From: Mitchell McInnes <mmcinnes@ualberta.ca>

Sent: Monday 21 October 2024 18:45

To: obligations@uwo.ca

Subject: Supreme Court of Canada -- illegal contracts -- corporate attribution -- limitation period

The Supreme Court of Canada recently released Scott v Golden Oaks Enterprises Inc 2024 SCC 32. The decision dealt with a variety of issues, but the focus fell on the recognition of illegal contracts and the attribution of knowledge within a one-person corporation.

A man named Lacasse was the only person involved in a company called Golden Oaks. The company ostensibly existed to undertake low-income housing projects it was actually used to perpetrate a Ponzi scheme. Early investors were paid by way of unusually high interest rates on promissory notes and referral contracts that paid commissions for attracting new investors. By the time that the scheme collapsed and the company entered into bankruptcy, those early investors had received nearly $8 million.

The trustee in bankruptcy sought to recover that money on behalf of the company. The defendant investors countered by arguing, inter alia, that (1) they received the commissions under referral contracts that constituted juristic reasons for their enrichments, and (2) the claims were time-barred under the limitation legislation. The success of the first argument depended on whether the referral contracts were illegal; the success of the second argument primarily turned on when the two-year limitation period began to run, which depended in turn on whether Lacasse s knowledge of the relevant facts could be attributed to the company.

The trial judge held that (1) the referral contracts did not violate the Securities Act and therefore were not illegal, and (2) Lacasse s knowledge was attributable to the company, but that the actions were not time-barred because it was not appropriate (in the language of the Limitations Act 2002) for the trustee to commence litigation until it had been able to investigate the nature of the Ponzi scheme.

Ontario s Court of Appeal held that (1) the referral contracts were illegal under the common law and therefore could not constitute juristic reasons for the receipt of the referral commissions, and (2) the trial judge should have exercised a discretion to refrain, on policy grounds, from attributing Lacasse s knowledge to the company.

A further appeal to the SCC was dismissed. The highlights of the majority judgment:

Illegal Contract          The referral contracts were illegal under the common law because they were were tainted with illegality (at [113]) insofar as their purpose was was, at least in part, to induce others to enter into the illegal loan agreements [as part of the illegal Ponzi scheme], a purpose that is contrary to public policy at common law (at [114]).

That was true even though the trial judge found that the defendants were not aware they were involved in a fraudulent Ponzi scheme. [That] lack of subjective knowledge of illegality does not defeat the trustee s illegality argument, because the question of whether a contract was entered into at least in part with the purpose of committing an illegal act is examined from the objective standpoint of a reasonable person (at [113]). The trial judge found that while the defendants were not subjectively aware of the overriding illegality of the Ponzi scheme, they should have known that they were entering into illegal agreements (2019 ONSC 5108, [484]). All of the investors who received referral commissions also received interest on promissory notes. That interest was extraordinarily high in many instances, criminally so.

Finally, while the defendants argued that they were not in pari delicto with Golden Oaks and consequently should not be compelled to make restitution, that argument failed. It cannot be said that the [defendants] were less blameworthy than Golden Oaks, unless Golden Oaks is first attributed with Mr. Lacasse s knowledge under the corporate attribution doctrine (at [118]). As explained below, that is not so. As a result, the referral contracts were illegal and consequently could not serve as juristic reasons. The defendants were liable to repay the referral commissions, as well as the interest payments.

Attributed Knowledge             The Court of Appeal correctly concluded that Lacasse s knowledge should not be imputed to Golden Oaks under the corporate attribution doctrine.

As a matter of law, the individual and the company were distinct. Even one-person corporations have an existence that is separate from that of their sole owner and directing mind (at [65]). There is no rule requiring knowledge to be attributed in the context of one-person corporations.

Nevertheless, under the corporate attribution doctrine, a person s fraudulent acts may be attributed to a corporation if (1) the wrongdoer was the directing mind of the corporation at the relevant times; and (2) the wrongful actions of the directing mind were performed within the sector of corporate responsibility assigned to them (at [62]). That general rule is subject to exceptions if the directing mind acted totally in fraud of the corporation (the fraud exception) [or] the directing mind s actions were not by design or result partly for the benefit of the corporation (the no benefit exception) (at [62]). While neither of those exceptions was applicable in this instance, the corporate attribution doctrine is also subject to judicial discretion. That discretion was properly exercised in this case because attributing Lacasse s knowledge to Golden Oaks would undermine both the discoverability rule, by causing the limitation period to expire even before the trustee in bankruptcy was appointed, and the statutory bankruptcy regime, by allowing the defendants to retain their wrongful gains and reduce assets available to creditors.  (The court had more to say about the corporate attribution doctrine in a companion case: Aquino v Bondfield Construction Co 2024 SCC 31.)