A recent decision of the Superior Court of Justice is instructive on remedies available to a creditor seeking default judgment on money fraudulently obtained by the debtor.
The case of The Bank of Nova Scotia v. Rosario Rosado concerned a professional student line of credit advanced by the Bank of Nova Scotia to the Defendant of $350,000.00. Only students seeking a professional designation in “qualifying professional study programs” could avail of the line of credit. In support of his application, the Defendant made representations to the Bank that he was enrolled in a dental surgery program at the University of Toronto. He also provided documentation to the Bank supporting this. It turned out that both the representations and documentation were fraudulent.
The Bank sued in February 2023, seeking repayment of the line of credit, an accounting and tracing order, interest, costs, punitive damages, and “a declaration that the debt arises from fraudulent misrepresentations and false pretences” for the purpose of section 178 of the Bankruptcy and Insolvency Act.
The Defendant did not file a defence and was noted in default. The Bank then brought a motion for default judgment.
The Court reviewed the law applicable to motions for default judgment and found that it favoured the Bank on this issue. It also reviewed the law applicable to a claim for fraud and concluded that the Bank had been induced to advance funds to the debtor through fraudulent misrepresentation.
The Bank sought punitive damages of $200,000, arguing that the conduct of the Defendant was “fraudulent, malicious, and premeditated.”
We have previously written about punitive damages here and here. The Rosado case is helpful in reviewing the general principles applicable to such damages. It also serves as a useful example of how those principles are applied in the context of fraudulently obtained funds.
As the Court noted, punitive damages are an “extraordinary remedy.” They are not compensatory damages. Instead, they are meant to punish the defendant. As the Court of Appeal held in Boucher v. Wal-Mart Canada Corp., such damages are only to be awarded in cases where the conduct in question has been “malicious, oppressive and high-handed” and “represents a marked departure from the ordinary standards of decent behaviour.” The Supreme Court of Canada has similarly commented that such damages are intended to address behaviour that is “harsh, vindictive, reprehensible and malicious” such that it is “deserving of full condemnation and punishment” (see Honda Canada Inc. v. Keays).
In Rosado, the Court observed that it may award punitive damages on a motion for default judgment. However, they are to be awarded “only where compensatory damages are insufficient to deter the conduct at issue.”
The Court concluded that punitive damages were appropriate in this case. It noted that the fraud at issue met the misconduct standard for such damages. It further concluded,
“it is hard to see how simply returning the funds fraudulently acquired would be sufficient, particularly with the goal of deterrence in mind.”
In assessing the amount of punitive damages to award, the Court referenced its earlier decision in Bank of Montreal v. 1886758 Ontario Inc. and set out the applicable factors:
The Court referenced two earlier decisions involving claims brought by defrauded creditors. In Gennett Lumber Co. v. John Doe, punitive damages were awarded against the defendant equal to “roughly 50 per cent of the actual losses suffered.” This was done to reflect the “governing rule of proportionality.” The Court in John Doe observed that an award that was equal to or higher than the losses actually suffered would not have been rational. Likewise, an award that was a “minor fraction” of those losses would not have met the goals of “retribution, denunciation and deterrence.”
Likewise, in Bank of Nova Scotia v. Anirudh Kumar, which concerned facts similar to those at issue in Rosado, a punitive damages award of $200,000 was ordered. This award reflected “approximately 57% of the balance owing on the loan” that was fraudulently obtained.
Based on these two decisions, the Court in Rosado likewise awarded punitive damages of $200,000.
The Bank in Rosado also sought an accounting and tracing order, arguing that it could not trace the proceeds borrowed on the line of credit. As the Court indicated, such orders are appropriate “in cases where the monies were fraudulently procured, and the Bank is not able to trace what happened to the loan funds.” The Bank did not seek an order imposing a constructive trust over such proceeds or property since it could not yet link the loan proceeds to any specific property. The Court referenced the earlier Bank of Montreal case, which states that after a creditor can identify such property, a court may ask to declare a constructive trust over the property. The Court in Rosado granted an accounting order, directing the defendant to provide an accounting of all money received from the Bank and “particulars as to how and where the money obtained from the Bank was expended.” It also granted the Bank the right to elect to pursue the imposition of a constructive trust, equitable lien, and/or damages.
The experienced litigation lawyers at Milosevic & Associates in Toronto can provide strategic and practical advice on recovering from fraudulent debtors, including in bankruptcy. For a consultation, contact us online or by phone at (416) 916-1387.
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