What Fraud Victims Should Know About Fraud by Omission

Promissory Note and Other Unsecured Loan Cases

We often receive inquiries from people who have loaned money without formal security, only to find that the person they loaned the money to have used their money for purposes other than they discussed, have refused to pay it back, and have assigned themselves into bankruptcy.

The recent criminal fraud case of R. v. Fontana, 2016 ONSC 7076, tells the story of the unsecured loan scenario where funds were advanced for a specific purpose but used for other purposes. This case gives fraud victims hope that a form of justice can be obtained through the coercive powers of criminal forfeiture orders.

The Promissory Note

The tragedy of Ms. Post, the victim of the fraud, was summarized by the Court as follows: Ms. Post, an older lady, had a dear friend, Ms. Fontana, who was also a lady advanced in years. Ms. Fontana advised Ms. Post that she had always wanted to set up a restaurant, but she lacked the funds to do so. Ms. Post, trusting her long-term friend, wishing to assist her friend pursue her dream, and knowing what a fine cook Ms. Fontana was, offered to lend her what equated to her retirement nest egg. The amount of the loan was to be $150,000.

To protect her estate interests, Ms. Post advised Ms. Fontana that she wanted a promissory note to give to her family. The terms of the promissory note were simple – one year interest free, then monthly payments of $2,500, with the loan to be fully repaid in five years. Ms. Post knew that Ms. Fontana owned her own house with her husband and felt she could get the loan proceeds from the equity in this house if something happened. Ms. Post and Ms. Fontana went to a lawyer to formalize the note. The lawyer suggested that Ms. Post obtain formal security for her loan, but Ms. Post did not follow the legal advice because of her trust in her friend Ms. Fontana.

What is critical to this case is that the promissory note did not indicate any term as to what the money was to be used for. That said, the promissory note also did not contain a clause that the agreement represented all terms of the agreement. Accordingly, the fact that the money was loaned on condition that it be used for creating a restaurant was implied from the conversations between Ms. Post and Ms. Fontana, and from those, such as the lawyer, who were aware of the conversations between Ms. Post and Ms. Fontana.

The Fraudulent Omissions

Unknown to Ms. Post, Ms. Fontana had a gambling vice. Ms. Fontana looked around for some restaurant properties, but when she discovered that starting a new business actually required significant effort, she resorted to her vice. Without advising Ms. Post what she was doing with the money that she had loaned, Ms. Fontana gambled away most of the funds, and spent the rest on personal expenses and for funding a BMW for herself.

Ms. Post only came to learn there was a problem over a year later when Ms. Fontana’s loan payment cheques came back NSF. Ms. Post then demanded repayment of the loan. In response Ms. Fontana assigned herself into bankruptcy, and advised her friend Ms. Post that she was without legal recourse. Ms. Post made a criminal complaint. The police (surprisingly) accepted the complaint and laid a charge of Fraud Over $5,000 on the basis of the “other fraudulent means” provision of Section 380(1) of the Criminal Code of Canada.

Fraud by “Other Fraudulent Means”

The Crown argued that Ms. Fontana fraudulently misrepresented the purpose for which she sought the loan, by failing to advise Ms. Post of important facts – specifically that Ms. Fontana used the funds for gambling and to cover personal expenses, together with non-disclosure of the true title to her home.

The Defence argued there was no evidence of deceit or falsehood – the first two means of engaging in fraud as set out in Section 380(1) of the Criminal Code of Canada. The Defence argued that the promissory note did not set out the purpose for which the money was to be used, and as the loan document did not specify the purpose for the use of the funds, Ms. Fontana was free to use the funds in whatever manner she wished. The Defence further argued that the failure to repay the loan is nothing more than a “civil dispute”, and that Ms. Fontana was within her rights to assign herself into bankruptcy to relieve herself of her debt obligations.

The Court relied on what a “reasonable person” would consider to be “dishonest conduct.” Citing R. v. Zlatic, [1993] 2 SCR 29, (“Zlatic”) the Court held:

Dishonest conduct can be defined as conduct “which ordinary, decent people would feel is at variance with straightforward or honourable dealings”. At its heart, the dishonesty of “other fraudulent means” connotes the wrongful use of something in which another person has an interest, in a manner that the interest of the other person is put at risk or extinguished.

The Court then rhetorically asked itself:

Would ordinary decent people consider Ms. Fontana’s actions in accepting the money for the establishment of a restaurant, and then using it for personal expenses and gambling, dishonest conduct?

Would an ordinary decent person consider the depleting of the loan proceeds by nearly $80,000 within five months of the loan being made, the actions of an honest person where none of the monies went into the restaurant business?

Would the ordinary decent person consider the use of the loan proceeds for a $9,000 payment for a BMW within seven weeks of receiving the loan proceeds, the actions of an honest person?

Defining Fraudulent Omissions

The Court held that not only did Ms. Fontana have an obligation to accurately advise what she was using the money for, she also had an obligation to advise Ms. Post if she ever changed her intention. The Court held:

I also infer from Fontana’s statement [that she would use the money to create a restaurant] that she knew she had an obligation to keep Ms. Post apprised of how

things developed so that Ms. Post knew how her money was spent. Ms. Fontana never advised Ms. Post of how she was spending the money. When Ms. Fontana failed in her efforts to set up a restaurant and began using the money for personal purposes, she did so dishonestly.

To use the words of the Supreme Court in Zlatic, the ordinary individual would have little difficulty concluding that Fontana’s actions were dishonest. Her initial actions may have been honest; but they became dishonest very soon after she accepted the money and she became frustrated in her efforts to set up a restaurant.

A Civil Dispute?

We typically advise clients to coordinate their criminal complaint, if they chose to make one, with civil recovery. This is because often criminal complaints do not result in criminal convictions, and even if they do, often recovery is not made through the criminal courts, and by the time victims realize this, they are timed out on bringing a civil action due to limitation periods. See our blog: Fraud victims know limitation periods

For now we note that the Court in the Fontana case did not conduct any analysis of what constitutes civil fraud. There are civil fraud cases where the Courts have held that civil fraud findings cannot be based on “other fraudulent means”, but yet other civil cases where the Courts declare liability for “fraud by omission”. This is the subject matter of another blog.

As it applies to this case, the Court correctly held that “a civil dispute does not mean that Ms. Fontana’s actions were also not criminal.” The Court held:

Fontana’s actions became criminal when she knew she was placing Edda’s money at risk by first of all not using the money towards a restaurant business, and secondly when she began using the money to fuel her gambling habit.

The Court also convicted Ms. Fontana of Theft by Conversion pursuant to section 322(1) of the Criminal Code. The charge read that Ms. Fontana fraudulently and without colour of right converted to her use money of a value exceeding $5,000 with an intent to deprive, temporarily or absolutely, Ms. Post of her money.

The Sentence – Recovery through the Criminal Process

The sentencing of Ms. Fontana is reported at R. v. Fontana, 2017 ONSC 2964. The Court imposed a conditional sentence (house arrest) of two years less one day, a restitution order of $150,000, and impressively a fine-in-lieu of forfeiture of $150,000 to be paid during the two years of house arrest, followed by three years of probation.

With respect to the “fine-in-lieu of forfeiture”, the Court held that if Ms. Fontana did not pay the $150,000 within the two years of house arrest, the Crown could apply to have her jailed for two to three years. Thus the “fine-in-lieu of forfeiture” is really “jail-in-lieu-of-forfeiture.”

The Court imposed the forfeiture order because Ms. Fontana had transferred title to her house to her husband – meaning that although the criminal court could not force Ms. Fontana to have her

husband sell their home, if she chose not to, she could face three years in jail. Thus it could be said that this aspect of the sentence is essentially “jail-in-lieu-of-equity in the marital home.”

Some fraud sympathizers may feel this is not fair to Ms. Fontana’s husband. The Court, however, was of the view that Ms. Fontana had caused Ms. Post to lose her retirement nest egg – so why could the Court not impose some coercion on Ms. Fontana to give it back to her.

This use of the fine-in-lieu of forfeiture provisions of the Criminal Code of Canada may be the subject of another blog. For more information on the use of criminal forfeiture orders to obtain recovery for fraud victims, see our blog Fraud victims know debtors jail

Inquiries

At Investigation Counsel, we investigate and litigate fraud recovery cases. If you discover you are a victim of fraud, contact us to have your case assessed and a strategy for recovery mapped out before contacting police or alerting the fraudster. We also promote victim advocacy and academic discussion through various private and public professional associations and organizations. If you have an interest in the topics discussed herein, we welcome your inquiries.

Norman Groot, LLB, CFE, CFI – June 9, 2017 www.investigationcounsel.com

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