Monday, April 7, 2014

SCC Clarifies Test For Civil Fraud

Albert Bruno was the principal of an American company called Bruno Appliance and Furniture, Inc.  In late 2001, Bruno met with Robert Cranston, the principal of a Panamanian company, Frontline Investments Inc.  As a result of those meetings, Bruno signed a number of investment documents in favour of Frontline.
In February of 2002, Bruno met with Cranston and Gregory Pebbles, a lawyer at the Toronto offices of Cassels Brock and Blackwell.  Robert Hryniak did not attend this meeting.  However, Hryniak's company, Tropos Financial Corp., received and paid a bill for Pebbles'  attendance. 
In early March of 2002, Bruno Appliance wired US$1 million to Cassels Brock who assigned the funds to an account associated with its client, Hyrniak's company, Tropos.  Bruno Appliance's funds were then "bundled" with other funds totalling US$3.5 million and paid to Tropos in a bank draft.  At the end of April 2002, Tropos paid US$2.5 million to a company called Southern Equity Investors Inc. and in June 2002, Tropos transferred approximately US$550,000 to an individual named Reinhard.  By the end of September 2003, the balance in Cassels Brock's  Tropos account had dwindled to US$19,000. 
Bruno Appliance's money was not invested and it never received a return on its investment. 
Bruno Appliance joined with other plaintiffs in a civil fraud action against Hryniak, Peebles and Cassels Brock.  The plaintiffs brought motions for summary judgment.  The motion judge found that Bruno Appliance had established its claim against Hryniak.  He found that despite his absence from the early meeting, Hryniak knew that the meeting was occurring and that his company Tropos paid for Pebbles' attendance.  The motion judge found that Hryniak was aware that US$1 million was placed in the Tropos account and that he gave instructions regarding those funds. 
On appeal to the Ontario Court of Appeal, the court allowed Hyrniak's appeal and held that there were two genuine issues that required a trial:  whether Hryniak induced Bruno Appliance to invest; and whether some of the funds were misappropriated by Cranston rather than Hryniak.
The Court of Appeal also found that the motion judge failed to address the issue of whether Hryniak knowingly made any misrepresentation that induced Bruno Appliance to invest, a necessary element of fraud. 
The Court of Appeal ordered that the Bruno Appliance action proceed to trial.  The plaintiff further appealed to the Supreme Court of Canada.
The Supreme Court of Canada dismissed the plaintiff's appeal and ordered that the action proceed to trial.  
At the Supreme Court the parties disagreed as to the elements of the tort of civil fraud, in particular whether proof was required that Hryniak induced Bruno Appliance to invest its money.  The judgment of the court was delivered by Justice Karakatsanis.  
The Supreme Court held that a classic statement of the elements of civil fraud stems from an 1889 decision of the British House of Lords, Derry v. Peek
First in order to sustain an action of deceit, there must be proof of fraud, and nothing short of that will suffice.  Secondly, fraud is approved when it is shewn that a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false... Thirdly, if fraud be proved, the motive of the guilty person of it is material.  It matters not that there was no intention to cheat or injure the person to whom the statement was made.
Since that statement was made, the Supreme Court of Canada has added two additional requirements - the false statement must actually induce the plaintiff to act upon it and proof of loss is required.
Accordingly, Justice Karakatsanis summarized the following four elements of the tort of civil fraud:  (1)  a false representation made by the defendant; (2)  some level of knowledge of the falsehood of the representation on the part of the defendant (whether through actual knowledge or recklessness); (3)  the false representation caused the plaintiff to act; and (4)  the plaintiff's actions resulted in a loss.
In dismissing the appeal, the SCC found that there was a genuine issue requiring a trial.  Civil fraud required a finding that Hryniak made a misrepresentation which induced Bruno Appliance to invest.  The motion judge did not identify the need for a misrepresentation and did not find that Hryniak had made one.  Since Hryniak was not present at the important meeting, he could only be liable for any misrepresentations made by Peebles or Cranston if their statements could be attributed to him.  However, the Court of Appeal considered and rejected the possibility that Pebbles or Cranston was acting as Hryniak's agent. 
While the motion judge found that the evidence clearly demonstrated that Hryniak was aware of the fraud and may have in fact benefited from the fraud, whether Hryniak perpetrated the fraud by inducing Bruno Appliance to contribute the US$1 million to a non-existent scheme was a genuine issue that required a trial. 

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