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Appellate Litigation

A  fiduciary’s responsibilities or duties are both ethical and legal in nature. The duty arises when a person (principal) willingly accepts and undertakes to enter into a fiduciary relationship on behalf of another party (the equitable owner) in relation to some beneficial interest. At that point the principal is required to act in the best interest of the equitable owner, the party whose assets they are controlling.

If the principal commits a fraudulent act and converts the assets to their use or benefit, they will be accountable for the loss personally. However, such endeavours are seldom accomplished alone. There may be partners, spouses, family, staff etc. that may have been used or needed to accomplish the fraud, knowingly or unknowingly. What liability do they bear?

Knowing Assistance

Strangers to a fiduciary relationship can be found liable along with the fiduciary when they knowingly assist the fraud through their “want of probity”, or lack of honesty based upon the decision of the Supreme Court of Canada (SCC) in Air Canada v. M & L Travel Ltd.,(1993).

In that case, the co-owners of a travel agency were held personally liable for fraud after funds held in trust for Air Canada were misappropriated, despite the fact that the agency itself was the trustee. The funds were taken from clients in exchange for airplane tickets, and were to be held in a separate trust account. However, the funds were instead held in the agency’s general account, mixing in with other income and funds, and being used to cover agency expenses. The agents, while technically ‘strangers’ to the fiduciary relationship between the airline and the travel agency, were found to be constructive trustees since they had knowledge of the relationship and the fact that the monies were not being properly accounted for.

The elements of knowing assistance by a ‘stranger’ fiduciary relationship in a fiduciary breach are:

  1. the existence of a fiduciary duty; 
  2. a fraudulent and dishonest breach of the duty by the fiduciary; 
  3. actual knowledge by the stranger of the fiduciary relationship and the fiduciary’s fraudulent and/or dishonest behaviour; and 
  4. participation by or assistance of the stranger in the fiduciary’s fraudulent and dishonest conduct.

Actual knowledge must include a knowledge of the fiduciary relationship and of the fraudulent and dishonest behaviour. It is not enough for the stranger to know or suspect in some unspecified way that the fiduciary was up to no good.

Further, “actual knowledge: can include a recklessness or wilful blindness to the fiduciary relationship or the fraudulent and dishonest conduct. The concept was developed first in criminal law and labelled “deliberate ignorance”. Wilful blindness has a similar meaning in knowing assistance cases. A person who wilfully shuts their eyes to the obvious is in no different position than if he kept them open.

Therefore, willful blindness requires a subjective standard of fault based on the stranger’s actual state of mind. It is not an objective determination of what the stranger must have known.

Knowing Receipt

This occurs where the stranger has received trust property for their own benefit and thereby been enriched at the beneficiary’s expense. The stranger is then held by the law to be conscience-bound to return the property based on the principle of restitution.

As the basis of liability for knowing receipt rests in restitution and not wrongdoing, a lower level of knowledge will suffice than in knowing assistance cases. In knowing receipt cases, constructive knowledge, based on knowledge of facts that would put a reasonable person on notice or inquiry may serve as a basis for restitutionary liability. This is an objective standard.

The elements of knowing receipt in a fiduciary breach are:

  1. the stranger receives trust property;
  2. for his or her own benefit or in his or her personal capacity, 
  3. with actual or constructive knowledge (wilful blindness or recklessly) that the trust property is being misapplied. 

Such constructive knowledge can be satisfied where the facts that they know, or must know, would put a reasonable person to make inquiries and perform some due diligence.

If you have a question about civil 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, and we work proactively to help clients limit losses whenever possible. Call us at 416-916-1387 or contact us online to learn more about how we can help.