21st Annual Fraud Conference
29-30 April 20192019-ACFI-Annual_Conference_Brochure
Norman Groot, Investigation Counsel PC
This article summarizes a recently published decision from the Ontario Court of Appeal which somewhat clarifies the where the line is drawn between a lawyer’s fair and zealous advocacy for their client and their liability for civil fraud for deceiving the Court and opposing counsel with false statements.
In our fraud recovery litigation, from time to time, we encounter lawyers for alleged fraudsters who make positive statements on behalf of their clients with the intention of having the court and opposing counsel rely the statements as if they are honest. In other words, we deal with lawyers who seek to give the impression that, by virtue of their profession, their statements not supported by evidence are honest and they not being used as a tool by the client to dupe the Court.
As an example, we recently dealt with a rogue’s lawyer who advised the Court, in the context of a civil contempt proceeding against the rogue, that an adjournment was necessary because the rogue was in police custody and therefore attend court. In fact, this lawyer’s statement to the Court was not true. This false statement was made after the lawyer was aware of his client’s long criminal record for fraud and breached orders to attend court, and after the lawyer was aware that his client had lied to the Court on numerous occasions in prior civil contempt proceedings.
In the example discussed above, the issue became whether the rogue’s lawyer should be personally liable for costs. The lawyer made similar false statements at the subsequent contempt hearing based on his rogue client’s unverified information, and then filed an affidavit with false information sworn by the rogue in yet a third adjournment attempt in the same contempt proceeding. This behaviour, in the absence of due diligence, raises the issue of how far will a Court let a lawyer go with making false statements before a sanction will be imposed.
The Court of Appeal in Paulus v. Fleury, 2018 ONCA 1072 provides some insight into this issue.
The Superior Court Decision: Paulus v. Fleury, 2018 ONSC 1188
On February 20, 2018, the motions judge in Paulus v. Fleury ruled that statements made by the plaintiff lawyer to defence counsel at a pre-trial to induce a settlement in a personal injury action amounted to civil fraud, and based on this finding the Court set aside a settlement for $850,000 agreed to at the pre-trial. The Plaintiffs appealed the decision that their lawyer engaged in civil fraud, and sought an order to enforce the settlement.
On December 21, 2018, the Ontario Court of Appeal overturned the finding that the plaintiff lawyer’s statements to defence counsel amounted to civil fraud, and held the settlement reached at the pre-trial was enforceable. The Ontario Court of Appeal relied on the recently released Supreme Court of Canada decision in Groia v. Law Society of Upper Canada, 2018 SCC 27, to conclude that a lawyer does not engage in misconduct if he or she acts on his or her client’s information in good faith.
The facts in Paulus v. Fleury pertain to a garden variety motor vehicle accident. At the pre-trial conference, plaintiff counsel advised the Court, defence counsel, and the defendant adjuster that the plaintiff would call third party witnesses who were “independent” and “good, solid witnesses.”
In reliance on the character of the third party witnesses, and for other reasons, the defendant agreed to settle. Subsequent to settlement, the defendant learned that the witnesses the plaintiff lawyer had referred to were not independent, and were not likely to be credible. The defendant asked the Court to set aside the settlement based on “false representations of counsel [that] would create a real risk of clear injustice to the defendant” (para 34).
The motions judge relied on the test for civil fraud as set out by the Supreme Court of Canada in Hryniak v. Mauldin, 2014 SCC 7, at para. 87, and held that:
The motions judge further held that the plaintiff lawyer was bound by the doctrine of honesty and good faith in contractual dealings as declared by the Supreme Court in Bhasin v. Hrynew, 2014 SCC 71. In other words, if one choses to make a statement, it must be an honest statement in the context of contractual dealings.
The motions judge stated “it is obvious that counsel have a duty not to lie or make knowingly misleading factual statements” and that this duty is owed to both the Court and to opposing counsel (paras 58 to 59). The motions judge acknowledged that an opposing lawyer is not obligated to disclose weaknesses in his client’s case, but if a lawyer raises an issue, then the statements he or she makes must be honest (para 62).
The Court of Appeal Decision: Paulus v. Fleury, 2018 ONCA 1072
The Court of Appeal noted that the motions judge did not have the benefit of Groia v. Law Society of Upper Canada, 2018 SCC 27, at the time he heard the motion. Groia is relevant because of its discussion regarding a lawyer’s duty of resolute advocacy on behalf of a client. That duty is relevant to an assessment of whether submissions by counsel amount to civil fraud.
In Groia, the Supreme Court held that the fact that a lawyer is mistaken is not a basis in itself for a finding of misconduct. Where counsel challenges opposing counsel’s integrity, that challenge does not amount to professional misconduct if the allegations are reasonably based and made in good faith, even if counsel is mistaken (para 12).
In Groia, the Supreme Court further held that the impact of an accusation of professional misconduct could so severely affect the reputation of the recipient lawyer that it is appropriate to require both good faith and a reasonable basis for the allegation. The Court stated:
[For a lawyer], maintaining a reputation for practicing with integrity is a lifelong challenge. Once sullied, a lawyer’s reputation may never be fully restored. As such, allegations of prosecutorial misconduct must have a reasonable foundation. …The consequences for the opposing lawyer’s reputation are simply too severe to require anything less than a reasonable basis for allegations impugning his or her integrity.
The Court of Appeal noted that a lawyer’s duty of resolute advocacy has limits. As Rule 5.1-2(e) of the Law Society of Ontario’s Rules of Professional Conduct indicates, when a lawyer is acting as an advocate, he or she shall not “knowingly attempt to deceive a tribunal by offering false evidence, misstating facts, presenting or relying upon a false or deceptive affidavit, suppressing what ought to be disclosed, or otherwise assisting in any fraud, crime, or illegal conduct.”
The Court of Appeal held that the statements of the plaintiffs’ lawyer were not statements of fact, but rather statements of opinion for which there was a reasonable basis at the time the statements were made. The Court of Appeal noted that “there was no indication of a criminal record that might undermine the witnesses’ credibility or any other history of dishonesty” (para 23).
The Court of Appeal characterized plaintiff counsel’s statements as a “legitimate exercise of advocacy. No complaint could have been made if counsel had provided a jury with the same observations concerning the quality of the witnesses in issue. Opinions as to whether someone is a good or independent witness are as open to debate and disagreement as opinions as to whether someone is a good lawyer” (para 24).
When do False Statements by Lawyers Amount to Civil Fraud?
In Paulus v. Fleury, the Court of Appeal held that a factual misrepresentation by counsel in judicial proceedings could amount to deceit or civil fraud when, for example, counsel tender a forged cheque as evidence of payment of a debt knowing the cheque was a false document. “In those circumstances there would be no reasonable basis for the factual assertion; nor could it be said that the statement was made in good faith” (para 30).
In applying this logic to the fraudulent adjournment that we were dealing with, it suggests that a lawyer should not make statements to the Court if the lawyer is basing statements solely on unsworn information from a rogue. If the lawyer takes the risk of making statements based solely on information from a rogue, then the lawyer has a duty to disclose his or her false statements once the dishonest nature of the statements is known to him or her.
The bottom line in the Paulus v. Fleury decision was the Court of Appeal’s observation that mistakes by lawyers are a “frequent occurrence”. Counsel may lose credibility with the Court and their colleagues if they are not scrupulously careful about factual assertions, or if they advance arguments with no reasonable foundation, but these should not amount to civil fraud in this context unless there is neither a reasonable basis for the statements nor a good faith belief in their accuracy (para 29).
David Debenham, McMillan LLP
A Non-prosecution agreement (“NPA”) , a Deferred prosecution agreement (“DPA”) and a Remediation Agreement (“RA”) are voluntary arrangements between a criminal prosecutor and usually a corporate accused facing white collar criminal charges, in which the accused receives a conditional amnesty on certain terms and conditions instead of going to trial on charges of criminal misconduct. Fulfillment of the conditions results in dismissal of the charges, whereas breach of the conditions results in an automatic guilty plea. Under the NPA, charges are threatened, but not filed, under the DPA charges are filed, but do not proceed. Since there is no court filing, there is no need for an NPA to become public, although it is common practice to publish them on government websites. Common terms in such agreements include full disclosure of the particulars of the offence, payment of a fine, paying restitution to any victims of the criminal activity, waiver of any limitation periods, and the implementation of a remediation and ongoing compliance program to ensure no repetition of criminal behavior in the future.
While such agreements are common in the United Kingdom and the United States, Canada was not receptive to such agreements because of the strict compartmentalization of law enforcement officials and Crown prosecutors, that made negotiations untenable. For example, full disclosure to the police provided no assurance of an agreement being entered into, as the Crown prosecutors had to take a fresh, independent look at the matter, at which time they might decide to prosecute with all of the accused admissions in hand. Also problematic, was the fact that there was no mechanism to bind the police and the prosecution to any arrangement other than a “gentlemen’s agreement” that could be undone at any time for any reason, as there is no statute of limitations in Canada, and Charter protections only come into effect once charges are laid. Once charges are laid, control of the prosecution is out of the hands of the police, and under the control of the Crown Prosecutors, who are far more comfortable with suspended sentences than stays of proceeding and dismissal of charges involving complex compliance monitoring.
With the attitude toward white collar crime moving away from trials and punishment to one of creating a culture of ongoing corporate compliance, Canada chose to implement its own form of DPA, called a “remediation agreement”. As a result, PART XXII.I of the Criminal Code was enacted to provide for “an agreement between an organization accused of having committed an offense and a prosecutor, to stay any proceedings related to that offense if the organization complies with the terns of the agreement. Under s. 715.32 a prosecutor may enter into a remediation agreement if there is (a) a reasonable prospect of conviction, (b) the offense was not committed by a criminal or terrorist organization and did not result in serious bodily harm or injure the national security, (c) the prosecutor believes that such an agreement is in the public interest, and (d) the Attorney General has consented to the negotiation of a remediation agreement. In considering the public interest, the prosecutor must consider (a) the circumstances under which the offence was brought to the attention of the investigative authorities (e.g. was there voluntary disclosure by the offender?), (b) the nature and gravity of the offence, including its effects on any victims, (c)whether the offender has made reparations and taken steps to avoid further occurrences (d) whether the organization has disciplined those involved in the offence, (e) the degree of involvement of senior officers of the organization, (f) whether the organization has fully disclosed those involved, and their degree of involvement, (g) the organization’s previous criminal and regulatory record, and any previous remediation agreements, any other factor the prosecutor deems relevant.
Notwithstanding the above, s. 715.32(3) of the Criminal Code confirms that in charges involving bribery of foreign government officials, the prosecutor shall not consider the the national economic interest or the reputation of the organization and individuals involved. This specific provision was required by Canada’s obligations under Article 5 of the OECD Convention on Bribery of Foreign Public Officials in International Business Transactions, which states that “Investigation and prosecution of the bribery of a foreign public official shall … not be influenced by considerations of national economic interest…or the identity of the natural or legal persons involved”. The treaty and the Criminal Code provision therefore prevents a “beggar thy neighbor” approach where organizations corrupt foreign government officials in order to secure and enhance domestic employment.
Where a remediation agreement has been entered into, it must be approved by the court that would otherwise have been the venue for the criminal trial. If approved, the terms of the agreement are published, unless the court orders otherwise.
The prosecutor’s decision as to whether or not to enter into negotiations for a remediation agreement is purely an act of prosecutorial discretion and is not reviewable by any court.
The Director of Public Prosecutions (“DPP”) is the Deputy Attorney General of Canada. (DPPA is the enabling statute. The Public Prosecution Service of Canada is the relevant government department. The Attorney-General has the power to assume control over a prosecution under s. 15 of the DPPA. Under the Shawcross doctrine the Attorney General can never take into account personal or partisan political considerations, but may consider matters of public policy. In considering public policy, the Attorney General may, but is not obliged to, consult with cabinet colleagues to ensure a knowledge of all relevant facts, and those colleagues must not put pressure on the Attorney General in the matter. The Attorney – General must apply “his judicial mind” as to considerations of “public morale and order,” and is to be the sole judge of whether to intervene under s. 15 of the DPPA based on whether there is a reasonable prospect of success and matters of public morale and order (“the Shawcross Doctrine”). Given the provision in s.715.32(3) of the Criminal Code about the irrelevance of the national economic interest in cases involving the alleged bribery of foreign public officials, the Attorney General’s “judicial mind” should exclude such considerations in these particular class of cases.
 SNC-Lavalin Group Inc. v. Canada  FC 282: Krieger v. Law Society of Alberta  SCC 65Miazga v. Kvello  SCC 51, at para 46-47
 S.O. 2006, c.9,s121
 Gravel c. Epiciers Unis Metro Richelieu Inc.  CanLii 7046 (QCCS)
Norm Groot, Investigation Counsel PC
At Investigation Counsel PC, we are often asked by victims of fraud for advice with respect to negotiating settlements in fraud actions. To state the obvious, fraud victims often have a well-founded skepticism that the defendant they settled with cannot be trusted to fulfill their settlement obligations honourably.
In 2018 we acted as counsel for Kuwait investors who lost $1.8M to a British Columbia based business associate. At the eve of trial, a $2.7M settlement was reached. Thereafter the defendant attempted to renegotiate the settlement, alleging the victims owed tax to the Canadian Revenue Agency, so that he could obtain a tax credit. This is their story.
Al-Thamer v. Bakhtiyari, 2018 BCSC 1526
On August 16, 2018, the Supreme Court of British Columbia released its decision in Al-Thamer v. Bakhtiyari, 2018 BCSC 1526, on the issue of whether a defendant may be permitted to withhold part of a settlement payment to pay potential tax liabilities to the Canada Revenue Agency (“CRA”), as opposed to making full payment to his victims. The Court held that an alleged rogue cannot withhold part of a settlement to obtain a tax credit from the CRA if he fails to provide an accounting for the allegedly defrauded funds.
The Investment and Resulting Litigation
On May 6, 2015, the Plaintiffs, investors from Kuwait, filed a claim against the defendants Shirvan Elyassi Bakhtiyari (“Bakhtiyari”) and his company 415185 B.C. Ltd. (415 BC Ltd.”) seeking general and punitive damages for fraud, breach of trust, breach of fiduciary duty, unjust enrichment, conversion and conspiracy. In addition, the Plaintiffs sought an accounting of their funds from the Defendants.
In their Statement of Claim, the Plaintiffs alleged that in the 1990s they transferred $1.8M to Bakhtiyari and his company in exchange for a beneficial interest in some land that 415 BC Ltd. owned in Delta, British Columbia. The Plaintiffs alleged that the property increased in value well in excess of the $1.8M they paid, that Bakhtiyari refused and failed to provide them an accounting of what he used their money for, despite their repeated requests, and that he had dishonestly converted their funds for his own use or that he had pocketed the increase in value of the property.
On July 24, 2015, the Plaintiffs filed a certificate of pending litigation (“CPL”) against the Delta property. Thereafter, discoveries of the Plaintiffs were held in England and discoveries of the Defendants were held in Vancouver. Throughout the discovery process, Bakhtiyari continued to refuse to provide the Plaintiffs with an accounting of what he did with their money. No evidence was ever provided that any of the Plaintiffs’ money was invested in the Delta Property or any other land.
On January 22, 2018, on the first day of a trial scheduled for four weeks, the parties participated in a day-long mediation and settled the Plaintiffs’ claims. The Minutes of Settlement included the following terms:
1. the defendant Bakhtiyari (personally) to pay $2,750,000 Cdn for general damages, costs, disbursements and prejudgment interest on behalf of all Defendants on an all-inclusive basis;
3. the $2,750,000 was to be paid on the following schedule:
a. $1,000,000.00 payable by February 1, 2018. and
b. $1,750,000.00 payable by June 30, 2018;
7. upon payment of the $2,750,000 …, the Plaintiffs would file the required documents to lift the CPL;
8. upon payment of the $2,750,000, the Plaintiffs… would instruct their counsel to prepare, endorse and deliver to counsel for the Defendants a consent dismissal order which shall provide for dismissal of proceedings… as if there had been a trial of the action on the merits; and
12. the Plaintiffs were solely responsible for any and all tax liability or obligations that may accrue to them in relation to the receipt of the $2,750,000.
On January 25, 2018, Bakhtiyari delivered, by personal cheque, the first instalment of $1M to counsel for the Plaintiffs.
On June 27, 2018, just prior to the payment deadline for the second instalment, Bakhtiyari refused to pay the second installment of $1,750,000, but rather proposed to pay the amount of $1,062,500 and remit $687,000 to the Receiver General on the basis that the Plaintiffs owed $687,000 pursuant to s. 116(5) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.).
The essence of Bakhtiyari’s reasoning was that if a CPL had been issued, this implied the Plaintiffs had made a capital gain of $900,000 (the settlement of $2.7M was $900,000 more than the Plaintiffs’ original $1.8M investment). The alleged rogue Bakhtiyari suggested, post settlement, that as the Plaintiffs were not Canadian citizens, it was his civic duty to ensure the Plaintiffs paid tax to the Canadian government.
Bakhtiyari advised the Plaintiffs that his proposed withholding could be avoided if:
1. the Plaintiffs obtained a clearance certificate from the CRA with respect to the transaction and provided it to him;
2. an undertaking from Plaintiffs’ counsel to withhold from the second and final instalment an amount sufficient to satisfy the Plaintiffs’ potential tax obligations until the CRA issued a tax clearance certificate in order to satisfy s. 116 of the Income Tax Act; or
3. Plaintiffs’ counsel provide an opinion from a Canadian tax lawyer confirming that no withholding is required which could be relied upon by the Defendants.
It appeared to the Plaintiffs that Bakhtiyari was seeking to obtain a tax credit on the Plaintiffs’ money that he never provided an accounting for. In response to Bakhtiyari’s demands, the Plaintiffs brought an application seeking an order requiring Bakhtiyari to pay the sum of $1,750,000 in accordance with the terms of the Minutes of Settlement.
Bakhtiyari in turn filed a cross-application seeking an order that he pay to the Plaintiffs only $1,062,500 and remit the balance owing, being $687,000, to the Receiver General. Bakhtiyari also sought an order releasing the CPL against his Delta Property.
The Submissions of the Parties
The Plaintiffs relied upon the principles of contract interpretation. In other words, they argued that the words of the Minutes of Settlement do not leave any doubt as to their meaning: Mountain v. TD Canada Trust, 2015 ONSC 4929 (CanLII) at para. 12; Olivieri v. Sherman (2007), 2007 ONCA 491 (CanLII), 86 O.R. (3d) 778 at para. 48 (C.A.); and Brentwood Enterprises Limited Partnership v. Revelstoke Mountain Resort Limited Partnership, 2014 BCSC 773 (CanLII) at para. 27.
The Plaintiffs submitted that per Term 12 of the Minutes of Settlement, the Plaintiffs assumed full responsibility for any tax liability. The Plaintiffs further submitted that they are at liberty to adopt a tax plan of their choosing, and if that tax plan is high-risk, then it is their own cross to bear. The Plaintiffs submitted that unlike Mountain v. TD Canada Trust, the Defendants did not require an indemnification clause with respect to a tax risk.
Bakhtiyari submitted that s. 116(5) of the Income Tax Act required him to withhold 25% of the funds and remit these funds to the CRA because the property was purchased with funds from a non-resident. Bakhtiyari further submitted that the CRA should ultimately determine if any tax was owing, and that pursuant to s. 227(1) of the Income Tax Act, he was not in breach the Minutes of Settlement due to his obligation to withhold funds from a non-resident and remit to the CRA.
Bakhtiyari referenced a number of cases including Fieguth v. Acklands Ltd. (1989), 1989 CanLII 2744 (BC CA), 37 B.C.L.R. (2d) 62 (C.A.) which concluded that where there had been a binding settlement agreement, deductions in accordance with the Income Tax Act were required by law. Notwithstanding that Fieguth v. Acklands Ltd. was a wrongful dismissal case which dealt with tax principles germane to employment scenarios, Bakhtiyari submitted that these principles were applicable and were utilized in a contract case: Geraghty v. Halcyon Waterspring Inc. (1999), 32 C.P.C. (4th) 152 (Ont. Gen. Div.).
The Court’s Decision
The Court held that the terms of the Minutes of Settlement were clear: the Plaintiffs explicitly agreed at Term 12 to be responsible for any tax implications.
The Court further held that per Term 13 of the Minutes of Settlement, the parties agreed there was no finding that the $1.8M the Plaintiffs’ paid to the Defendants 25 years earlier had actually been invested into the Delta property as was supposed to have occurred.
The Court further held that notwithstanding that the Defendants had not provided any evidence that the Plaintiffs’ money had been invested as represented, Term 10 of the Minutes of Settlement declared that there was no admission of liability by the Defendants, and that the settlement was a compromise of a disputed claim.
The Court rejected Bakhtiyari’s suggestion that the taxes owing would be $687,000, or 25% of $2.7 million that he sought to withhold. The Court found that the Plaintiffs invested $1.8 million; received $400,000 in returned capital prior to the litigation, and paid $450,000 in legal fees. Accordingly, the capital gain, if any, was approximately $500,000, implying the potential taxes would be significantly less than the amount alleged by Bakhtiyari.
With respect to any potential capital gain, the Court found that the settlement amount reflected payments for compounded pre-judgment interest and other legal expenses—not the profit derived from any investment in land. On this basis, the Court held that there was no capital gain at all in the circumstances of this matter. The Court granted the Plaintiffs’ application and dismissed Bakhtiyari’s cross application.
Tax Issues on Settlements in Fraud Cases
While the Court ruled in favour of the Plaintiffs, it also noted that if the Plaintiffs, as non-residents of Canada, had disposed of taxable Canadian property, they would have been liable to pay tax under s. 116 of the Income Tax Act, and that Bakhtiyari, as the “purchaser” of such a disposition, would have been required to withhold it under s. 116(5).
However, because none of the settlement funds were identified as pertaining to any specific cause of action, and because the parties expressly agreed that there had been “no admission of liability by the Defendants”, and because the settlement was “a compromise of a disputed claim”, the Court looked to the intent of the parties to see if any allocation towards a capital gain was intended.
The Court cited Schwartz v. Canada, 1996 CanLII 217 (SCC),  1 S.C.R. 254, where the CRA sought to tax a settlement amount received by a departing lawyer from his firm as a “retiring allowance”. There was no evidence that any part of the settlement was allocated to a “retiring allowance”. The Supreme Court of Canada found that, there being no such evidence, the amount was not taxable. The Court said at para 41:
Logically, the Minister should not have the burden of presenting, in every case where the apportionment of a general award is at issue, specific evidence amounting to an explicit expression of the concerned parties’ intention with respect to that question. However, there must be some evidence, in whatever form, from which the trial judge will be able to infer, on a balance of probabilities, which part of that general award was intended to compensate for specific types of damages. [Emphasis in original.]
Similarly, in this case the Court found that the parties’ settlement was a calculated business decision which was intended to free the Defendants from the consequences of litigation and not strongly related to the value of the Plaintiffs’ claims. Bakhtiyari agreed to pay the settlement amount without admitting liability and without agreeing that the Plaintiffs had any interest in the land.
What this case essentially stands for is the importance of drafting Minutes of Settlement that considers the tax consequences of the deal. Here, the intent of the parties was that the funds were compensation for general damages, legal fees, disbursements, and pre-judgment interest. There was no evidence that the Defendants invested the Plaintiffs’ monies in the Delta property. The result was that Bakhtiyari could not obtain a tax credit on funds he refused to account for.
December 29, 2018