1. Introduction
When an employee engages in a kickback scheme, thereby defrauding the employer, and uses the moneys to pay off the mortgage on his house, can the employer obtain a constructive trust over the property, and can it succeed in a claim for punitive damages? That, in brief, is what Sunwing Airlines Inc. v. Mora[1] is about. The case does not provide many facts since it involved supplementary submissions by the Airline on these matters. However, two previous cases provide the background facts: Sunwing Airlines Inc. v. Mora et al.,[2] which was a motion for a Mareva injunction freezing Mora’s assets, and Sunwing Airlines Inc. v. Mora,[3] which was the trial of the action against Mora.
The Airline employed Mora as regional airport manager for Latin America. The Airline engaged another person as an independent contractor to supervise flights to Cuba. From the money she received, she paid certain amounts to Cuban workers who assisted the Airline on the ground in Cuba. When her contract came up for renewal in 2012, Mora persuaded her to ask for a significantly higher remuneration and to pay him a portion of the increase in cash. She made these payments to Mora over a period of five years but disclosed the kickback scheme to the Airline in April 2017. The Airline investigated the matter and, at a meeting with Mora, terminated his employment. During this meeting Mora admitted the kickback scheme. The total amount paid to him over the five years was $537,885.
The Airline brought an action against Mora in 2017 for damages for civil fraud, breach of contract, breach of fiduciary duty, breach of trust, conversion, or unjust enrichment in the amount paid to him over the five years, for punitive damages, and for related relief. Mora brought an action for wrongful dismissal. The Airline obtained an interim Mareva order in 2017 and the court continued the order in the Mareva Motion proceeding in 2019.
The trial took place in 2021. The court noted that this was strictly a credibility case. It found the evidence of the witnesses who testified for the Airline to be credible beyond a reasonable doubt and did not believe or accept any of Mora’s evidence. It found that the Airline had just cause to terminate Mora. Thus, it granted the Airline’s action and awarded it the amount claimed in damages. And it dismissed Mora’s wrongful dismissal action since he was terminated for cause.
2. Supplementary Submissions
The Airline then made the supplementary submissions regarding a constructive trust over Mora’s property, and regarding punitive damages. With respect, these reasons are disappointing in that the court does not explain why it held that a constructive trust was appropriate and why punitive damages were appropriate.[4] Instead, the court seems simply to have accepted the Airline’s submissions on both points.
2.1 Constructive Trust
On the constructive trust issue, the Airline argued: (a) that a monetary award would not properly address its legitimate needs; and (b) since Mora used the kickbacks to pay off the mortgage on his property, the court could impose a constructive trust on it since there was a direct link between the Airline’s money and the property. The Airline listed the four conditions for imposing a constructive trust based on wrongful conduct identified by the Supreme Court of Canada in Soulos v. Korkontzilas:[5]
(a) the defendant must have been under an equitable obligation, that is, an obligation of the type that courts of equity have enforced, in relation to the activities giving rise to the assets in his hands;
(b) the assets in the hands of the defendant must be shown to have resulted from deemed or actual agency activities of the defendant in breach of his equitable obligation to the plaintiff;
(c) the plaintiff must show a legitimate reason for seeking a proprietary remedy, either personal or related to the need to ensure that others like the defendant remain faithful to their duties; and
(d) there must be no factors which would render imposition of a constructive trust unjust in all the circumstances of the case; e.g., the interests of intervening creditors must be protected.
The Airline also submitted that Mora was enriched, it was deprived, there was no juristic reason for the enrichment, and the enrichment was traceable into the property.
Apart from a few parenthetical comments, the court did not engage with Mora’s submissions but stated that a constructive trust order was appropriate. However, it put the order on hold and stated that it would be granted in 30 days if Mora had not paid the damage award in full. This part of the judgment makes sense since the Airline had asked for a constructive trust order over the property co-extensive with the amount of the damages.
It is regrettable that the court did not address the question whether the court can award a constructive trust for a common law wrong. The first condition listed by the Supreme Court in Soulos was that the defendant must have been under an equitable obligation of the type that courts of equity have enforced. Was Mora under such an obligation? Was he a fiduciary? He was an employee, but the facts do not suggest that his position was sufficiently senior that he could be considered a fiduciary on the basis of the principles outlined in Canadian Aero Service Ltd. v. O’Malley.[6] It is undoubtedly true that Mora was unjustly enriched in the broad sense, although it was not a true unjust enrichment; rather he made a wrongful gain and the question was whether the court could strip him of that gain by way of a constructive trust. The law is still unclear on the question whether the court can grant a constructive trust for a common law wrong. I believe that it can. I refer to what Waters says on this point in the latest edition of his seminal text.[7] The text refers to the first condition in Soulos and its requirement that the defendant must been under an equitable obligation. Waters comments:
But in the twenty-first century the relevance of this is not clear. If the trust is the appropriate remedy, then it is so whether the wrong from which it arises is sourced in Equity or common law.[8]
The text refers to the judgment of Wilson J in LAC Minerals v International Corona Resources Ltd.,[9] who quoted from a lecture given by John McCamus, in which he said,
Would it not be anomalous to allow more sophisticated from of relief for breach of fiduciary duty than for those forms of wrongdoing recognized by the law of torts, some of which, at least, would commonly be more offensive from the point of view of either public policy or our moral sensibilities than some breaches of fiduciary duty?[10]
Waters also quotes[11] from the judgment of Binnie J in Cadbury Schweppes Inc. v FBI Foods Ltd.,[12] who said, ‘whether a breach of confidence in a particular case has a contractual, tortious, proprietary or trust flavour goes to the appropriateness of a particular equitable remedy but does not limit the court’s jurisdiction to grant it’.
Waters concludes,[13] ‘The clear implication is that even in a case in which the only wrong was a common law tort, or even a breach of contract, a constructive trust could be viewed as the appropriate remedy’, and refers to a number of cases in support of this statement.
Consequently, the constructive trust the court awarded in Sunwing can be viewed as the appropriate remedy for Mora’s tortious conduct. However, I should have liked to see a discussion of the law on this point.
2.2 Punitive Damages
Since this issue does not concern constructive trusts, I shall address it only briefly. On this issue too, the court seems to have adopted the Airline’s submissions and did not engage with Mora’s submissions. The Airline submitted that the court can award punitive damages in exceptional cases for misconduct that ‘offends the court’s sense of decency’ and ‘represents a marked departure from ordinary standards of decent behaviour’. It noted that it is well-established that punitive damages are appropriate in cases of employee fraud and referred to Elekta Ltd. v Rodkin,[14] in which the court concluded at para. 31 that the time had come ‘to raise the range of possible awards of punitive damages made in cases involving serious, protracted fraud by an employee who works in a position of trust handling the funds of his employer’. The court concluded that past decisions that awarded punitive damages in the range of $25,000 did not register in the consciences of the public. It ended up awarding punitive damages of $200,000.
Justice Ferguson concluded in para. 8 of Sunwing:
Punitive damages are absolutely appropriate. Mora is a thief. He stole $537,885.00. To not award punitive damages will send a message that if you steal from your employer you only have to pay it back. If this was in the criminal system, he would go to jail. Punitive damages are awarded in the amount of $200,000.00.
In the circumstances, this would seem to be an appropriate award.
—
[1] 2021 ONSC 6179 (‘supplementary submissions’).
[2] 2019 ONSC 3917 (‘Mareva proceeding’)
[3] 2021 ONSC 1376 (‘trial’)
[4] The reasons also do not give citations to most of the cases referred to.
[5] [1997] 2 SCR 217, 146 DLR 4th 214, para 45.
[6] [1974] SCR 592.
[7] Waters’ Law of Trusts in Canada, 5th ed. by Donovan W.M. Waters, Mark R. Gillen, and Lionel Smith (Toronto: Thomson Reuters, 2021).
[8] Ibid., p. 556.
[9] [1989] 2 SCR 574 at 632.
[10] J.D. McCamus, ‘The Role of Proprietary Relief and the Modern Law of Restitution’, in Cambridge Lectures 1987 (1989) at 141, 150
[11] Waters, supra, p. 557.
[12] [1999] 1 SCR 142.
[13] Waters, supra, p. 557.
[14] 2012 ONSC 2062.
—
This paper is intended for the purposes of providing information only and is to be used only for the purposes of guidance. This paper is not intended to be relied upon as the giving of legal advice and does not purport to be exhaustive.
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Written by: Albert Oosterhoff
Posted on: October 29, 2021
Categories: Commentary, WEL Newsletter
1. Introduction
When an employee engages in a kickback scheme, thereby defrauding the employer, and uses the moneys to pay off the mortgage on his house, can the employer obtain a constructive trust over the property, and can it succeed in a claim for punitive damages? That, in brief, is what Sunwing Airlines Inc. v. Mora[1] is about. The case does not provide many facts since it involved supplementary submissions by the Airline on these matters. However, two previous cases provide the background facts: Sunwing Airlines Inc. v. Mora et al.,[2] which was a motion for a Mareva injunction freezing Mora’s assets, and Sunwing Airlines Inc. v. Mora,[3] which was the trial of the action against Mora.
The Airline employed Mora as regional airport manager for Latin America. The Airline engaged another person as an independent contractor to supervise flights to Cuba. From the money she received, she paid certain amounts to Cuban workers who assisted the Airline on the ground in Cuba. When her contract came up for renewal in 2012, Mora persuaded her to ask for a significantly higher remuneration and to pay him a portion of the increase in cash. She made these payments to Mora over a period of five years but disclosed the kickback scheme to the Airline in April 2017. The Airline investigated the matter and, at a meeting with Mora, terminated his employment. During this meeting Mora admitted the kickback scheme. The total amount paid to him over the five years was $537,885.
The Airline brought an action against Mora in 2017 for damages for civil fraud, breach of contract, breach of fiduciary duty, breach of trust, conversion, or unjust enrichment in the amount paid to him over the five years, for punitive damages, and for related relief. Mora brought an action for wrongful dismissal. The Airline obtained an interim Mareva order in 2017 and the court continued the order in the Mareva Motion proceeding in 2019.
The trial took place in 2021. The court noted that this was strictly a credibility case. It found the evidence of the witnesses who testified for the Airline to be credible beyond a reasonable doubt and did not believe or accept any of Mora’s evidence. It found that the Airline had just cause to terminate Mora. Thus, it granted the Airline’s action and awarded it the amount claimed in damages. And it dismissed Mora’s wrongful dismissal action since he was terminated for cause.
2. Supplementary Submissions
The Airline then made the supplementary submissions regarding a constructive trust over Mora’s property, and regarding punitive damages. With respect, these reasons are disappointing in that the court does not explain why it held that a constructive trust was appropriate and why punitive damages were appropriate.[4] Instead, the court seems simply to have accepted the Airline’s submissions on both points.
2.1 Constructive Trust
On the constructive trust issue, the Airline argued: (a) that a monetary award would not properly address its legitimate needs; and (b) since Mora used the kickbacks to pay off the mortgage on his property, the court could impose a constructive trust on it since there was a direct link between the Airline’s money and the property. The Airline listed the four conditions for imposing a constructive trust based on wrongful conduct identified by the Supreme Court of Canada in Soulos v. Korkontzilas:[5]
(a) the defendant must have been under an equitable obligation, that is, an obligation of the type that courts of equity have enforced, in relation to the activities giving rise to the assets in his hands;
(b) the assets in the hands of the defendant must be shown to have resulted from deemed or actual agency activities of the defendant in breach of his equitable obligation to the plaintiff;
(c) the plaintiff must show a legitimate reason for seeking a proprietary remedy, either personal or related to the need to ensure that others like the defendant remain faithful to their duties; and
(d) there must be no factors which would render imposition of a constructive trust unjust in all the circumstances of the case; e.g., the interests of intervening creditors must be protected.
The Airline also submitted that Mora was enriched, it was deprived, there was no juristic reason for the enrichment, and the enrichment was traceable into the property.
Apart from a few parenthetical comments, the court did not engage with Mora’s submissions but stated that a constructive trust order was appropriate. However, it put the order on hold and stated that it would be granted in 30 days if Mora had not paid the damage award in full. This part of the judgment makes sense since the Airline had asked for a constructive trust order over the property co-extensive with the amount of the damages.
It is regrettable that the court did not address the question whether the court can award a constructive trust for a common law wrong. The first condition listed by the Supreme Court in Soulos was that the defendant must have been under an equitable obligation of the type that courts of equity have enforced. Was Mora under such an obligation? Was he a fiduciary? He was an employee, but the facts do not suggest that his position was sufficiently senior that he could be considered a fiduciary on the basis of the principles outlined in Canadian Aero Service Ltd. v. O’Malley.[6] It is undoubtedly true that Mora was unjustly enriched in the broad sense, although it was not a true unjust enrichment; rather he made a wrongful gain and the question was whether the court could strip him of that gain by way of a constructive trust. The law is still unclear on the question whether the court can grant a constructive trust for a common law wrong. I believe that it can. I refer to what Waters says on this point in the latest edition of his seminal text.[7] The text refers to the first condition in Soulos and its requirement that the defendant must been under an equitable obligation. Waters comments:
But in the twenty-first century the relevance of this is not clear. If the trust is the appropriate remedy, then it is so whether the wrong from which it arises is sourced in Equity or common law.[8]
The text refers to the judgment of Wilson J in LAC Minerals v International Corona Resources Ltd.,[9] who quoted from a lecture given by John McCamus, in which he said,
Would it not be anomalous to allow more sophisticated from of relief for breach of fiduciary duty than for those forms of wrongdoing recognized by the law of torts, some of which, at least, would commonly be more offensive from the point of view of either public policy or our moral sensibilities than some breaches of fiduciary duty?[10]
Waters also quotes[11] from the judgment of Binnie J in Cadbury Schweppes Inc. v FBI Foods Ltd.,[12] who said, ‘whether a breach of confidence in a particular case has a contractual, tortious, proprietary or trust flavour goes to the appropriateness of a particular equitable remedy but does not limit the court’s jurisdiction to grant it’.
Waters concludes,[13] ‘The clear implication is that even in a case in which the only wrong was a common law tort, or even a breach of contract, a constructive trust could be viewed as the appropriate remedy’, and refers to a number of cases in support of this statement.
Consequently, the constructive trust the court awarded in Sunwing can be viewed as the appropriate remedy for Mora’s tortious conduct. However, I should have liked to see a discussion of the law on this point.
2.2 Punitive Damages
Since this issue does not concern constructive trusts, I shall address it only briefly. On this issue too, the court seems to have adopted the Airline’s submissions and did not engage with Mora’s submissions. The Airline submitted that the court can award punitive damages in exceptional cases for misconduct that ‘offends the court’s sense of decency’ and ‘represents a marked departure from ordinary standards of decent behaviour’. It noted that it is well-established that punitive damages are appropriate in cases of employee fraud and referred to Elekta Ltd. v Rodkin,[14] in which the court concluded at para. 31 that the time had come ‘to raise the range of possible awards of punitive damages made in cases involving serious, protracted fraud by an employee who works in a position of trust handling the funds of his employer’. The court concluded that past decisions that awarded punitive damages in the range of $25,000 did not register in the consciences of the public. It ended up awarding punitive damages of $200,000.
Justice Ferguson concluded in para. 8 of Sunwing:
Punitive damages are absolutely appropriate. Mora is a thief. He stole $537,885.00. To not award punitive damages will send a message that if you steal from your employer you only have to pay it back. If this was in the criminal system, he would go to jail. Punitive damages are awarded in the amount of $200,000.00.
In the circumstances, this would seem to be an appropriate award.
—
[1] 2021 ONSC 6179 (‘supplementary submissions’).
[2] 2019 ONSC 3917 (‘Mareva proceeding’)
[3] 2021 ONSC 1376 (‘trial’)
[4] The reasons also do not give citations to most of the cases referred to.
[5] [1997] 2 SCR 217, 146 DLR 4th 214, para 45.
[6] [1974] SCR 592.
[7] Waters’ Law of Trusts in Canada, 5th ed. by Donovan W.M. Waters, Mark R. Gillen, and Lionel Smith (Toronto: Thomson Reuters, 2021).
[8] Ibid., p. 556.
[9] [1989] 2 SCR 574 at 632.
[10] J.D. McCamus, ‘The Role of Proprietary Relief and the Modern Law of Restitution’, in Cambridge Lectures 1987 (1989) at 141, 150
[11] Waters, supra, p. 557.
[12] [1999] 1 SCR 142.
[13] Waters, supra, p. 557.
[14] 2012 ONSC 2062.
—
This paper is intended for the purposes of providing information only and is to be used only for the purposes of guidance. This paper is not intended to be relied upon as the giving of legal advice and does not purport to be exhaustive.
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