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Appellate Litigation

The Supreme Court of Canada (SCC), in Citadel General Assurance Co. v. Lloyds Bank of Canada, established the three ways in which a stranger to a trust can be held liable as a constructive trustee for a breach of that trust. They are:

  1. as a trustee de son tort;
  2. for knowing assistance in a fraudulent scheme of the actual trustee. This can be through actual knowledge, recklessness, or wilful blindness but not constructive knowledge; and,
  3. for knowingly taking receipt of fraudulently obtained proceeds or goods for their own use or benefit. Here constructive knowledge is enough given the enrichment of the recipient at the expense of the real beneficiary.

What is Constructive Knowledge?

This occurs where the potential constructive trustee has knowledge of facts sufficient to put a reasonable person on notice as to the possible misapplication of the subject trust funds.  The focus is therefore on the recipient’s state of mind because, without constructive or actual knowledge of the breach of trust, the recipient could have a lawful claim to the funds and the plaintiff would not be entitled to a restitutionary remedy.

The Fraud in Citadel

In Citadel, the constuctive trust related to a third-party bank and its retention of insurance premiums that benefitted both the actual trustee and the bank itself. In some cases, the fraud may be the gambling away of trust funds or the receipt of fraudulently obtained goods paid for by trust money. In all cases, the beneficiaries of the trust have lost money or assets which have benefited not only the perpetrators of the fraud but also a third party such as a bank or a casino. The beneficiaries then seek to recover the lost value from the third party as a constructive trustee. Money or assets obtained by fraud can be subject to a constructive trust.

A Recent Example of Employee Fraud & Knowing Receipt

The Ontario Court of Appeal (ONCA) recently dealt with “knowing receipt” in Wescom Solutions Inc. v. Minetto. There, an employee used her employer’s corporate credit card to fraudulently purchase Apple products worth 6.2 million dollars. She offered them for sale on social media. This led to the development of a relationship between the employee and a regular buyer. They met in parking lots and the transactions were all in cash. When the fraud was discovered the employer sued the purchaser as a constructive trustee by reason of being wilfully blind, or with actual knowledge of the fraud. At trial, the employer was awarded $5.1 million in damages.

The ONCA confirmed that knowing receipt can be proven not only by establishing actual knowledge or wilful blindness but also by establishing “constructive knowledge” using objective criteria. Specifically, knowing receipt can be proven by showing that the defendant: (i) had knowledge of circumstances that would indicate the facts to an honest and reasonable person; or (ii) had knowledge of circumstances that would put an honest and reasonable person on inquiry.

At trial, however, the constructive knowledge issue was not before the court, only wilful blindness was. The trial court erred therefore in using an objective standard to establish the wilful blindness. As the ONCA stated in a previous decision:

“Where wilful blindness is at issue, the question is not whether the accused should have been suspicious, but whether the accused was in fact suspicious.”

R. v. Malfara (2006),211 O.A.C. 200 (C.A.)

In short, a finding of wilful blindness, which is the same standard in criminal and civil proceedings, involves a subjective focus on the workings of a defendant’s mind.

This error was not fatal. The findings of fact made it clear that there was actual subjective knowledge sufficient to safely conclude that wilful blindness did exist. A person who becomes aware of the need for some inquiry, but declines to do so for fear of learning the truth, is wilfully blind.

If you have a question about civil fraud, employee fraud, or similar issues, the highly skilled Toronto corporate lawyers at Milosevic & Associates can help. We can provide you with advice and guidance suited to your unique situation. Call us at 416-916-1387 or contact us online to learn more about how we can help.