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What Fraud Victims Should Know about the Tort of “Dishonest Receipt” – THE MIS– USE OF CRIMINAL RESTITUTION ORDERS

Canadian Fraud Lawyer

The Ontario Court of Appeal last week (July 9, 2015) released a decision in Healthy Body Service Inc. ats 1261679 Ontario Ltd., 2015 ONCA 516, on the law involving what is often referred to as ‘knowing receipt’ or ‘dishonest receipt’. The tort of knowing receipt is of interest to fraud victims as recovery against the primary fraudster is often impossible or frustrated by obstruction tactics.

 

The case of Healthy Body pertains to a bizarre scenario involving criminal restitution being paid with funds obtained by fraud, which was then transferred through a law firm of the fraudster under the Crown’s supervision, and into the hands of another victim. In addition to describing the law of knowing receipt, this case also addresses the issues of claims between competing fraud victims. At the conclusion of this blog, we discuss the growing scope of the tort of knowing receipt, especially how it could apply to fees paid to lawyers defending alleged fraudsters.

 

 

Background

 

The unusual story of Healthy Body involves a fraudster by the name of Utpal Patel (‘Patel’). Patel was a bookkeeper for the defendant 1261679 Ontario Ltd. which operated as Raytek Communications (‘Raytek’). Patel defrauded Raytak of $670,000 during the time he was their trusted bookkeeper. He was charged criminally and sued civilly. Only $70,000 was recovered civilly by Raytek against Patel and his spouse. As part of his plea bargain with the Crown, Patel agreed to pay Raytek restitution through the Crown’s office on condition that the more money he paid to Raytek, the less time he would serve in jail. To provide the opportunity to pay restitution, the Crown agreed to defer his sentence.

 

So what did Patel do? He did what he knew best. Patel obtained employment as a bookkeeper for the plaintiff Healthy Body. Healthy Body was unaware of Patel’s guilty plea for fraud as it was not published publicly and Patel did not disclose it. Patel, in turn, defrauded Healthy Body of $490,000. By the time Healthy Body discovered Patel’s fraud, he had paid $390,000 restitution to Raytek. In effect, the Crown’s agreement to defer Patel’s sentence gave Patel the opportunity to commit another significant fraud.

 

Once Healthy Body learned that their stolen money had been used by Patel to pay his way out of jail, it brought action against Raytek alleging that Raytek knowingly received funds obtained by fraud – the tort of ‘knowing receipt’. As discussed above, sometimes recovery against the primary fraudster for fraud is impossible or frustrated by obstructionist tactics. In this case, Patel was deported from Canada to India after the discovery of his fraud involving Healthy Body. Patel effectively got away with much of his crime. Accordingly, Healthy Body sought recovery from a secondary defendant – the victim that had received its stolen funds – Raytek.

 

One may wonder how is it that a fraudster like Patel could pull such a stunt as stealing from ‘Peter’ to pay ‘Paul’ while on charge and conditions of bail. Patel was released on bail, with conditions including not to reoffend and to remain in the jurisdiction. These conditions were of little effect. Patel gave funds in the form of cheques or bank drafts derived from stolen proceeds from Healthy Body and possibly elsewhere to his criminal defence lawyer who passed them on to the office of the Crown. The Crown delivered each of the cheques or bank drafts to Raytek under a covering letter copied to Raytek’s civil lawyer and the investigating officer.

Once Patel’s fraud against Healthy Body was discovered his bail was revoked. Patel plead guilty for the fraud against Healthy Body and was sentenced to six years of incarceration and later deported to India. A free-standing restitution order in the amount of $650,000 was also made against Patel in favour of Healthy Body (now there are two criminal restitution orders) – but they are of little value as Patel is in India or elsewhere. Healthy Body also obtained a default civil judgment as against Patel for $590,000, but has been unable to realize on it.

 

The story, unfortunately, gets more complicated. By the time Healthy Body’s action had come to trial against Raytek, Raytek had ceased operations. The affect of Patel’s fraud had drained Raytek sufficiently that it could no longer go on. So Healthy Body attempted to recover from the fraud by suing for ‘knowing receipt’ the primary director of Raytek, Milton Ramsawak (“Ramsawak’). Healthy Body alleged that Ramsawak should be personally liable to Healthy Body because he knew that the funds he had received through Raytek were obtained by fraud, and he used some of this money to pay down debts he personally owed, such as to CRA as a director of Raytek by virtue of Patel not paying (stealing) Raytek’s tax payments.

 

Ramsawak, in response, alleged that he did not owe anything to Healthy Body because he did not have actual knowledge of Patel’s fraud against them. Ramsawak further alleged that even if the funds he received were obtained by Patel’s fraud on Healthy Body, that he and Raytek had no duty to make an inquiry as to the source of funds as he received the funds through the Crown’s office. In other words, Ramsawak alleged he received money from Patel with a ‘commercial good conscience.’ Ramsawak attempted to paint himself a sympathetic person whose claim on the stolen money superseded that of Healthy Body.

 

This case involved other complicated legal issues, such as tracing the money from Healthy Body to Raytak through the Crown’s office. The law on common law and equitable tracing is not discussed in this blog. This case also addressed the complex issue of when certificates of criminal convictions are admissible in subsequent civil proceedings as evidence of fact and liability. Again, such evidence issues are beyond the scope of this blog. In this blog we focus on the tort of knowing receipt and the duty to make inquiry as to the source of funds.

 

For the purposes of this blog, the important facts are that Ramsawak learned of the Patel’s fraud on Healthy Body on October 6, 2008, and yet made a payment to CRA with money he received from Patel on or before October 30, 2008. On October 6, 2008, the Crown advised Ramsawak that there would be no further restitution payments, and that Patel’s bail would be revoked because the restitution cheques paid to Raytek were fraudulent (proceeds of fraud).

 

 

The Law of Knowing Receipt

 

Liability for “knowing receipt” relates to strangers to a trust who receive trust property for their own benefit and with knowledge that the property was transferred to them in breach of trust. A plaintiff who alleges knowing receipt must prove three issues:

 

  1. the transfer of assets resulted from a breach of a fiduciary duty (breach of trust);
  2. the assets are traceable from the claimant (plaintiff) to the recipient (defendant); and
  3. the recipient (defendant) had knowledge that the assets he received were traceable to the breach of fiduciary duty (were part of a constructive trust).

 

Applying the legal test to this scenario, Healthy Body submitted that:

 

  1. Patel, as a bookkeeper to Healthy Body, was in a fiduciary position to Healthy Body, and that he breached his fiduciary duty by committing a fraud on Healthy Body;

 

  1. all funds that Patel transferred to Raytek were traceable from Healthy Body, and were therefore subject to a constructive trust in favour of Healthy Body;

 

  1. Ramsawak was informed by the Crown that the restitution cheques that Raytek had received were proceeds of a fraud that Patel perpetrated. Despite having this knowledge, Ramsawak made no further inquiries, and transferred funds he received from Patel to CRA and others to pay down his personal debts.

 

 

The Trial

 

At trial, a forensic accounting expert of Healthy Body testified that of the $282,452 that was paid to Raytek, Raytek paid $150,000 to Ramsawak personally who utilized the funds to pay the debt he incurred personally to CRA, and to pay down other personal debt.

 

The trial judge held, as a general principle, that a recipient of funds is not expected to be unduly suspicious of the source of funds and, is not to be held liable unless he or she went ahead without further inquiry in circumstances in which an honest and reasonable person would have realized that the money was the proceeds of a fraud.

 

Applying this test, the trial judge went on to conclude in the circumstances of this case that:

 

[I]t has not been shown that Ramsawak went ahead without further inquiry in circumstances in which an honest and reasonable person would have realized the monies taken were probably trust money and were being misapplied…

 

The restitutionary cheques were transferred from Patel’s counsel to the Crown and provided to Raytek under cover copied both to the investigating officer and [Patel’s lawyer]. The last restitution cheque was provided to Raytek on September 17, 2008, prior to the detection by [Healthy Body] of the fraud perpetrated against it.

 

A reasonable person would, in these particular circumstances, have believed, as did Ramsawak, that he had a lawful claim to the “trust property”. .. The plaintiff’s claim based on “knowing receipt” must therefore be dismissed.

 

In other words, the trial judge did not split the loss as between the fraud victims, but decided that Healthy Body should bear the full impact of the loss.

 

 

On Appeal

 

On appeal the majority agreed with the findings of the trial judge. However, a noteworthy dissent was written that hopefully will result in this case making its way to the Supreme Court of Canada. Justice Lawwers wrote:

 

“[T]he defendant must be shown to have had knowledge of facts that would have put a reasonable person on notice or inquiry as to the source of the funds.” Error crept into [the trial judge’s] consideration of this … element. …[T]he real problem is raised…where [the trial judge] noted that on October 6, 2008, the Crown Attorney…told…Ramsawak…that the restitutionary funds received had been obtained by fraud and no more funds would be forthcoming.

 

…Ramsawak plainly admitted knowing by October 6,…before he caused the funds to be paid to CRA, that the restitutionary money was the result of a fraud. Despite this evidence, the trial judge concluded…[that it had] not been shown that Ramsawak went ahead without further inquiry and circumstances of which an honest and reasonable person would have realized that monies taken were probably trust monies and were being misapplied.

 

With respect, this conclusion simply does not follow from the evidence outlined by the trial judge. I am compelled to find [that the trial judge] made a palpable and overriding error. At the moment that Ramsawak caused Raytek to pay …CRA, he knew that the funds had been obtained by fraud. They were impressed with a constructive trust, a trust that he and Raytek both breached.

 

When Ramsawak got the money in April, and used it to pay down his personal debt in May, he did not know that the money was tainted. But when he made the payments to CRA in October, he was fully aware that it was tainted. Therefore, the knowledge requirement of knowing receipt is clearly made out.

 

In this case the trial judge was faced with rival claims from two fraud victims. She was manifestly sympathetic to the plight of Ramsawak and his wife…She described Ramsawak…as an older gentleman of retirement age. She noted…that Raytek went out of business because, according to Ramsawak, “they couldn’t afford to continue,” largely as a result of Patel’s predations. (No similar details are recorded about [Healthy Body]).

 

But the case must be resolved by the application of legal principles, not judicial sympathy. For these reasons I would grant judgment in favour of [Healthy Body] in the amount of $190,000 plus interest and costs.

 

The effect of the decision by the dissenting judge of the Court of Appeal would have been to apportion the loss between the fraud victims.

 

 

Broader Application

 

It is the issue of what constitutes constructive knowledge and the basis upon which this is adjudicated that is of concern to fraud victims.

 

For example, should a civil defence lawyer, defending an alleged fraudster, who is offered cash as payment for fees, be deemed to be on notice to make inquiries as to the source of the cash, if at the time said civil defence lawyer has knowledge of the fraud as alleged, and knowing the fraudster has no known legitimate source of income or assets.

 

This question of constructive knowledge and duty on a lawyer representing an alleged fraudster to make inquiries when in receipt of cash for payment of legal fees is another issue (money laundering) that would benefit from further judicial review.

 

 

Inquiries

 

Reviewing your action for recovery against secondary defendants by alleging knowing receipt in addition to suing the primary fraudster for fraud is something fraud victims should discuss with their civil fraud recovery counsel. For further information or to have your case assessed, please contact us.

 

Norman Groot, LLB, CFE, CFI – July 12, 2015

www.investigationcounsel.com

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.

2 Responses to "What Fraud Victims Should Know about the Tort of “Dishonest Receipt” – THE MIS– USE OF CRIMINAL RESTITUTION ORDERS"

  • What Fraud Victims Should Know About a Fraudster’s Obligation to Account - Canadian Fraud News
    April 29, 2016 - 3:19 pm

    […] In tandem with pleading for orders to account and orders to support tracing, fraud victims should plead the tort of knowing receipt against Doe defendants. In fraud cases, the victims often do not know to whom the fraudster sent their money. Those third parties should be identified in the claim as Doe defendants who will be named when their identity is revealed as a result of the accounting or tracing process. The test for pleading knowing receipt is more fully discussed in our blog post What Fraud Victims Should Know About the Tort of Dishonest Receipt. […]

  • What Fraud Victims Should Know About a Fraudster’s Obligation to Account - Canadian Fraud News
    April 29, 2016 - 3:19 pm

    […] In tandem with pleading for orders to account and orders to support tracing, fraud victims should plead the tort of knowing receipt against Doe defendants. In fraud cases, the victims often do not know to whom the fraudster sent their money. Those third parties should be identified in the claim as Doe defendants who will be named when their identity is revealed as a result of the accounting or tracing process. The test for pleading knowing receipt is more fully discussed in our blog post What Fraud Victims Should Know About the Tort of Dishonest Receipt. […]

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