Credifinance Securities Limited v DSLC Capital Corp

CASE LAW UPDATE

2011 ONCA 160 (Released March 2, 2011)

Trustee – Constructive Trust – Fraud – Bankruptcy

In this case, the Court of Appeal for Ontario explained the conditions under which a constructive trust remedy can be granted in favour of defrauded creditors after the fraudster enters into bankruptcy proceedings.

After Credifinance Securities Limited ("Credifinance") made an assignment into bankruptcy, DSLC Capital Corp. ("DSLC") filed a proof of claim in the amount of $400,000 in accordance with section 81 of the Bankruptcy and Insolvency Act, RSC 1985, c B-3 (the "BIA"). The proof of claim maintained that $310,500 in the possession of Credifinance was DSLC's property. The Trustee of Credifinance denied the claim. DSLC appealed the decision to the Superior Court on the basis that it was a victim of a fraud and therefore a constructive trust should be granted in its favour.

The Superior Court judge found that DSLC had been defrauded into loaning Credifinance the $400,000 and granted a constructive trust over what remained of the loan on the basis that it did not form part of the bankrupt estate. The trustee appealed the factual and jurisdictional basis for the decision to the Court of Appeal.

In its judgment, the Court of Appeal discussed the process for appeals under the BIA. In obiter, the court commented that the British Columbia approach of hearing the matter as a true appeal makes more sense than the Ontario approach of potentially hearing it as a hearing de novo instead of as a true appeal, the policy rationale for the B.C. approach being that trustees in bankruptcy...