In our blog entitled A Fraud Victim’s Motion to Freeze Their Money we summarized the law that a fraud victim may rely on in a motion for a court order to freeze the bank accounts and other property of a fraudster who wrongfully obtained their money or other assets. This form of motion is typically brought without notice to the fraudster so that the money is not transferred or otherwise dissipated before the order is obtained. When the fraudster is notified, he or she will often take the position that the injunction was improperly obtained, or that it freezes money or property that never belonged to the victim, and is needed by the fraudster for living and legal expenses. In this blog, we provide some legal information for fraud victims who are faced with a fraudster’s motion to vary or set aside their asset freezing order.
Whether a Court will vary the terms of asset freezing order depend on a number of factors, including whether the assets frozen are proprietary in nature (clearly belonging to the fraud victim) or not: see Canadian Imperial Bank of Commerce v. Credit Valley Institute of Business and Technology et al, 2003 CarswellOnt 35, 119 A.C.W.S. (3d) 826, at paragraphs 14-17. A proprietary injunction (as distinct from an ordinary Mareva injunction) preserves “an asset in the possession of a defendant, which the plaintiff says belongs to the plaintiff, or is subject to a trust in favour of the plaintiff.” A proprietary injunction is “typically sought in cases of alleged theft, conversion or fraud where the defendant, by some wrongdoing, comes into the possession of the plaintiff’s property.” Consequently, a proprietary injunction is intended to “preserve the disputed property until trial so that the property will be returned to the plaintiff if successful at trial, rather than used by the defendant for his own purposes.”
In order to obtain an ordinary Mareva injunction, a plaintiff is not required to demonstrate an ownership interest in the property subject to the injunction. This is because a Mareva injunction is intended to “restrain a defendant from taking unusual steps to put his assets beyond the reach of the plaintiff in order to thwart any judgment the plaintiff might eventually obtain.” As an ordinary Mareva injunction is more sweeping in scope than a purely proprietary injunction, fraud victims should be aware that the Courts often issue Mareva injunctions in contemplation that their orders will likely later be modified to permit the defendant to maintain his or her standard of living and to meet legitimate debt payments accruing in the normal course, together with reasonable legal expenses to defend the lawsuit (Canadian Imperial Bank of Commerce v. Credit Valley Institute of Business and Technology et al., at paragraphs 17-18).
In order for a fraudster to successfully vary the terms of the injunction, he must first convince the Court that he does not have any assets that are not bound by the injunction with which to pay his reasonable living expenses and legal fees. This is because most courts are wary about permitting a defendant “to use the plaintiff’s money for the purpose of attempting to defeat the plaintiff’s claim, or to delay the plaintiff from obtaining judgment.” Where the alleged fraudster is successful in showing a Court that he or she has no other assets, the Court must then “engage in a balancing exercise as to whether the injustice of permitting the use of the funds by the defendant is out-weighed by the possible injustice to the defendant if he is denied the opportunity of advancing what may of course turn out to be a successful defence’” (Canadian Imperial Bank of Commerce v. Credit Valley Institute of Business and Technology et al., at paragraphs 20-21).
The Courts typically consider the following factors when determining whether or not to vary the terms of a proprietary Mareva injunction:
(i) Has the defendant shown by way of evidence that there are assets caught by the injunction that are from a source other than the plaintiff, i.e. assets that are subject to a Mareva injunction, but not a proprietary claim?
(ii) Has the defendant used the non-proprietary assets frozen by the Mareva injunction to pay his reasonable living expenses, debts and legal costs. Those assets must be exhausted before the defendant is entitled to look to assets subject to the proprietary claim.
(iii) If the defendant has used all assets not caught by a proprietary claim and still requires funds for legitimate living expenses and to fund his defence, the court must balance the competing interests of the plaintiff in not permitting the defendant to use the plaintiff’s money for his own purposes against that of the defendant having a proper opportunity to present his defence before assets in his name are removed from him without a trial.
In weighing the interests of the parties, it is relevant for the Court to consider the strength of the plaintiff’s case, as well as the extent to which the defendant has put forward an arguable case to rebut the plaintiff’s claim.
The cost and strategic risk in bringing a motion for a Mareva Injunction, and in resisting a motion for carving out reasonable living and legal expenses, are important considerations for a victim of fraud. For further information, contact us at www.investigationcounsel.com.