The complex case deals with a company attempting to recover funds from employee's spouse
by Rhonda B. Levy and Barry Kuretzky of Littler
A recent Ontario Court of Appeal (OCA) decision demonstrates the process an employer may be expected to undertake to recover employee-stolen funds when the proceeds of the fraud are traced to the assets of a “stranger to the fraud,” even when this third party is closely related to the employee. In Sase Aggregate Ltd. v. Langdon, 2023 ONCA 554, the OCA upheld the lower court’s refusal to impose a constructive trust over the proceeds of the sale of property owned by the defrauding employee’s wife.
Background
When the company discovered that its employee defrauded it of more than $2.1 million, it terminated his employment and brought an application to recover its stolen funds against the employee’s wife, claiming they were used to purchase and renovate a property in her name.
Upon learning that the wife’s property had been sold, the company claimed a constructive trust over the net proceeds from the sale alleging that she was liable based on the doctrines of knowing receipt, knowing assistance, and unjust enrichment. The wife denied knowledge of the fraud and claimed that she purchased and renovated the property from legitimate sources; however, she admitted that, upon reviewing banking records, she discovered that her husband made payments in the amount of $177,632.38 using the employer’s funds.
Decision of Lower Court
The application judge concluded that, except for the acknowledged amount ($177,632), the employer did not substantiate its claims because: (1) the wife had no actual or constructive knowledge of the fraud; (2) the employer was unable to trace the balance of its funds into the wife’s property; and (3) the wife used legitimate sources to buy and renovate the property. Accordingly, the net sale proceeds belonged to wife, less the $177,632 that she admitted belonged to the employer.
Employer’s Argument on Appeal
The employer appealed, arguing that the application judge erred when she made the following findings: (a) the imposition of a constructive trust depends on the existence of a fiduciary relationship; (b) there was insufficient evidence to establish that the employee owed the employer a fiduciary duty; (c) the employer had not properly traced its funds; and (d) the wife did not receive employee property or benefit from the fraud perpetrated by her husband, the employee.
OCA’s Decision
For the reasons set out below, the OCA dismissed the employer’s appeal.
First, the OCA found that the application judge did not require a finding of a fiduciary relationship before she could impose a constructive trust. It found that in her reasons, the application judge accurately identified the requirements for a finding of unjust enrichment and demonstrated that she understood and applied this test, finding the wife was unknowingly unjustly enriched by payments totaling $177,632.38 made by her husband toward the wife’s property using company funds. The OCA noted that the application judge refused to grant a constructive trust with respect to the balance because the company did not show that its money was used in the acquisition and improvement of the wife’s property.
Second, the OCA agreed with the employer that the evidence supported the conclusion that the employee’s fraudulent actions breached a fiduciary duty owed to the employer; however, it found that the application judge’s finding that the employer did not provide sufficient evidence to establish that the employee owed it a fiduciary duty had no impact on the appeal.
Third, the OCA saw no error in the application judge’s articulation of the test for tracing funds, and in its application of the test to the evidence. The court noted that the Supreme Court of Canada described tracing as, “…an identification process…the claimant must demonstrate that the assets being sought in the hands of the recipient are either the very assets in which the claimant asserts a proprietary right or a substitute for them.” The OCA emphasized that the employer was not seeking a constructive trust over the bank accounts but over the sale proceeds of the wife’s property; however, since the employer’s tracing stopped at the bank accounts its tracing was incomplete as it did not trace its funds into the payments made for the purchase and renovation of the wife’s property. Accordingly, the employer’s evidence was inadequate to prove that its money was used to purchase and improve the wife’s property. In contrast, the wife provided detailed evidence demonstrating that the wife’s property was funded using other sources.
Fourth, the OCA found the application judge did not err in finding that the wife did not receive employer property or benefit from the fraud perpetrated by her husband. The OCA stated that the wife had nothing to do with the first bank account the funds were deposited into, and rarely used the joint account. There was no evidence linking the wife to these transfers; the employer had to demonstrate that that its money ended up in the wife’s property and that any benefit or enrichment was a tangible benefit that could be restored “in specie or by money” to the employer. In addition, the OCA noted that the wife provided evidence accepted by the application judge that there were legitimate sources of money available to her, which she used to acquire and renovate the wife’s property; the employer could not demonstrate that the wife benefited because its funds were used to buy and renovate the wife’s property, except for the $177, 632.
Bottom Line for Employers
Sase Aggregate demonstrates how an employer may be required to proceed upon attempting to impose a constructive trust onto a third party’s asset to recover funds stolen from it by an employee. When the proceeds of an employee’s fraud must be traced to the assets of a third party who did not participate in the fraud, the tracing process should not stop short of proving that the third party received the proceeds of the employee’s fraud, and that such funds ended up in the third party’s asset. To be granted a constructive trust over a third party’s asset, the employer should also demonstrate that any benefit or enrichment was tangible and could be restored “in specie or by money” to the employer.
In this case, the employer brought an application seeking to recover its stolen funds against its employee’s wife. Notably, the OCA’s view was that the application procedure was “ill-suited to the determination of the issues between the parties because there were disputed facts and questions of credibility,” and did not allow for oral evidence “on a written record that was not fully developed.” Considering these comments, when facts are disputed and credibility is an issue, employers seeking to recover funds stolen by an employee from a third party may wish to avoid proceeding by way of an application and pursue a trial instead.