Think the limitations clock has run out? Think again; it may not even be ticking‎

In Golden Oaks Enterprises Inc v Scott, 2022 ONCA 509,‎ ¹‎ the Ontario Court of Appeal addressed important issues of the corporate attribution doctrine and its interplay with limitation periods. Most importantly, the Court of Appeal confirmed that the court has discretion to refuse to apply the corporate attribution doctrine for one-person corporations, particularly in cases of fraud.

The Ponzi scheme

Golden Oaks Enterprises Inc. was advertised as a rent-to-own business, but in reality, it was a Ponzi scheme. Golden Oaks issued a large number of high-interest promissory notes to over 150 investors who advanced loans for a short period of time, promising a fast and easy way to make a profit. The initial interest rates were attractive, but as the financial situation at Golden Oaks deteriorated, Golden Oaks began issuing notes with criminal interest rates. Eventually, the funds from new investors were largely used to pay existing investors until the scheme ultimately crumbled.

After the scheme collapsed, Golden Oaks, as well as its founder, Jean Claude Lacasse, went into receivership and bankruptcy.

Doyle Salewski Inc. was appointed as the Trustee in Bankruptcy and Receiver. In that capacity, Doyle Salewski commenced approximately 88 separate legal proceedings against creditors and others for receipt of preferences, settlements, unjust enrichment, usurious interest and unlawful commissions. The Trustee settled with approximately 71 defendants before the initial trial in December 2018. Following the trial decision of August 30, 2019, a further four either settled with the Trustee or accepted their judgement. Thirteen of the defendants proceeded to the Court of Appeal.

Corporate attribution and discoverability

A key focus of the appeal was whether the trial judge should have exercised discretion not to apply the corporate attribution doctrine. The Court of Appeal found that it was “clear” that the discretion should have been exercised so that Mr. Lacasse’s knowledge was not attributed to Golden Oaks.

The Trustee brought the actions outside of the standard two-year limitation period in the Limitations Act, 2002. However, the trial judge determined that the claims only became discoverable at the point at which the Trustee began to act and received authority to bring the actions. The appellants, relying on the corporation attribution doctrine, argued that Golden Oaks first discovered the claim when Mr. Lacasse had knowledge of the fraud as the corporation’s directing mind.

The corporate attribution doctrine (sometimes called the “corporate identification doctrine”) attributes the conduct or actions of a corporation’s directing mind (in this case, Mr. Lacasse) to the corporation itself in instances where the conduct or actions taken are within the scope of the individual’s role or authority. The Supreme Court of Canada has held that courts retain discretion to refrain from applying the corporate attribution doctrine in matters where it would not be in the public interest to do so.

Guiding principles for discretion

In summarizing the case law on the exercise of this discretion, the Court of Appeal identified three key principles to help guide when the corporate attribution doctrine should not be applied:

1. courts should be sensitive to the context and field of law in which corporate attribution arises;
2. the exercise of this discretion is grounded in public policy and the social implications of holding a corporation accountable; and,
3. 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 victim of the fraud are to be avoided.

In applying these principles, the Court of Appeal found that there were strong public policy grounds to refuse to allow those who benefitted from the Ponzi scheme at the expense of other creditors to avoid liability by applying the corporate attribution doctrine.

Until this decision, it has been an open question as to whether the discretion not to apply the corporate attribution doctrine is available in matters which involve a single individual at the helm of a corporation. However, the Court of Appeal found that there was no principled basis upon which not to exercise this discretion in the circumstances of the case.

The Court of Appeal specifically noted that a finding of corporate attribution in this matter would undermine the foundational basis of insolvency law in the circumstances. The social policy goal of promoting corporate responsibility as it relates to fraud prevention and regulatory compliance through the corporate attribution doctrine was not at play in a matter where only one individual is in charge of a corporation. Additionally, to apply the doctrine in the circumstances could have the effect of encouraging victims of a multi-party fraud to use the principle to gain a greater recovery at the expense of other victims.

Timing is everything

In matters that involve the corporate attribution doctrine as a consideration and where misconduct is alleged against a corporation’s directing mind, discoverability may not be as straightforward as it first seems. While any potential limitation period issues should always be addressed early on to avoid later complications and potential disappointment, the discretion of the court to not apply the corporate attribution doctrine where fraud or other misconduct has gone undetected as the result of the actions of a directing mind may provide an alternative avenue for advancing an action that may otherwise seem statute-barred.

‎[1] Doyle Salewski Inc. was represented on the appeal by Harvey Chaiton, Partner at Chaitons LLP and Doug Bourassa, Partner at Torkin ‎Manes LLP. DLA Piper (Canada) LLP represents Doyle Salewski in a related ongoing action against key ‎insiders in the Ponzi scheme.‎‎

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