Golden Oaks Enterprises Inc. v. Scott, 2022 ONCA 509

July 20, 2022

When will the court refuse to apply the corporate attribution doctrine?

Golden Oaks was a Ponzi scheme operating in Ottawa between 2009 and 2013. It was publicly advertised as a “rent-to-own” business, but was promoted to certain individuals as a way to turn a quick profit by advancing funds for short periods of time in exchange for high-interest promissory notes. During its operational period, Golden Oaks issued 504 promissory notes to 153 investors, with early investors earning commissions for persuading new investors to make loans. The scheme collapsed in July 2013. Both Golden Oaks and its principal and directing mind, Lacasse, went into receivership and made assignments in bankruptcy a few weeks later.

Once appointed, Doyle Salewski as Trustee began over 80 separate legal actions against creditors in 2015. Seventeen of these actions were brought against individuals and companies who received payments from Golden Oaks in 2012 and 2013. The theory of these 17 actions was that, as a Ponzi scheme, Golden Oaks was by definition insolvent, it never had enough money to pay what it owed to legitimate creditors, and the commission payments and usurious interest payments to the defendants deprived those creditors of their share of the company’s remaining equity.

The 17 actions were heard together in a summary trial. With respect to the investor appellants in the “Usurious Interest Action”, the trial judge granted claims for repayment of interest in varying amounts between $4,000 and $67,500. The trial judge found that these investors knew or ought to have known that the returns promised on their investment were too good to be true.

On appeal, these appellants argued that Golden Oaks must be imputed with Lacasse’s knowledge of the fraud under the corporate attribution doctrine pursuant to the Supreme Court’s decision in Canadian Dredge & Dock Co. v. The Queen. The Trustee argued that the doctrine does not apply in the context of a Ponzi scheme. The test for corporate attribution as set out in Canadian Dredge requires the party relying on the doctrine to meet two conditions: (1) the wrongdoer must be the directing mind of the corporation; and (2) the wrongful actions of the directing mind must have been done within the scope of his or her authority. An individual will cease to be a directing mind unless the action (1) was not totally in fraud of the corporation; and (2) was by design or result partly for the benefit of the corporation.

The Supreme Court in Deloitte & Touche v. Livent Inc. (Receiver of) emphasized that Canadian Dredge was a criminal law case and recognized that courts retain a discretion to refrain from applying the corporate attribution rule where, in the circumstances, it would not be in the public interest to do so. The following principles can be taken from subsequent decisions which have considered the discretion recognized in Livent not to apply the corporate attribution doctrine:

  1. courts should be sensitive to the context and field of law in which corporate attribution arises;

  2. the exercise of this discretion is grounded in public policy and the social implications of holding a corporation accountable; and

  3. uses of corporate attribution which encourage victims of fraud to enlarge their recovery at the expense of other victims, or which permit those who have benefitted from fraud to insulate themselves from accountability against other parties who are victim of the fraud, are to be avoided.

In this case, there were strong public policy grounds to resist permitting those who benefited from the usurious interest scheme perpetrated by Lacasse from avoiding liability in the Trustee’s unjust enrichment action through the application of the corporate attribution doctrine, at the expense of other creditors to Golden Oaks. The trial judge erred by failing to consider the discretion not to apply the corporate attribution doctrine on public interest grounds. Discretion should have been exercised in this case so as not to attribute the knowledge of Lacasse to Golden Oaks.

Corporate attribution would undermine a fundamental tenet of insolvency law, the policy of ensuring equitable distribution of the assets between creditors. Attribution would lead to the perverse outcome of saving the appellants from the consequences of their collection of usurious interest, as well as depriving the Trustee of a civil remedy that would inure solely for the collective benefit of legitimate creditors. Furthermore, the social policy goal of promoting corporate responsibility to prevent fraud and regulatory non-compliance through the corporate attribution doctrine is not advanced where a sole fraudster is in charge of a one-person corporation. Finally, attribution could also wrongly encourage victims of a multi-party fraud to use the corporate attribution principle to enlarge their potential recovery at the expense of their fellow victims.

For this and other reasons, the Court dismissed the appeal.

Judges: Strathy C.J.O., Roberts and Sossin JJ.A

Counsel: Alyssa Tomkins of Gowling WLG for the appellants/respondents (investors) by way of cross-appeal and Harvey Chaiton and Doug Bourassa of Chaitons for the respondent/appellant (Doyle Salewski Inc. in its capacity as Trustee in Bankruptcy of Golden Oaks Enterprises Inc. and Joseph Gilles Jean Claude Lacasse) by way of cross-appeal

By Matilda Lici