We previously wrote about the doctrine of corporate attribution in the context of bankruptcy in Ernst & Young Inc. v. Aquino. This decision was followed by another decision of the Court of Appeal in Golden Oaks Enterprises Inc. v. Scott, which also concerned bankruptcy. One of the primary issues before the Court of Appeal in Golden Oaks related to applying the doctrine of corporate attribution in the context of discoverability under the Limitations Act, 2002.
When applied, the doctrine of corporate attribution attributes an individual’s actions to a particular corporation. It often comes into play when determining whether or not the corporation should be held responsible for particular violations of criminal or regulatory law or for torts committed by specific individuals.
The doctrine will apply when two conditions are met. First, the individual who commits the wrongful act must be the directing mind of the corporation, and second, the act must have occurred “within the scope of his or her authority” (see Canadian Dredge & Dock Co. v. The Queen). In addition, the act cannot have been “totally in fraud of the corporation” and must have been “by design or result, partly for the benefit of the corporation.”
The Golden Oaks case concerned a company named Golden Oaks Enterprises Inc. The company’s sole director and officer was an individual named Lacasse. Between 2009 and 2013, it operated as a Ponzi scheme in Ottawa, publicly advertising itself as a “rent-to-own” business. However, the company promoted itself as accepting funds from investors in return for high-interest promissory notes. Some investors earned commissions by convincing others to make loans to the company. Eventually, as the company’s situation grew worse, it began issuing promissory notes with interest rates that exceeded the criminal rate of interest of 60%. Money from new investors was then being used to repay existing ones. The scheme eventually ended with the company and Lacasse going into receivership and making assignments in bankruptcy.
As trustee in bankruptcy, Doyle Salweski Inc. commenced more than 80 legal actions against the company’s creditors. These creditors included those who had received commission payments and interest on the promissory notes. At trial, some investor creditors were ordered to repay interest the company had paid them.
The trustee, in bankruptcy, commenced the action that was the subject of the appeal in 2015, even though the interest payments and investments comprising the Ponzi scheme had occurred outside the applicable two-year limitation period. A limitation period does not generally begin until the claim in issue is discovered or discoverable. The trial judge concluded it was appropriate to apply the law of corporate attribution to determine when the claim had been discovered.
Under the applicable section of the Limitations Act, 2002, determining when a claim is discovered is to be made based on various criteria, including when the person with the claim first knows that “a proceeding would be an appropriate means to remedy it.” According to the trial judge, so long as Lacasse controlled Golden Oaks, a proceeding would not have been legally appropriate since “there was no legal or practical route … for the initiation of legal proceedings in the name of Golden Oaks by anyone other than Lacasse.” Bringing such a claim likely would have exposed the company’s Ponzi scheme. As such, the trial judge found that a proceeding would not have been appropriate until the company had gone into receivership. Therefore, the claim against the investor creditors was not discovered until the receivership occurred and was not statute-barred.
Some of the investor creditors appealed this finding, among others.
Reviewing the law around the doctrine, the Court of Appeal noted 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.” This is the case even when the two conditions outlined in Canadian Dredge are satisfied.
The Court observed that “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 victims of the fraud are to be avoided.”
It also noted that courts must be alert to the “context and field of law in which corporate attribution arises” and ensure that their discretion to apply the doctrine is “grounded in public policy and the social implications of holding a corporation accountable.”
Ultimately, the Court of Appeal in Golden Oaks concluded that there were “strong public policy grounds” against using the doctrine of corporate attribution to permit the investor-creditors to avoid liability at the expense of the company’s other creditors. It found that applying the doctrine in the circumstances would undermine a basic purpose of insolvency law, namely “the policy of ensuring equitable distribution of the assets between creditors.” Applying the doctrine would lead to a “perverse outcome” by “saving the appellants from the consequences of their collection of usurious interest.” Accordingly, the Court of Appeal found the doctrine should not apply, and the claim against the investor creditors was, therefore, not time-barred.
The Supreme Court of Canada subsequently granted leave to appeal in Golden Oaks, just as it did in Aquino. We continue to await its decision.
The experienced litigation lawyers at Milosevic & Associates in Toronto can effectively represent you in complex corporate commercial litigation matters. For a consultation, contact us online or by phone at (416) 916-1387.
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