Ponzi Scheme Participants Ordered To Return Payments That Were "Too Good To Be True"

• Published date: 12 July 2022
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Corporate and Company Law, Insolvency/Bankruptcy
• Law Firm: Gardiner Roberts LLP
• Author: Mr James R.G. Cook

Investors in a scheme that seems too good to be true should be aware that they may be liable to return the funds under principles of unjust enrichment or bankruptcy preference laws.

The claims in Golden Oaks Enterprises Inc. v. Scott, 2022 ONCA 509 (CanLII), arose from a Ponzi scheme in Ottawa that was advertised as a "rent-to-own" business (Golden Oaks) but was promoted by its principal owner (Lacasse) to certain individuals as a way to turn a quick profit by advancing funds for short time periods in exchange for high-interest promissory notes.

Over five hundred promissory notes were issued by Golden Oaks to investors from 2009-2013, with early investors earning commissions for persuading new investors to make loans. The interest on the issues increased to the point where it exceeded the criminal rate of 60%, and money from new investors was being used to pay existing investors.

The court later described the scheme as follows:

Its core business was persuading investors to lend the company money with the lure of unrealistically high returns, to the profit of Lacasse and early investors. These returns were not being funded by the Rent2Own operations. These operations were not viable and generated almost no income. The interest and commissions paid to early investors in Golden Oaks were funded by money from later investors. Early investors and insiders did very well, assuming they withdrew their funds before the whole scheme collapsed in on itself in June 2013. Later investors and ordinary creditors who were totally unaware of the true nature of Golden Oaks' business were left holding the bag.

After the scheme collapsed, Golden Oaks and Lacasse went into receivership and made assignments in bankruptcy.

A trustee in bankruptcy was appointed and brought several actions against individuals and companies who received payments from Golden Oaks in 2012 and 2013, which included commission payments and interest on promissory notes. The trustee's argument was that, as a Ponzi scheme, Golden Oaks was by definition insolvent, it never had enough money to pay what it owed to legitimate creditors, and the commission payments and usurious interest payments to the defendants deprived those creditors of their share of the company's remaining equity.

One of the defendants (LS), was a real estate agent who became involved with the company's operations in 2011 and signed a referral agreement for commissions in 2012. The trustee sought repayment of $72,575 paid to LS in 2012...