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What Fraud Victims Should Know About Recovery against Those Who Resell Property Obtained by Fraud. Liability for Knowing Receipt by Proving Willful Blindness

Investigation Counsel Fraud Recovery Lawyers

On September 14, 2017, the Ontario Superior Court released its decision in Wescom v. Minetto, 2015 ONSC 5568.[1] This is an important decision for victims of fraud as it discusses the legal test a court will consider when deciding whether to permit a fraud victim to recover from those who receive the proceeds of the fraud perpetrated against them.

 

The Underlying Fraud Action

The plaintiff Wescom Solutions Inc. (“Wescom”) employed the defendant Nadia Minetto (“Minetto”) as an accounting manager. Minetto had access to an AMEX card of Wescom, and used it to purchase products from Apple Inc. which she sold for her private benefit.

In November 2011 Minetto placed an ad on Kijiji offering an iPad for sale. The defendant Gabriel Kit Chun Fung (“Fung”), the owner of Plus One Solutions of Markham, met Minetto in a parking lot at the Yorkdale Mall. Minetto sold Fung an iPad in its original package. Fung paid cash. The first iPad that Fung purchased from Minetto was inauspicious.

Over the next 32 months, however, Fung would go on to purchase 4,942 iPhones and 5,321 iPads from Minetto in increments of up to 10 or 20 pieces at a time. Minetto always insisted Fung pay her in cash. Fung paid 5.2 million dollars in cash to Minetto for those Apple products.

On July 9, 2014, the plaintiff Wescom Solutions Inc. (“Wescom”) discovered that its trusted employee Minetto had perpetrated a serious fraud against it. On July 17, 2014, Wescom obtained an order against Minetto on an ex-parte basis for, amongst other things, a Mareva injunction, an Anton Piller order and an order requiring Minetto to immediately attend an examination and disclose all her assets to Wescom.

On July 30, 2014, Minetto was cross-examined on an affidavit of assets pursuant to the ex parte order. Minetto only disclosed what she did with approximately $430,000. On October 31, 2014, Wescom obtained judgment against Minetto based on her consent. Remarkably Minetto consented to a judgment in the amount of $6,831,834.17 plus interest.

 

The Test for Knowing Receipt Action on the Basis of Willful Blindness

As Wescom only recovered a fraction of its loss from Minetto, it continued its action against Fung, his store Plus One Solutions, his company GF International, and his associate Eric Yip. Wescom’s action alleged the tort of knowing receipt as against these defendants.

We have previously published a blog on recovery through the tort of knowing receipt – see What Fraud Victims Should Know About the Tort of Knowing Receipt. In this blog we discussed the legal elements of the tort. The blog focuses on the legal test for willful blindness against the purchaser of property obtained by Fraud.

 

The Agreed Facts

Fung, along with his businesses Plus One Solutions and GF International, entered into an agreement with Wescom to conduct a summary trial of the claims made against them. As part of the agreement, Wescom and Fun agreed to the following facts:

  • Minetto was employed with Wescom as its accounting manager from June 9, 2008 until July 2014.
  • Minetto began defrauding Wescom at some date prior to January 2011 through the fraudulent use of the company’s corporate AMEX Card.
  • In January 2011, Minetto began purchasing new Apple products using the AMEX card, which she then sold for her own personal gain.
  • Thereafter, Fung began buying Apple products from Minetto.
  • Minetto would advise Fung of what Apple products she had access to and Fung would indicate how many he could buy.
  • Minetto would then order these Apple products and notify Fung upon acquiring them.
  • At all material times, Fung owned a store, Plus One Solutions, located in First Markham Place, 3255 Highway 7 East, Unit 155 B, Markham, Ontario.
  • Plus One was a retail business that sold accessories, phones, and iPads. In addition, it provided services such as the unlocking of phones and repairs.
  • Of the Apple products that Minetto supplied to Fung, approximately 10% to 15% were sold through Plus One. The remaining 85% to 90% of the Apple products were sold by Fung to offshore companies in Hong Kong, to local wholesalers, to other stores and to online purchases.
  • Fung had a business relationship with Eric Yip. Yip assisted Fung with the sale of the Apple products through his network. (Yip, a named defendant in the action, is also known as Samson Man Chun Yip. There is no mention in the judgment that Wesco also moved for judgment against Yip at this time).
  • Fung conducted a largely cash business at his store Plus One Solutions. Fung also paid Minetto for all of the transactions in cash.
  • Fung and Yip rented a “virtual office space” at 15 Allstate Parkway, Markham. They used this address, in part, as a delivery location for the shipments of Apple products.
  • From April 2013 to July 2014, 224 shipments were directed by Minetto to the Allstate Address totaling $3,124,361 worth of Apple products.

Schedule 1 to the Agreement set out the dates between November 9, 2011, and July 9, 2014, on which Minetto purchased products by using a Wescom credit card from either the Apple online store or an Apple store that she would subsequently sell to Fung.

The total value of the Apple products acquired by Minetto through the fraudulent use of the Wescom credit card that she sold to Fung was $5,356,641.06.

Fung made 20% on the fraudulently obtained Apple products for a profit of $1,027,552.58.

 

Fung’s Evidence of How Business is Conducted in the Chinese Community

According to Fung’s evidence, 99%, if not 100%, of the businesses located at First Markham Place are owned or operated by Chinese people, and over 90% of the customer base of those businesses is of Chinese or Asian origin or ancestry. Plus One Solutions is located in First Markham Place.

Fung told the Court that it is not unusual for transactions, even those that are substantial in nature, to be carried out using cash at those businesses. According to Fung, tax is often not paid or collected on cash transactions within the Chinese community.

Fung also testified that the secondary market for the resale of handsets is primarily a cash business. Fung related his experience at First Markham Place and in reselling cellphones on the secondary market with his arrangement to purchase iPhones and iPads from Minetto for cash.

Fung further testified that it is “very common” that participants in the secondary market do not inquire into the source of the products that they obtain for resale. He stated that the source of the products is a “business trade secret”. It is for this reason that he did not ask Minetto how or where she obtained her products.

Fung justified his cash transactions with Minetto as a cultural norm in the Chinese community. He explained that it was a common business practice for him not to press his sellers about where they were getting their product from. In his line of work, “everyone is a middle man”. Fung reasoned that once a purchaser knows where the middle man is sourcing products to sell, the middle man is soon removed from the equation.

 

The Test for Willful Blindness

The Court noted that most cases involving the doctrine of willful blindness arise in the context of criminal law. However willful blindness arises in a civil action from time to time. In Cora v. Adwokat, [2005] O.J. No. 4, it was held that the definition of willful blindness is the same in civil cases as it is in criminal law. See also Bartin Pipe & Piling Supply Ltd., v. Epscan Industries Ltd., 2004 ABCA 52, A.J. No. 126, at para. 28.

The modern statement defining willful blindness is found in the criminal case of R. v. Sansregret, [1985] 1 S.C.R. 570, which is given in the context of distinguishing willful blindness from recklessness. The distinction between willful blindness and recklessness was explained as follows:

Willful blindness is distinct from recklessness because, while recklessness involves knowledge of a danger or risk and persistence in a course of conduct which creates a risk that the prohibited result will occur, willful blindness arises where a person who has become aware of the need for some inquiry declines to make the inquiry because he does not wish to know the truth. He would prefer to remain ignorant.

The culpability in recklessness is justified by consciousness of the risk and by proceeding in the face of it, while in willful blindness it is justified by the accused’s fault in deliberately failing to inquire when he knows there is reason for inquiry . . . .

Based on its review, the Court in the Wescom action held that the concept of willful blindness is made of two parts:

 

  1. in circumstances that arouse the suspicions of a reasonable and honest person that are strong or sufficient enough to raise a duty to inquire; and
  2. whether someone in that person’s position chooses to remain deliberately ignorant to the knowledge that inquiry would reveal.

 

The Court held that willful blindness occurs when it is proven on the balance of probabilities that the person would have had actual knowledge about the true facts but for his or her choice to remain deliberately ignorant in the face of that suspicion. Liability for willful blindness to knowingly receiving stolen goods arises where the person proceeds to engage consciously and deliberately without asking for further information or verification from a reliable source that he knows would furnish him with knowledge.

The Court noted that in “knowing receipt” cases provide some insight into what kinds of facts give rise to a duty to inquire. In Gold v. Rosenberg, [1997] 3 S.C.R. 767, at para. 76, the Supreme Court of Canada held that a bank had a duty to inquire where knowledge of the circumstances would alert an honest and reasonable person of the need for further inquiries.

The Court held that the law does not require one to exercise a standard of perfection; rather, one must do what is expected of an honest and reasonable person. To go further would be to impose “an impractically extensive duty of inquiry” on a party who is otherwise acting reasonably: Gold v. Rosenberg, at para. 83; and Citadel General Assurance Co. v. Lloyds Bank Canada, [1997] 3 S.C.R. 805.

 

The Court’s Finding of Fung’s Willful Blindness

Applying the law to the facts in the Wescom case, the Court held that there were sufficient circumstances for a reasonable and honest person to suspect during this period of time that the Apple products Fung was purchasing from Minetto were not legitimate.

The Court found as a fact that Fung made a conscious choice not to seek verification or further information about the source of the Apple products he was purchasing from Minetto. Rather, Fung chose to remain deliberately ignorant as to the source of those products.

The Court held that Fung’s suspicions should have been sufficiently aroused to ask Minetto to produce receipts in her name as proof of ownership for the Apple products that he was purchasing. Fung could have required Minetto to provide a letter of authorization from the source of the products. Fung could have stopped purchasing the Apple products altogether until he received satisfactory proof that those products had not been stolen or acquired through fraud.

The Court further held that Fung’s evidence that buyers in the secondary market do not ask persons in the middle about the source of the products they are purchasing from is disingenuous in nature and not believable in view of all the other evidence.

The Court found that Fung’s explanation of how business is conducted in the Chinese community was irrelevant as Minetto is not a member of the community. The Court also found that there was no evidence to suggest that Minetto had told Fung that she was involved in the secondary market for electronic products.

The Court concluded its judgment by stating:

 

“As the saying goes, if something is too good to be true, it probably is. I find that on the balance of probabilities Mr. Fung knew, or chose not to make inquiries about whether, Ms. Minetto was selling Apple products to him that had been stolen or obtained through fraudulent means… Instead, he chose to remain deliberately ignorant as to that knowledge.”

 

For the full reasons for judgment, see Wescom v. Minetto, 2017 ONSC 249, 2017 CarswellOnt 14895.

It is not known as at the time of this press release whether Mr. Fung has appealed this decision.

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.

 

[1] https://www.canlii.org/en/on/onsc/doc/2015/2015onsc5568/2015onsc5568.html?searchUrlHash=AAAAAQAGd2VzY29tAAAAAAE&resultIndex=1

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