Family Members Liable For Knowing Receipt Of Trust Funds

• Published date: 01 March 2022
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Criminal Law, Corporate and Company Law, Trials & Appeals & Compensation, White Collar Crime, Anti-Corruption & Fraud, Trusts
• Law Firm: Gardiner Roberts LLP
• Author: Mr James R.G. Cook

People who receive funds from someone whom they know, or reasonably ought to have known, obtained the funds through a breach of trust may be liable to return the funds based on the doctrines of knowing assistance or knowing receipt. Turning a blind eye or otherwise failing to question the source of the funds will not absolve the recipients from liability.

In Quantum Dealer Financial Corporation v. Toronto Fine Cars and Leasing Inc., 2022 ONSC 1132 (CanLII), the plaintiff corporations were in the business of financing used car inventories for motor vehicle dealers in Ontario. One of the plaintiffs' customers, Toronto Fine Cars and Leasing (TFC), was a used car motor vehicle dealership in Mississauga. TFC was owned by an individual (Diego), who was the sole director, officer and controlling shareholder.

In October 2016, the plaintiffs attended at the TFC dealership and found that Diego was not present, nor was anyone else from TFC. The premises appeared to be abandoned but for some vehicles which they had not financed. The plaintiffs later determined that the cars had been sold in the United States. The plaintiffs were unable to recover the proceeds of sale of the vehicles. Cheques from TFC were returned NSF.

The plaintiffs commenced an action alleging that Diego and TFC had fraudulently sold off the vehicles that they had financed without paying for them. The action named several other defendants who appeared to have participated in or received funds from the fraudulent scheme, including Diego's wife, who was part of the management team at TFC, her sister, a numbered company (for which the sister was the sole officer, director and shareholder), and the sister's spouse.

The plaintiffs brought a motion for summary judgment, arguing that Diego sold off practically the entire car lot overnight and dissipated the proceeds through overseas and non-arm's length transfers including to the other defendants. To conceal his fraud and to defeat creditors, Diego acquired the numbered company, using his sister-in-law as the putative owner and operator, while he called the shots. Diego then used the numbered company to launder funds and to flow through cash to the family member defendants.

As an example, in the two years following the sale of TFC inventory, the numbered company paid $182,233 to Diego's wife, while also paying their children's private school tuitions. The plaintiffs also alleged that Diego's sister-in-law received $175,000 from Diego's wife, ostensibly her...