Ruling also informs Superior Court jurisdiction in dealing with an abuse of process
In a ruling which clarified the law related to Mareva orders, the Ontario Court of Appeal has ordered that a company cannot collect funds it is owed on several defaulted mortgages until the determination of a fraud case in which the mortgager is a defendant.
At the root of Buduchnist Credit Union Limited v. 2321197 Ontario Inc., 2024 ONCA 57 was a sophisticated fraud perpetrated against a company called Trade Capital Finance Corp. The scam involved Trade Capital’s president, Peter Cook, who admitted to and was jailed for making unauthorized payments of $7 million to various entities, including companies controlled by a man named Carlo De Maria.
Buduchnist Credit Union was the mortgage lender on several of De Maria’s properties. These mortgages eventually defaulted, and Buduchnist sought to collect on payments it made on their behalf.
But before the mortgages defaulted, Trade Capital had determined through a series of Norwich orders that $4 million of the money it was defrauded had passed through The Cash House, a payday lending business De Maria owned until 2015. Trade Capital got a Mareva order, freezing assets De Maria and his companies owned. Buduchnist continued to make monetary advances to De Maria, which turned out to be a breach of the order.
“We used the standard form Mareva template, as promulgated by the commercial list in Toronto,” says Peter Carey, counsel for Trade Capital. “That's a very comprehensive order. It's designed to avoid a lot of problems that have come up in the case law over the years around Mareva – or freezing orders, as the English call them.”
While Buduchnist wanted to collect on the money De Maria and his companies owed, Trade Capital argued that it should wait until its fraud case's conclusion.
Superior Court Justice Michael Penny found that Buduchnist had indeed breached the Mareva order in its post-Mareva payments to De Maria’s companies. But he also found that he did not have the jurisdiction to prevent Buduchnist from collecting on its debt. While Penny disallowed Buduchnist’s claims as a secured creditor on the post-Mareva advances, he found that it could enforce its claim as an unsecured creditor and granted a distribution order over both the pre- and post-Mareva advances.
Buduchnist had also argued that the numbered companies to which it had made advances were not named defendants, so the Mareva order did not cover them. But Penny ruled that the order captured those assets. The Court of Appeal confirmed the finding.
“This is the first determination of this issue in Canada,” says Carey, a partner at Levitt Sheikh Employment & Labour Law. “If you own a numbered company, and you are the sole officer and director and shareholder of that company, that company’s assets are frozen.”
On appeal, Trade Capital argued that Penny should have exercised his jurisdiction to prevent Buduchnist from recovering any money obtained by breaching the Mareva order until after the final determination in Trade Capital’s action.
Writing for the Court of Appeal’s panel, Justice Lois Roberts said that having found Buduchnist breached the Mareva order, the Superior Court had “broad jurisdiction” to deal with the abuse of process, regardless of the parties’ chosen procedural route. Roberts said the motion judge was entitled to strip Buduchnist of its priority as a secured creditor for the post-Mareva advances, to decline to vary the Mareva order and delay enforcement of Buduchnist’s claim until the determination of Trade Capital’s action.
Justice Roberts said the motion judge’s removal of Buduchnist’s secured creditor status for the post-Mareva order advances was a recognition that the court should not permit Buduchnist to defy a court order and obtain relief that would effectively defeat the order’s purpose. However, the motion judge was wrong in finding that he lacked the jurisdiction to order the receiver to hold the proceeds pending the resolution of Trade Capital’s claims. In doing so, the judge “unnecessarily and incorrectly fettered the exercise of his discretion,” said Roberts.
The judge said that removing Buduchnist as a secured creditor was an inadequate response to its breach. In light of the company’s breach, “the appropriate and proportionate order” is to delay enforcement of Buduchnist’s judgment while the Mareva Order is in place and until a court determines Trade Capital’s action against De Maria and his related companies, said Roberts.