Employee fraud is a form of civil fraud and is a serious offence whereby an employee commits fraud against their employer’s company or organization. Employee fraud can break trust in the employment relationship and be grounds for a “just cause” dismissal. Beyond this, it can cause serious financial consequences for the employer, who may be sued for negligence for failing to prevent such fraud.
In a recent decision from the Ontario Court of Appeal, the Court considered an application judge’s refusal to grant an employer a constructive trust over the sale proceeds of a property. This matter came to light after an investigation uncovered that an employee had created fraudulent invoices and deposited the invoice payments into his own corporate accounts before further transferring them.
Company investigation finds evidence of employee fraud
In Sase Aggregate Ltd. v. Langdon, the appellant (Sase Aggregate Ltd.) owned and operated a gravel pit in Uxbridge. Sase had initially purchased the gravel pit from Jamie Showers and his business partners in 2012. After the sale, Showers continued to act as the pit’s general manager. In 2020, the appellant discovered that the pit manager had defrauded the company and accordingly terminated his employment. In 2021, an investigation uncovered evidence that the pit manager had defrauded the company of over $2.1 million.
The appellant, Sase, subsequently filed an application to recover the stolen funds. However, this action was brought against the pit manager’s wife. The appellant claimed that the stolen funds were used to purchase and renovate a property owned by the wife. As a result, they sought a constructive trust over the net proceeds from the property sale and claimed that the wife “was liable based on the doctrines of knowing receipt, knowing assistance and unjust enrichment.” The property was purchased for $800,000 and was sold in 2021 for over $2.3 million, and the appellant claimed that the fraudulent funds could be traced to the purchase of the property and improvements made to the property.
An investigation by the appellant discovered that between May 2016 and November 2020, the pit manager had issued false invoices on behalf of the appellant to two customers and had then deposited the payments into two different bank accounts at the Bank of Nova Scotia. The respective bank accounts were registered in the names of two companies incorporated by the pit manager. Further, the investigation disclosed that several other payments had been improperly diverted into these two corporate accounts.
Application judge dismisses company’s claim, finds wife had no knowledge of husband’s fraud
The pit manager’s wife denied knowledge of the alleged fraud and argued that the funds used to purchase and renovate the property came from legitimate sources, including the sale proceeds from another investment property she owned. However, upon review of the bank records, she admitted that she noticed her husband had used $177,632.38 of the appellant’s funds to make payments.
Despite this acknowledgment, the application judge determined that the appellant had not made out its claims because:
- The wife did not have actual or constructive knowledge of the fraud;
- The appellant could not trace all of its funds to the wife’s property; and
- The wife used funds from legitimate sources to purchase and renovate the property.
Upon review of the evidence, the application judge found no evidence to suggest that the pit manager’s wife received funds over $2.1 million in breach of trust. Instead, the evidence provided to the Court showed that she had unknowingly received just over $177,000. Furthermore, the application judge determined that the wife was unaware of her husband’s alleged fraudulent activities, and she had no knowledge of factual evidence that would justify a finding of constructive knowledge.
Application judge dismisses claim for constructive trust; company appeals
On appeal to the Ontario Court of Appeal, Sase argued that the application judge made several errors in deciding not to impose a constructive trust, including by:
- Finding that the imposition of a constructive trust depends on the existence of a fiduciary relationship;
- Finding there was insufficient evidence to establish that the pit manager owed the appellant a fiduciary duty;
- Finding that the appellant had not properly traced its funds; and
- Finding that the pit manager’s wife did not receive the appellant’s property or benefit from the fraud perpetrated by her husband.
Court of Appeal finds company sued a “stranger to the fraud”
The appellant took the position that the application judge should have imposed a constructive trust over all of the net sale proceeds. It argued that this was a logical conclusion after the court found that the pit manager had deposited cheques payable to the appellant (Sase) into corporate bank accounts and subsequently transferred those funds into a joint account owned by the pit manager and his wife.
The Court of Appeal rejected this argument, noting that while there was evidence that a fraud had occurred, the appellant did not bring an action against the alleged fraudster. Instead, the Court of Appeal found the appellant had sued a “stranger to the fraud.” While the appellant claimed that showing the funds went into a joint account was sufficient, it did not seek a constructive trust over the joint account as no funds remained. Therefore, the application judge made no error in failing to impose a constructive trust over the property proceedings to “avoid offending the principle of good conscience.”
Company failed to properly trace stolen funds
The Court of Appeal also agreed with the application judge in finding that the appellant had not properly traced the funds in and out of the joint account. The appellant claimed that the fraudulent proceeds were deposited into a bank account and then mixed with other funds, and while liability is strict when tracing assets, it did not need to establish that the funds were the same.
Despite this, the Court of Appeal noted that the appellant sought a constructive trust over the property sale proceeds, not the accounts. The appellant could have traced the funds in and out of the joint accounts, but instead, it stopped tracing at the accounts. By the time the appellant obtained a Norwich order to freeze the accounts, the funds were gone.
Court of Appeal dismisses appeal
On the other hand, the Court of Appeal found the pit manager’s wife had provided sufficiently detailed evidence that established where she derived the funds from and explained how the transfer of funds occurred. As a result, the Court concluded that she identified the legitimate and independent sources from which the funds were derived and further showed that these funds were not connected to the fraudulent funds.
While the Court of Appeal found the pit manager had defrauded the appellant and how the funds were moved had indicators consistent with money laundering, the Court dismissed the appeal after finding no errors in the application judge’s decision requiring intervention.
Contact the Civil Fraud Lawyers at Milosevic & Associates in Toronto for Advice on Employee Fraud Claims
At Milosevic & Associates, our skilled commercial litigation lawyers provide clients with legal representation in matters concerning civil fraud and employee fraud. We also help clients pursue debt collection and enforcement of foreign judgment in cross-border disputes. We pride ourselves on helping clients navigate the most complex disputes and ensure that they are positioned for the best possible outcome. Whether you are an employer who suspects an employee of engaging in fraud or an employee who has been accused of fraudulent activity, contact us by phone at 416-916-1387 or online to learn how we can assist you.