A Ponzi scheme is a fraudulent investment operation where the operator, an individual or organization, pays returns to existing investors from funds paid by new investors, rather than from legitimate gains. The scheme’s success depends on a constant flow of new investments to sustain the illusion of profitability. When the flow of new investments dries up, the scheme collapses, often leaving investors with substantial losses.

We have assisted clients who were investors defrauded by Ponzi schemes. Once the scheme is exposed, the fraudsters often use bankruptcy as a shield to prevent recovery. By law, the maximum that a defrauded investor may recover is the investment principal amount, without any gain. These make the recovery an arduous process and recovering lost investments can be a complex legal battle.

One of the key aspects of this battle is understanding the applicable limitation periods, which set deadlines for initiating legal actions to recover lost funds. A recent Supreme Court of Canada case, Scott v. Golden Oaks Enterprises Inc., offers valuable insights into the legal tactics and lessons learned when trying to recover investments from a Ponzi scheme.

The Golden Oaks Ponzi Scheme

The case centered on Golden Oaks Enterprises Inc., a company operated by its sole officer, shareholder, and directing mind, Joseph Lacasse. Golden Oaks presented itself as a legitimate rent-to-own residential property business, attracting investors with promises of high returns on short-term loans. However, the company was a classic Ponzi scheme, using new investments to pay off older investors and maintain the facade of a successful business.

The scheme collapsed in 2013, leading to Golden Oaks and Lacasse filing for bankruptcy. A trustee was appointed to manage the bankruptcy proceedings and initiate actions to recover funds for the investors. The trustee sued the company’s lenders, arguing that the interest payments made to them were based on illegal interest rates.

The Limitation Period Argument

The investors countered the trustee’s actions, claiming they were statute-barred due to the expiration of the limitation period. Their argument was based on the Ontario Limitations Act, 2002, which sets a two-year limitation period for such claims. This time limit is identical to the BC limitation rules. They argued that Lacasse, as the sole director of Golden Oaks, was aware of the Ponzi scheme from the start, and his knowledge should be attributed to the company. Therefore, the limitation period began when the payments were made, between 2011 and 2013, and the trustee’s legal action in 2015 was outside this period.

Under the corporate attribution doctrine, the actions of a company’s directing mind (in this case, Lacasse) are often attributed to the company itself. However, both the Ontario Superior Court of Justice and the Ontario Court of Appeal reasoned that Lacasse’s knowledge should not start the limitation period clock for the trustee’s recovery actions. They concluded that a claim does not become “appropriate” for legal action until it is feasible for the party to pursue it—in this case, after the bankruptcy trustee had been appointed.

The Supreme Court of Canada agreed with the two levels of lower courts, affirming that because the trustee could not have known about the fraudulent payments before the investigation and bankruptcy proceedings, the limitation period only began once the trustee was in a position to take legal action.

The Court’s Decision on Corporate Attribution

The Supreme Court examined the concept of corporate attribution, the legal principle determining when a corporation can be held liable for the actions or knowledge of its directors. The Court clarified the principles of corporate attribution, emphasizing that it should be applied with a focus on the purpose of the law under which attribution is sought.

In this case, attributing Lacasse’s knowledge to Golden Oaks would have contradicted the purpose of the Limitations Act, 2002, which is to prevent injustice by ensuring that an action can be brought before the expiry of the limitation period. The Court also considered the purpose of the Bankruptcy and Insolvency Act, which includes the equitable distribution of assets among creditors and the financial rehabilitation of the bankrupt. Attributing Lacasse’s knowledge to Golden Oaks would have allowed the investors to benefit from their illegal actions, reducing the assets available for other creditors.

Lessons for Creditors

The Supreme Court’s decision in Scott v. Golden Oaks provides important lessons for creditors attempting to recover funds from a collapsed Ponzi scheme:

1. Limitation Periods and Discoverability: The case highlights the importance of the discoverability rule in limitation periods. The limitation period begins not necessarily when the wrongdoing occurs but when it is discovered, or ought to have been discovered, by the party with the claim.
2. Corporate Attribution: The decision clarifies that corporate attribution is not a rigid rule but a principle that should be applied in line with the purpose of the relevant laws. This means that even if a director is aware of wrongdoing, their knowledge may not be automatically attributed to the company if it contradicts the purpose of laws designed to protect creditors and ensure equitable distribution of assets.
3. Equitable Set-off: The case also touches upon the concept of equitable set-off, which allows parties to offset mutual debts. The Court confirmed that this principle applies in bankruptcy cases, allowing a creditor to use their debt to the bankrupt as a form of security.

What Should a Creditor Do to Recover From a Ponzi Scheme?

The legal battle to recover investments from a Ponzi scheme is challenging. The Supreme Court’s decision in Scott v. Golden Oaks offers clear guidance on limitation periods, corporate attribution, and equitable set-off, empowering creditors with the knowledge to navigate this complex landscape.

The law set out in Scott v. Golden Oaks by the Supreme Court of Canada applies to British Columbia.

By understanding these legal tactics and lessons learned, creditors can increase their chances of recovering their investments and finding a path toward financial recovery.

Contact Roland Luo in Vancouver for Trusted Advice on Ponzi Scheme Compensation

For the past two decades, our firm developed significant experience in the areas of recovery from civil fraud, and in particular, from Ponzi schemes. Should you encounter such a dispute, contact Roland Luo. We have experience in assisting clients by using both alternative remedies e.g., arbitration, mediation, or through litigation in BC, Ontario and New York.

Located in downtown Vancouver, Roland Luo proudly represents clients throughout British Columbia, as well as clients across Canada and the United States. To schedule a confidential consultation, contact us online (the more efficient way) or by phone at 604-800-4628.