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Civil Procedure - Motions to Strike

Equity - Knowing Receipt of Trust Funds

Equity - Unjust Enrichment - Unconscionability

Equity - Constructive Trust - Embezzlement

Paton Estate v. Ontario Lottery and Gaming Corporation (Fallsview Casino Resort and OLG Casino Brantford) (Ont CA, 2016)

In this case, where embezzled funds were spent in gambling, the Court of Appeal commented as follows on the law applicable to motions to strike:
(1) Motions to strike

[11] As the Supreme Court indicated in R. v. Imperial Tobacco Canada Ltd., 2011 SCC 42 (CanLII), [2011] 3 S.C.R. 45, at para. 19, the purpose of a motion to strike is to eliminate hopeless claims. However, the court in that case also noted, at para. 21, that it “is a tool that must be used with care.”

[12] It is not determinative, on a motion to strike, that the law has not yet recognized a particular claim. Rather, the court must ask whether it is plain and obvious that the claim has no reasonable prospect of success. The court must take the facts pleaded in the statement of claim as true, unless they are patently ridiculous or manifestly incapable of being proven, and the approach must be generous, erring on the side of allowing a novel, but arguable, claim to proceed. While no evidence is admissible on a motion to strike, claimants must clearly plead all facts on which they intend to rely, as those facts are the basis on which the possibility of success will be evaluated. See Imperial Tobacco, at paras. 17-22; and Frank v. Legate, at para. 36, and the cases cited therein.

.....

[14] I recognize that these factual allegations were not always neatly tied to a particular cause of action in the statement of claim. However, that is not fatal on a pleadings motion, provided the material facts are pleaded: Dean’s Standard Inc. v. Hachem, 2014 ONSC 1977 (CanLII), at para. 14; McGillvray v. Penman, 2016 ONSC 1271 (CanLII), at para. 12. See also Almas v. Spenceley, 1972 CanLII 609 (ON CA), [1972] 2 O.R. 429 (C.A.), at p. 433.
The court also affirmed that where a third party knowingly receives trust funds and has reason to suspect that they are being spent in fiduciary breach that a cause of action lies at the hands of the beneficiary against that third party:
(i) Knowing receipt of trust funds

[15] A stranger to a trust may be liable where it receives trust property for its own benefit, has knowledge of facts which would put a reasonable person on inquiry, but fails to inquire as to the possible misapplication of trust property: Citadel General Assurance Co. v. Lloyds Bank Canada, 1997 CanLII 334 (SCC), [1997] 3 S.C.R. 805, at para. 49. The recipient’s enrichment is “unjust” due to the lack of inquiry with respect to the possible misapplication of the trust property. The focus is therefore on the recipient’s state of mind because, without constructive or actual knowledge of the breach of trust, the recipient could have a lawful claim to the funds and the plaintiff would not be entitled to a restitutionary remedy. See Citadel General Assurance, at paras. 48-51.

[16] I am not convinced that the appellants’ claim for knowing receipt could not possibly succeed. If a trier of fact were to conclude that OLGC had good reason to suspect that the money gambled by Ms. Spinks might have been stolen, the appellants may fall within the protection afforded by Citadel General Assurance.

[17] According to Peter D. Maddaugh & John D. McCamus, The Law of Restitution, loose-leaf (2015-Rel. 16), (Toronto: Canada Law Book, 2015), at paras. 5-16 to 5-25, money obtained by fraud can be subject to a constructive trust. In Healthy Body Services Inc. v. 1261679 Ontario Ltd. (Raytek Communications), 2015 ONCA 516 (CanLII), 338 O.A.C. 346, at paras. 30-40, Lauwers J.A., dissenting, would have held that money obtained by fraud was subject to a constructive trust and that a party that subsequently obtained that money could be liable in knowing receipt. The majority in that case did not consider the issue of knowing receipt, as it held the funds in question could not be traced.
The court continued to comment as follows on the interaction of the law of unjust enrichment as it was influenced by the presence of unconscionability on the part of the ultimate receipient of the funds:
(ii) Unjust enrichment

[21] The trial judge correctly set out the requirements for a claim in unjust enrichment: (1) an enrichment of the defendant; (2) a corresponding deprivation of the plaintiff; and (3) the absence of a juristic reason for the enrichment. See Pettkus v. Becker, 1980 CanLII 22 (SCC), [1980] 2 S.C.R. 834, at p. 848; and Garland v. Consumers’ Gas Co., 2004 SCC 25 (CanLII), [2004] 1 S.C.R. 629, at para. 30.

[22] The motion judge held that third parties such as the appellants could not advance a claim for unjust enrichment unless Ms. Spinks, the gambler, also had that right. He held that while OLGC was enriched, and Ms. Spinks was correspondingly deprived, there were juristic reasons for the enrichment – namely, a valid gambling contract and the fact that OLGC was a bona fide purchaser for value without notice that it was receiving money obtained by fraud.

[23] The motion judge did not consider the possibility that the juristic reasons for the enrichment might be vitiated on the ground of unconscionability. The appellants pleaded in their statement of claim that OLGC received an “unconscionable benefit.” If OLGC knew that Ms. Spinks was addicted to gambling, and was in fact unable to refrain from losing money, but allowed her to continue gambling nonetheless, I am not convinced that the appellants’ claim in unjust enrichment would necessarily fail.

[24] This approach was adopted by the Court of Appeal of the Supreme Court of Victoria in Kakavas v. Crown Melbourne Ltd. & Ors, [2012] VSCA 95, aff’d [2013] HCA 25. In that case, the appellant claimed that he was a “pathological gambler” and that the casino’s actions in luring him back to the casino, and in encouraging his gambling, were unconscionable.

[25] The court described, at paras. 17-19, the parameters of unconscionability in that context as encompassing circumstances in which: (i) a party to a transaction is under a special disability in dealing with the other party, such that there is no reasonable degree of equality between them; and (ii) the disability is sufficiently evident to the stronger party to make it prima facie unfair for him or her to procure or accept the weaker party’s agreement to the transaction in the circumstances. The common characteristic of adverse circumstances constituting a special disability is that they have the effect of placing one party at a serious disadvantage with respect to the other party. The focus is on the conduct of the stronger party in attempting to enforce or retain the benefit of a transaction with a person under special disability, where it is not consistent with equity or good conscience to allow him or her to do so.

[26] Following trial, the plaintiff’s claim in Kakavas was dismissed on the ground that he did not suffer from the special disability or disadvantage of addiction to gambling. Appeals to the Court of Appeal and the High Court of Australia were dismissed. Again, while the plaintiff lost because of the factual findings made in that case, a finding of unconscionability – knowingly taking advantage of an addicted gambler – could have opened the door to compensation.
And lastly, the court commented on the application of the doctrine of constructive trust in the context of embazzlement:
[28] Furthermore, in Soulos v. Korkontzilas, 1997 CanLII 346 (SCC), [1997] 2 S.C.R. 217, at paras. 34 and 43, the Supreme Court of Canada recognized that the remedy of a constructive trust could be imposed where required by good conscience, including both for wrongful acts like fraud and where there is unconscionable unjust enrichment:
It thus emerges that a constructive trust may be imposed where good conscience so requires. The inquiry into good conscience is informed by the situations where constructive trusts have been recognized in the past. It is also informed by the dual reasons for which constructive trusts have traditionally been imposed: to do justice between the parties and to maintain the integrity of institutions dependent on trust-like relationships. Finally, it is informed by the absence of an indication that a constructive trust would have an unfair or unjust effect on the defendant or third parties, matters which equity has always taken into account. Equitable remedies are flexible; their award is based on what is just in all the circumstances of the case.



I conclude that in Canada, under the broad umbrella of good conscience, constructive trusts are recognized both for wrongful acts like fraud and breach of duty of loyalty, as well as to remedy unjust enrichment and corresponding deprivation. While cases often involve both a wrongful act and unjust enrichment, constructive trusts may be imposed on either ground: where there is a wrongful act but no unjust enrichment and corresponding deprivation; or where there is an unconscionable unjust enrichment in the absence of a wrongful act, as in Pettkus v. Becker, supra. Within these two broad categories, there is room for the law of constructive trust to develop and for greater precision to be attained, as time and experience may dictate.

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