A recent Ontario decision dealt with the issue of liability as between two defrauded employers: is a past (former) employer liable to a new employer when a fraudulent employee steals money from the latter to satisfy its debt to the former?

In the recent Ontario Superior Court of Justice decision in Healthy Body Services Inc. v. 1261679 Ontario Ltd., 2013 ONSC 6396, the defrauded employer, Healthy Body Services, attempted to recover from the former employer, Raytek, on the basis that the fraudulent employee, Mr. Patel, paid Raytek a settlement with funds stolen from Healthy Body Services. As is the case with many fraudsters, Mr. Patel appeared to have a history of fraud, and had similarly defrauded his prior employer, Raytek. Using funds stolen from Healthy Body Services, Mr. Patel paid significant amounts to satisfy the claims of Raytek.

Healthy Body Services based its claim against Raytek in the causes of action of knowing receipt and unjust enrichment. The claim of knowing receipt requires the plaintiff to establish that the defendant received trust property, with knowledge that the property was transferred to that defendant in breach of a trust. If the funds can be traced, the only issue for the Court is whether or not the defendant “had knowledge of facts that would have put a reasonable person on notice or inquiry as to the source of the funds.” If so, the claim will succeed, and the plaintiff is entitled to the return of its money.

The claim of unjust enrichment has 3 necessary elements: an enrichment, a corresponding deprivation, and the absence of a juristic reason for the enrichment. Assuming that tracing can be established, the central issue is whether or not a juristic reason exists for the payments. In the Healthy Body Services case, the Court noted several factors to support a juristic reason; namely that the first employer acted in “commercial good conscience” when making the settlement agreement, the employer had a civil judgment on same issue, and the funds the employer received were applied for commercial purposes.

The Healthy Body Services decision provides useful direction for settlements with a former employee. The key point is that the former employer must take care to shield itself from future liability concerning the source of settlement payments in case their source is a subsequent fraud. These steps should include:

• Carefully assessing the circumstances regarding payment of the funds. Are there any facts which may put the employer “on notice” to make reasonable inquiries as to the source of the funds? While the employer does not need to be “unduly suspicious”, the employer cannot turn a blind eye to facts that reasonably require investigation.
• Entering into a settlement agreement, obtaining a judgment or otherwise documenting the obligation of the fraudster.

Please feel free to contact Jordan Deering of our Fraud, Corruption & Asset Recovery Group directly if you would like to discuss the application of this decision to your particular circumstances.

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