Ponzi scheme clawbacks: BC Supreme Court approves summary process

As made infamous by Charles Ponzi in the 1920s, Ponzi schemes generate purported “returns” for earlier investors by using funds contributed by newer investors. When the scheme inevitably collapses, the most recent investors are left with significant losses.

While some of the victims’ money will have gone to the Ponzi scheme’s perpetrator, much of it will have ended up in the hands of earlier investors. These dynamics mean that Ponzi schemes will have both “winners” and “losers,” all of whom were typically unaware they had been lured into a fraud.

How does the law deal with this uneven outcome? Should the innocent “winners” get to keep what they were paid? What procedure should the “losers” be required to use to recover what they lost?

These questions were recently dealt with by Justice Fitzpatrick of the Supreme Court of British Columbia in My Mortgage Auction Corp. (Re) 2025 BCSC 1520. 

Background

In May 2023, My Mortgage Auction Corp. (MMAC), a registered mortgage broker with the BC Financial Services Authority, was placed into bankruptcy after it came to light that its sole owner, Gregory Joseph Martel, had been operating a massive Ponzi Scheme. Mr. Martel was also forced into bankruptcy. He did not cooperate with the Trustee, defied court orders, and ultimately fled the country.

From 2018 to 2023, MMAC raised approximately $301 million from thousands of investors for the alleged purpose of funding bridge loans for real estate developers who required short-term financing.

The court-appointed Trustee, PwC, assigned MMAC into bankruptcy on June 6, 2023. The Trustee compiled and categorized over 65,000 transactions to determine the source and uses of the funds from MMAC. It was determined that of the $301 million contributed by investors, only $210 million was returned to investors.  Millions of dollars were lost to trading stock options, Mr. Martel’s personal travel costs, and costs associated with the purchase of personal real estate. The Trustee determined that MMAC never actually advanced any bridge loans. 

Through its investigation, the Trustee identified approximately 1,700 investors. Those who received funds in excess of the principal amount they invested (Excess Funds) were labelled by the Trustee as “Net Winners”, and those who lost money as “Net Losers”. The Net Winners received Excess Funds of about $68.2 million and the Net Losers lost about $149 million.

Legal basis for clawback

Under section 95(1)(a) of the Bankruptcy and Insolvency Act, RSC 1985, c B-3, s 95(1), (BIA), any payment made to an arm’s length creditor within three months of the bankruptcy in preference to other creditors is a void as against the Trustee and can be clawed back. In the interests of justice and fairness, this meant that any amounts the Net Winners received within three months of the bankruptcy could be clawed back by the Trustee so that those amounts would be available to be paid out to the Net Losers.

In addition to advancing claims to void fraudulent preferences under s. 95(1)(a) of the BIA, the Trustee sought to recover the Excess Funds from the other Net Winners as fraudulent conveyances made contrary to the Fraudulent Conveyance Act, R.S.B.C. 1996, c. 163 (FCA), under the equitable doctrine of unjust enrichment, and under the common law remedy of monies had and received.

The proposed summary procedure

Rather than commencing a separate action against each of the New Winners, the Trustee brought a motion pursuant to Rule 11 of the BIA Rules to have the Excess Funds claims dealt with through a unified summary procedure. The Trustee proposed that this summary process would proceed in two stages:

• A Phase I hearing where the Trustee would seek declarations that MMAC’s payments of Excess Funds to the Net Winners were void and of no effect against the Trustee because they were:
  • fraudulent preferences under s. 95(1)(a) of the BIA;
  • fraudulent conveyances under the FCA;
  • unjust enrichments; and/or
  • money had and received.
• A Phase II process to determine whether, and in what amount, if any, the Net Winners received Excess Funds. The proposed process would include:
  • the Trustee providing recipients of the Excess Funds a “clawback” calculation (Clawback Calculation) detailing the Excess Funds the Net Winner allegedly received;
  • an opportunity for the alleged Net Winner to dispute their Clawback Calculation with the Trustee, failing which they could apply to the Court to resolve the issue; and
  • the Trustee would ultimately be able to obtain, file, and enter a money judgment against each Net Winner with the Court, subject to the Net Winner disputing their Clawback Calculation and, if so, the resolution of the issues by the Court.

Objections of the alleged net winners

The proposed summary process was objected to by various alleged Net Winners, who asserted that the determinations sought by the Trustee in Phase I were procedurally inappropriate because:

• the Trustee should be required to commence separate actions against each Net Winner in a separate proceeding;
• the Trustee should be required to provide a transaction-by-transaction analysis for each of the investors, rather than the summary position based on all transactions for that investor toward characterizing that person as a “Net Winner”; and
• no liability of any Net Winner should be established under Phase I prior to the Trustee being required to negotiate with each investor and, failing agreement, any such liability should be later determined by the Court.

Analysis

The Supreme Court of British Columbia found in favour of the Trustee. In her reasons, Justice Fitzpatrick endorsed the Trustee’s position that a summary procedure constituted a just, practical, effective and efficient means of balancing the interests of not only the Net Winners, but all investors involved. 

She affirmed that procedural flexibility is a “hallmark of solvency law,” alluding to the “culture shift” called for by the Supreme Court of Canada in Hryniak v. Mauldin, 2014 SCC 7. Quoting the observation of Justice Myers in National Telecommunications Inc. (Re), 2017 ONSC 1475, Justice Fitzpatrick confirmed: “The goals identified in Hryniak are equally the goals of the bankruptcy process,” and under both Rule 11 of the BIA Rules and Hryniak, “the court is directed to consider whether the use of a summary process will yield a fair result that serves the goals of timeliness, affordability, and proportionality and is therefore in the interest of justice.”

Justice Fitzpatrick noted, “consistent with that flexibility, the court and the parties can tailor proceedings to fit a particular case and design a process that is appropriate toward the goals in a particular matter. Considering the minimal recovery of funds from MMAC and the lack of cooperation from Mr. Martel himself, it was imperative that the Trustee conserved recovered funds for the purpose of disbursements, instead of the costs associated with litigating each claim.

Justice Fitzpatrick proceeded with Phase I, declaring that that the payments of Excess Funds were void on all four of the grounds advanced by the Trustee. She found that there was no legitimate creditor-debtor relationship between the investors and MMAC and that the Excess Funds were the result of fraudulent payments rather than genuine returns on investments. There is no reasonable expectation of profiting through a fraudulent and illegal scheme at the expense of less fortunate, innocent investors. MMAC’s payments of Excess Funds were declared void and required to be returned to the bankrupt’s Estate to be redistributed by the Trustee.

With Phase I concluded, the Trustee was ordered to proceed to the Phase II procedures to substantively address the actual amounts that must be returned to the Estate.

Implications

The Supreme Court of British Columbia’s ruling underscores the importance of proportionate and timely summary procedures in both bankruptcy proceedings and civil litigation more broadly. Both the BIA Rules and rules of civil procedure provide the Court with significant flexibility. Particularly post-Hyrniak, the Court and its participants have a duty to consider the just, most efficient, and least expensive means of fairly adjudicating disputes. As demonstrated in My Mortgage Auction Corp., a thoughtful summary procedure tailored to the case before the Court may be exactly what is required to provide meaningful, fair, and proportionate access to justice.