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Knowing Receipt of Trust Property

. Caja Paraguaya de Jubilaciones y Pensiones del Personal de Itaipu Binacional v. Garcia

In Caja Paraguaya de Jubilaciones y Pensiones del Personal de Itaipu Binacional v. Garcia (Ont CA, 2020) the Court of Appeal considers the equitable principle of knowing receipt of trust property:
[55] The theory of liability of strangers to the trust for knowing receipt rests in the law of restitution. Liability arises from the fact that the stranger has received trust property for its own benefit and in doing so, has been enriched at the beneficiary’s expense: Citadel, at para. 31. The stranger is therefore conscience-bound to restore the property received: Citadel, at para. 32.

[56] Since liability rests in restitution and not wrongdoing, a lower level of knowledge will suffice than in knowing assistance cases. In knowing receipt cases, constructive knowledge, based on knowledge of facts that would put a reasonable person on notice or inquiry, may serve as a basis for restitutionary liability: Citadel, at para. 48.

[57] The legal test for knowing receipt therefore requires that: (1) the stranger receives trust property (2) for his or her own benefit or in his or her personal capacity, (3) with actual or constructive knowledge that the trust property is being misapplied. In addition to actual knowledge, including wilful blindness or recklessness, requirement (3) can be met where the recipient, having “knowledge of facts which would put a reasonable person on inquiry, actually fails to inquire as to the possible misapplication of the trust property”: Citadel, at para. 49; Gold v. Rosenberg, 1997 CanLII 333 (SCC), [1997] 3 S.C.R. 767, at para. 74; see also Paton Estate v. Ontario Lottery and Gaming Corporation (Fallsview Casino Resort and OLG Casino Brantford), 2016 ONCA 458, 131 O.R. (3d) 273, at para 62.

[58] Where liability is imposed, the “measure of the restitutionary recovery is the gain the [defendant] has made at the [plaintiff’s] expense”: Citadel, at para. 30, citing Air Canada v. British Columbia, 1989 CanLII 95 (SCC), [1989] 1 S.C.R. 1161, at pp. 1202-03.
. DBDC Spadina Ltd. v. Walton

In DBDC Spadina Ltd. v. Walton (Ont CA, 2018) the Court of Appeal considered liability under the restitutionary doctrines of 'knowing receipt' of trust property:
The Ont CA majority ruling was replaced by the van Rensburg dissent by the SCC [Christine DeJong Medicine Professional Corp. v. DBDC Spadina Ltd. (SCC, 2019)] on the issue of 'knowing assistance', so paras 40 on regarding 'knowing assistance' at the CA are not quoted here. The CA dissent concurs on 'knowing receipt' at paras 205-209.
A. KNOWING RECEIPT

[37] A stranger to a trust or fiduciary relationship may be liable under the doctrine of “knowing receipt” if the stranger receives trust property in his or her own personal capacity with constructive knowledge of the breach of trust or fiduciary duty. It is a recipient-based claim arising under the law of restitution: see Citadel General Assurance Co. v. Lloyds Bank Canada, 1997 CanLII 334 (SCC), [1997] 3 S.C.R. 805, at para. 48.
. Paton Estate v. Ontario Lottery and Gaming Corporation (Fallsview Casino Resort and OLG Casino Brantford)

In Paton Estate v. Ontario Lottery and Gaming Corporation (Fallsview Casino Resort and OLG Casino Brantford) (Ont CA, 2016), where embezzled funds were spent in gambling, the Court of Appeal 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.


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