1. Introduction
A person obtains funds from a bank through fraudulent misrepresentation. What means are available to the bank to recover the funds, or damages? The court explored these issues in The Bank of Nova Scotia v Rosario Rosado.[1]
2. Facts
The Bank makes a line of credit available to students who are enrolled in qualifying professional study programs in which they pursue a professional designation. In 2022, the Bank advanced such a line of credit to the Defendant. In support of his application the Defendant represented to the Bank that he was enrolled in a Doctor of Dental Surgery program at the University of Toronto and provided documentation in support. All the representations and back-up documents were fraudulent and false.
By Statement of Claim, the Bank sued the Defendant for liquidated damages and fraud. It sought repayment of the credit line, an accounting and tracing order together with interest, punitive damages, a declaration that the debt arises from fraudulent misrepresentations and false pretences, and costs on a full indemnity or substantial indemnity basis.
The Bank was unable to effect personal service of the Claim and had to obtain an order for substituted service. The Defendant did not file a Statement of Defence and in September 2023 the Bank noted him in default and then brought this Motion for default judgment.
Under Rule 19.02(1)(a) of the Rules of Civil Procedure[2] a defendant who has been named in default is deemed to admit the truth of all allegations of fact made in the statement of claim. The allegations included: (1) the fact that the Defendant produced a letter from the Faculty Registrar at the Faculty of Dentistry stating that the Defendant had been offered a position in the Doctor of Dental Surgery program, and a confirmation of enrolment letter signed by the University Registrar stating that the Defendant was registered in the program; (2) that the documents were forgeries or falsified, and that the Defendant made the representations and produced the documents to the Bank knowing that they were false, with the intention that the Bank would rely on them; and (3) that Bank relied on the representations and documents, which caused the Bank to suffer losses and damages.
Rule 19.06 provides that a plaintiff is not entitled to judgment on a motion for judgment merely because the facts are deemed to be admitted, unless the deemed admission of facts and the facts adduced at the hearing entitle the plaintiff to judgment. Further, under Rule 19.05(2) a motion for judgment must be supported by evidence given by affidavit if the claim is for unliquidated damages.
The deemed facts were supported by the affidavit of a law clerk who contacted the Faculty of Dentistry and was told that while the Defendant had applied to the Faculty, he was not admitted. Moreover, correspondence from the Faculty, appended to the affidavit, confirmed that the Faculty documents submitted by the Defendant to the Bank were fraudulent. Finally, the Plaintiff submitted an affidavit of a Bank officer attaching a payout statement showing that the Defendant remains indebted to the Bank in the principal amount of the Line of Credit plus interest.
3. Analysis and Judgment
Justice Charney held that the deemed facts together with the affidavits filed in support of the motion for default judgment, are sufficient to support judgment in favour of the Bank. Accordingly, his Honour ordered the Defendant to pay the Plaintiff the amount of the funds advanced, plus pre- and post-judgment interest.
Fraudulent Misrepresentation
His Honour noted[3] that a plaintiff who asserts a claim for fraud must prove the following: (1) a false representation by the defendant; (2) some level of knowledge of the falsehood of the representation (either through knowledge or recklessness); (3) that the false representation caused the plaintiff to act; and (4) that the plaintiff suffered a loss. He went on to hold that the deemed admissions together with the affidavit evidence proved these elements. Thus, his Honour was satisfied that the Plaintiff was entitled to default judgment and to a finding that the Defendant induced the Bank to advance the funds to him through fraudulent misrepresentation.
Punitive Damages
His Honour then turned to the claim for punitive damages. The Plaintiff sought punitive damages of $200,000 because of the Defendant’s fraudulent, malicious and premeditated conduct. He noted that punitive damages are an extraordinary remedy and may be awarded only if compensatory damages are inadequate to deter the Defendant’s conduct. The amount awarded must be proportionate to the compensatory damages.[4] He concluded that in this case the Bank’s entitlement to punitive damages ‘appears well justified’, and that the perpetrated fraud meets the standard of “high-handed, malicious, arbitrary or highly reprehensible misconduct that departs to a marked degree from ordinary standards of decent behaviour”[5]. In a similar case, Bank of Nova Scotia v Anirudh Kumar,[6] the court awarded $200,000 in punitive damages and Justice Charney concluded that this amount is the appropriate and proportionate award of punitive damages in this case.
Tracing Order
On the motion the Bank seeks only an accounting order and an order preserving its right to elect between a constructive trust or other proprietary right and damages. That is because if the Bank is able to trace the proceeds into any identifiable property it will be entitled to a declaration of a constructive trust, but such a declaration cannot be made if the Bank is unable to trace the proceeds. Hence the Bank seeks an accounting order to obtain further information about how the Defendant used the funds. The court granted the order, as well as an order for disgorgement of any funds or profits found in the process, and an order that the Bank may elect in whole or in part between (1) the imposition of a constructive trust, or an equitable lien, or both, and (2) damages.
Declaration That the Debt Arises Due to Fraud
The Bank seeks this declaration because of s 178(1)(e) of the Bankruptcy and Insolvency Act (BIA’).[7] It provides that a discharge from bankruptcy releases the debtor from any pre-bankruptcy debts, except for ‘any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation’. Thus, the Bank is asking for this declaration for the event that the Defendant should declare bankruptcy. However, the Plaintiff advised the court that there are divided Superior Court decisions on whether the court can make such a declaration before a defendant makes an actual assignment in bankruptcy. In one line of cases the courts have granted the declaration in these circumstances. In a second line of cases the courts have refused to grant a declaration that the debt survives a bankruptcy discharge, but are willing to declare that a debt results, inter alia, ‘from obtaining property or services by false pretences or fraudulent misrepresentation’ (using the language of s 178(1)(e)). In a third line of cases the courts have refused to grant the declaration.
Justice Charney stated that he preferred the second line of cases, but did not wish to make a ‘declaration’, because it is, by definition, ‘a statement confirming the existence of a legal right’. However, since he has made a finding of fraudulent misrepresentation, the court can rely on it in a future proceeding in which the application of s 178(1)(e) arises.
Costs
Justice Charney awarded costs on a substantial basis. Such costs are available when a party has engaged in reprehensible conduct, and the Defendant’s fraudulent conduct amount to reprehensible conduct.
—
[1] 2024 ONSC 4395.
[2] RRO 1990, Reg 194.
[3] Citing Bank of Montreal v 1886758 Ontario Inc, 2022 ONSC 4642, para 3.
[4] Citing Gennet Lumber Co v John Doe, 2019 ONSC 1345, para 54.
[5] Citing Boucher v Wal-Mart Canada Corp, 204 ONCA 419, para 59.
[6] 27 October 2022, CV-22-00682274-0000 (unreported)
[7] RSC 1985, c B-3.
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Written by: Albert Oosterhoff
Posted on: January 28, 2025
Categories: Commentary, WEL Newsletter
1. Introduction
A person obtains funds from a bank through fraudulent misrepresentation. What means are available to the bank to recover the funds, or damages? The court explored these issues in The Bank of Nova Scotia v Rosario Rosado.[1]
2. Facts
The Bank makes a line of credit available to students who are enrolled in qualifying professional study programs in which they pursue a professional designation. In 2022, the Bank advanced such a line of credit to the Defendant. In support of his application the Defendant represented to the Bank that he was enrolled in a Doctor of Dental Surgery program at the University of Toronto and provided documentation in support. All the representations and back-up documents were fraudulent and false.
By Statement of Claim, the Bank sued the Defendant for liquidated damages and fraud. It sought repayment of the credit line, an accounting and tracing order together with interest, punitive damages, a declaration that the debt arises from fraudulent misrepresentations and false pretences, and costs on a full indemnity or substantial indemnity basis.
The Bank was unable to effect personal service of the Claim and had to obtain an order for substituted service. The Defendant did not file a Statement of Defence and in September 2023 the Bank noted him in default and then brought this Motion for default judgment.
Under Rule 19.02(1)(a) of the Rules of Civil Procedure[2] a defendant who has been named in default is deemed to admit the truth of all allegations of fact made in the statement of claim. The allegations included: (1) the fact that the Defendant produced a letter from the Faculty Registrar at the Faculty of Dentistry stating that the Defendant had been offered a position in the Doctor of Dental Surgery program, and a confirmation of enrolment letter signed by the University Registrar stating that the Defendant was registered in the program; (2) that the documents were forgeries or falsified, and that the Defendant made the representations and produced the documents to the Bank knowing that they were false, with the intention that the Bank would rely on them; and (3) that Bank relied on the representations and documents, which caused the Bank to suffer losses and damages.
Rule 19.06 provides that a plaintiff is not entitled to judgment on a motion for judgment merely because the facts are deemed to be admitted, unless the deemed admission of facts and the facts adduced at the hearing entitle the plaintiff to judgment. Further, under Rule 19.05(2) a motion for judgment must be supported by evidence given by affidavit if the claim is for unliquidated damages.
The deemed facts were supported by the affidavit of a law clerk who contacted the Faculty of Dentistry and was told that while the Defendant had applied to the Faculty, he was not admitted. Moreover, correspondence from the Faculty, appended to the affidavit, confirmed that the Faculty documents submitted by the Defendant to the Bank were fraudulent. Finally, the Plaintiff submitted an affidavit of a Bank officer attaching a payout statement showing that the Defendant remains indebted to the Bank in the principal amount of the Line of Credit plus interest.
3. Analysis and Judgment
Justice Charney held that the deemed facts together with the affidavits filed in support of the motion for default judgment, are sufficient to support judgment in favour of the Bank. Accordingly, his Honour ordered the Defendant to pay the Plaintiff the amount of the funds advanced, plus pre- and post-judgment interest.
Fraudulent Misrepresentation
His Honour noted[3] that a plaintiff who asserts a claim for fraud must prove the following: (1) a false representation by the defendant; (2) some level of knowledge of the falsehood of the representation (either through knowledge or recklessness); (3) that the false representation caused the plaintiff to act; and (4) that the plaintiff suffered a loss. He went on to hold that the deemed admissions together with the affidavit evidence proved these elements. Thus, his Honour was satisfied that the Plaintiff was entitled to default judgment and to a finding that the Defendant induced the Bank to advance the funds to him through fraudulent misrepresentation.
Punitive Damages
His Honour then turned to the claim for punitive damages. The Plaintiff sought punitive damages of $200,000 because of the Defendant’s fraudulent, malicious and premeditated conduct. He noted that punitive damages are an extraordinary remedy and may be awarded only if compensatory damages are inadequate to deter the Defendant’s conduct. The amount awarded must be proportionate to the compensatory damages.[4] He concluded that in this case the Bank’s entitlement to punitive damages ‘appears well justified’, and that the perpetrated fraud meets the standard of “high-handed, malicious, arbitrary or highly reprehensible misconduct that departs to a marked degree from ordinary standards of decent behaviour”[5]. In a similar case, Bank of Nova Scotia v Anirudh Kumar,[6] the court awarded $200,000 in punitive damages and Justice Charney concluded that this amount is the appropriate and proportionate award of punitive damages in this case.
Tracing Order
On the motion the Bank seeks only an accounting order and an order preserving its right to elect between a constructive trust or other proprietary right and damages. That is because if the Bank is able to trace the proceeds into any identifiable property it will be entitled to a declaration of a constructive trust, but such a declaration cannot be made if the Bank is unable to trace the proceeds. Hence the Bank seeks an accounting order to obtain further information about how the Defendant used the funds. The court granted the order, as well as an order for disgorgement of any funds or profits found in the process, and an order that the Bank may elect in whole or in part between (1) the imposition of a constructive trust, or an equitable lien, or both, and (2) damages.
Declaration That the Debt Arises Due to Fraud
The Bank seeks this declaration because of s 178(1)(e) of the Bankruptcy and Insolvency Act (BIA’).[7] It provides that a discharge from bankruptcy releases the debtor from any pre-bankruptcy debts, except for ‘any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation’. Thus, the Bank is asking for this declaration for the event that the Defendant should declare bankruptcy. However, the Plaintiff advised the court that there are divided Superior Court decisions on whether the court can make such a declaration before a defendant makes an actual assignment in bankruptcy. In one line of cases the courts have granted the declaration in these circumstances. In a second line of cases the courts have refused to grant a declaration that the debt survives a bankruptcy discharge, but are willing to declare that a debt results, inter alia, ‘from obtaining property or services by false pretences or fraudulent misrepresentation’ (using the language of s 178(1)(e)). In a third line of cases the courts have refused to grant the declaration.
Justice Charney stated that he preferred the second line of cases, but did not wish to make a ‘declaration’, because it is, by definition, ‘a statement confirming the existence of a legal right’. However, since he has made a finding of fraudulent misrepresentation, the court can rely on it in a future proceeding in which the application of s 178(1)(e) arises.
Costs
Justice Charney awarded costs on a substantial basis. Such costs are available when a party has engaged in reprehensible conduct, and the Defendant’s fraudulent conduct amount to reprehensible conduct.
—
[1] 2024 ONSC 4395.
[2] RRO 1990, Reg 194.
[3] Citing Bank of Montreal v 1886758 Ontario Inc, 2022 ONSC 4642, para 3.
[4] Citing Gennet Lumber Co v John Doe, 2019 ONSC 1345, para 54.
[5] Citing Boucher v Wal-Mart Canada Corp, 204 ONCA 419, para 59.
[6] 27 October 2022, CV-22-00682274-0000 (unreported)
[7] RSC 1985, c B-3.
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