud by omission (dishonest act), and not for making any false representations to the victim. Malette relied on the statements of the criminal court:

I find that such a continuing non-disclosure by Nicol Malette constitutes evidence of both the actus reus by “other fraudulent means” as well as the mens rea of his fraud on these victims. I do not believe Nicol Malette when he claims such ignorance of the law.

I am satisfied on this evidence, including the testimony of Nicol Malette, that he failed to disclose his conflict of interest and also that his failure to disclose was deliberate in the sense that his failure to act was committed with the knowledge that the economic interests of the Caisse were being put at risk.

The civil court in Deposit Insurance, however, found Malette liable for civil fraud. It held that a re-litigation of the criminal finding would be res judicata and an abuse of process. More importantly, the Court further held:

The findings of [the criminal court] mirror the essential elements of the civil tort of fraud:

  a.  Mr. Malette’s non-disclosure … constituted a false statement of fact (“A failure to disclose equals concealment of a material fact, equals an express misrepresentation”: G.H.L. Fridman et al, The Law of Torts in Canada, 3rded., (Toronto: Carswell, 2010) at 711, citing Johnson v Erdman (2002), 2002 SKQB 447 (CanLII), 226 Sask. R. 81 (Q.B.)).

b.  Malette continuing non-disclosure also constituted evidence of the mens reaof his fraud and, hence, intent. Nadeau J. rejected Mr. Malette’s claims of ignorance of his statutory responsibilities to disclose under the Credit Unions and Caisses Populaires Act, R.S.O. 1990, c. C.44s. 69(1) and the Credit Unions and Caisses Populaires Act, 1994, S.O. 1994, c. 11s. 146.

c.   Malette knew that, by his non-disclosures, the economic interests of the Caisse were being put at risk.

d.    Malette knew that the shareholders’ loans scheme implicated over sixty shareholders involving more than $3,000,000 in loans from the Caisse (reasons of Nadeau J, para 22) and, hence, that reliance on his representation by non-disclose caused damage to the plaintiff.

For the purposes of the four point civil fraud test, [this evidence] is sufficient to support a finding of civil fraud in respect of all of the loans.  There is therefore no merit to the defendant’s argument that a trial is required to find out which of the loans were a product of fraud and then assess damages accordingly.

To avoid unfortunate decisions such as in Lee v. Transamerica Life Canada, where it was held that the tort of deceit or fraudulent misrepresentation does not capture misconduct where the fraudster has used omissions and/or concealment to perpetrate the fraud, we advise victims of fraud to plead “equitable fraud” in situations where “dishonest means” are present notwithstanding that formal misrepresentations have not been made.

 

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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