Defrauded Company Failed to Recover from Fraudster’s Wife

September 06, 2023

By Nasra Esak

In Sase Aggregate Ltd. v. Langdon, 2023 ONCA 554, the Court of Appeal considered a defrauded company’s attempt to recover stolen funds not from the employee who committed the fraud, but from the employee’s spouse. The case recognizes the significance of proper tracing, knowledge, and the application of identifying constructive trusts.

Background

In this matter, the appellant, Sase Aggregate Ltd. (“Sase”), owned and operated a gravel pit in Uxbridge, Ontario. In 2021, Sase discovered that the pit manager of the company, Mr. Showers, had committed extensive fraud against the company over a period of several years. The embezzlement amounted to more than $2.1 million dollars.

Interestingly, Sase decided not to initiate legal proceedings against Mr. Showers directly, but instead brought an application against Mr. Showers’s wife, Ms. Langdon. Sase alleged that the proceeds of the fraud had been used by Ms. Langdon for the purchase and renovation of a property located in Uxbridge, Ontario (the “Wagg Rd. Property”).

Sase sought a constructive trust over the net proceeds from the sale of the Wagg Rd. Property on the basis that its funds could be traced to the purchase and improvement of the property. During the application proceedings, Sase claimed that a constructive trust ought to be imposed based on the following reasons:

  1. Knowing Receipt: Ms. Langdon knowingly received funds belonging to Sase to purchase and improve the property;
  2. Knowingly Assisted: Ms. Langdon knowingly assisted her husband in perpetrating the fraud by allowing cheques payable to Sase be deposited into her accounts under her control; and
  3. Unjust Enrichment: Ms. Langdon was unjustly enriched by her husband’s fraud.

Application Proceedings

Sase’s evidence was provided through an affidavit sworn by the owner of the company, Mr. D’Orazio. Mr. D’Orazio introduced bank records obtained through a Norwich order, which revealed the movement of the stolen funds into joint bank accounts belonging to Mr. Showers and Ms. Langdon. He submitted that the stolen funds could be traced to the purchase and renovation of the Wagg Rd. Property. Mr. D’Orazio also submitted that the stolen funds could be traced to a corporation of which Ms. Langdon was an officer, and thus had control over the corporation’s funds. 

In Ms. Langdon’s affidavit, she denied any knowledge of her husband’s alleged fraud and submitted that she had rarely used the joint bank account into which the majority of the stolen funds were transferred, though she did acknowledge that she had discovered her husband had made payments totalling $177,632.38 using Sase’s funds. She also stated that she was not aware that she was an officer of the aforementioned corporation, and had no involvement in the corporation’s account.

The application judge, after careful review of the affidavits and tracing documentation provided by both parties, accepted Ms. Langdon’s evidence that she did not have constructive knowledge of Mr. Showers’s embezzlement, and that she had obtained funds for the Wagg Rd. Property from legitimate sources. The application judge held that the evidence presented did not support Sase’s claims of knowing receipt, knowing assistance, or unjust enrichment. The judge also found that Sase failed to properly trace its funds to the property, which was necessary for its claims.

As such, the application judge ruled in favour of Ms. Langdon, except for the $177,632.38 which she admitted were traced to Sase stolen funds. Sase appealed the application judge’s decision.

Court of Appeal

In its analysis, the Court of Appeal dismissed the appeal on the following grounds.

Issue 1: Did the application judge err in failing to impose a constructive trust?

The Court of Appeal agreed that fraud had clearly occurred. However, Sase made the choice to pursue their claim against a stranger to the fraud, Ms. Langdon. The Court held that Sase failed to prove that its funds were used in the purchase and renovation of the Wagg Rd. Property, and that it was not sufficient for Sase to simply demonstrate that the stolen funds were traced to a shared bank account of Mr. Showers and Ms. Langdon.

The Court pointed out that Sase chose to not seek a constructive trust over the subject bank account because there was no money remaining. Sase had the burden of proving that the stolen funds were used for the purchase of the property to establish a constructive trust, while Ms. Langdon only needed to show that the funds used for the purchase were not Sase funds to meet the evidentiary burden placed upon her.

As such, the Court of Appeal affirmed that a constructive trust was not found, as Sase had not met the burden to show that the stolen funds were used in the acquisition of the Wagg Rd. Property.

Issue 2: Did the application judge err in law in finding that the appellant failed to provide sufficient evidence to establish that Mr. Showers owed his employer a fiduciary duty?

The Court of Appeal did agree with Sase that the evidence provided did support the conclusion that Mr. Showers’ fraudulent actions were in breach of a fiduciary duty he owed to Sase. However, the Court clarified that this finding was immaterial to the outcome of the appeal, as the application judge rejected this finding based on other grounds.

Issue 3: Tracing of Funds

Sase submitted that the application judge erred in finding that they had not properly traced the funds. The Court of Appeal held that the nature of tracing requires identifying the assets in the recipient’s possession as either the exact assets claimed by the appellant or substitutes for them.

The Court notes that Sase’s tracing was incomplete, because it only demonstrated its money being deposited into bank accounts, and did not trace it into the payments for the property. In contrast, Ms. Langdon provided evidence which demonstrated funding towards the Wagg Rd. Property from non-Sase sources.

Issue 4: Receiving Property or Benefit

Sase asserted that the application judge also erred in concluding that Ms. Langdon did not receive any Sase property or benefit from her husband’s fraud. Sase submitted that that Ms. Langdon received funds from Sase as soon as they were deposited into the joint bank accounts, and once those funds were deposited, she “received the funds in her personal capacity”.

However, the Court of Appeal held that Sase had the burden to prove that its funds were used for the Wagg Rd. property’s purchase and renovation, which it failed to do. Furthermore, the benefit received had to relate to the property itself. As such, the Court also dismissed Sase’s arguments on this issue.

Disposition

The Court of Appeal affirmed the application judge’s decision and dismissed Sase’s appeal, awarding costs to Ms. Langdon.

Notably, the Court of Appeal did remark on some concerns they identified when reaching its conclusion:

  1. There was no question that Sase was defrauded by Mr. Showers, and the movement of funds were consistent with money laundering.
  2. The application process was ill suited in this case given the disputed facts between parties and questions of credibility.
  3. The documentary record was incomplete, and thus made it difficult to trace the stolen funds movements to the Wagg Rd. Property.
  4. The Court of Appeal’s decision was driven by Sase’s decision to pursue a remedy by commencing legal proceedings against Ms. Landon through the application process, and opting to proceed without oral evidence.

Takeaways

This case provides valuable insights into the strict standards upheld by the courts when imposing constructive trusts onto third party assets, even if they are closely related. Despite establishing that fraud had occurred against Sase, this case demonstrates the high threshold of proof required when tracing those proceeds to “strangers to the fraud”.

This case also identifies the potential issues litigants may face when initiating a legal proceeding as an application in complex cases where there are disputes on issues of fact and credibility concerns.