Most fraud recovery claims involve a claim of conspiracy. Fraud by its nature is opaque and in many cases the victim knows it has been defrauded, knows that a number of parties were involved, knows that the money or assets have been hidden or moved outside of the jurisdiction beyond reach and knows that the ill-gotten gains can be moved faster than the victim can chase them. In looking to attach liability to the individuals behind the fraud, the plea of conspiracy is usually advanced. However, in many cases the particulars of the conspiracy are vague and difficult to ascertain. The recent decision in HSBC Bank of Canada v. 1100336 Alberta Ltd. (Incredible Electronics Wholesale), 2011 ABQB 748 is instructive on how parties must be careful in the manner in which they allege and marshal evidence to prove the “agreement” or “common design” necessary to establish a conspiracy.
HSBC Bank of Canada alleged the Defendants Fuss, Kendrick, Thuna, and the Defendant companies controlled by those individuals, conspired to prevent HSBC realizing a debt owing by 828326 Alberta Ltd.
Kendrick was a director and shareholder in 828326, as was HBC Business Credit Inc., a corporation controlled by Fuss. Fuss's wife, Thuna, was a director of 828326 and HBC. Fuss was a director of the Defendant 1100336 Alberta Ltd.
HSBC began providing financing to 828326 in 2001 through an operating line of credit. As security for the debt, 828326 executed a General Security Agreement (GSA), granting HSBC a charge on all personal property of 828326, including its goodwill, revenues, income contract agreements, book debts, accounts receivable and all other property and things of value. It was also a term of the GSA that any money collected or received as proceeds or in respect of accounts, contractual rights or rights to payment were subject to a trust in favour of HSBC.
By January 29, 2004, 828326 owed $862,000.00, and HSBC served written notice that it would no longer honour any of 828326's cheques. On March 8, 2004, HSBC made a demand for payment and on March 28 and 29, 2004, Price Waterhouse Coopers (PWC) was retained by HSBC. PWC was later appointed receiver and manager of the business and undertakings of 828326. HSBC later petitioned 828326 into bankruptcy. PWC's recovery from 828326 was negligible.
The Fraudulent Scheme
At the beginning of February 2004, Fuss and Kendrick decided to continue the business of 828326 by opening an account with Toronto Dominion Canada Trust Bank (TD) on February 5. Unbeknownst to HSBC, the TD account was opened on February 4, 2004, in the name of the Defendant Electronics Wholesale (Edmonton) Ltd. (EWE), and not 828326. Thuna was a director of EWE. From that point on, all receivables coming to 828326 were deposited in the TD account. Fuss and Kendrick subsequently incorporated 1100336 on April 1, 2004, and 1100336 took over the operation of the 828326 business. Both EWE and 1100336 were successors of 828326 and carried on 828326's business.
The Court found that 1100336 was used by the Defendants in an attempt to strip 828326 of its assets. The transfer of property from 828326 to 1100336 and the use of the EWE TD bank account represented an intentional and deliberate process designed to sequester 828326's assets in 1100336, and leave 828326 with the liability to HSBC. 1100336 had no legitimate business purpose; it was created solely for the purpose of defeating a creditor claim (that of HSBC).
HSBC alleged that the Defendants' actions from February 4, 2004, onwards amounted to a conspiracy against HSBC to deprive it from recovering the debt owing by 828326, which would then allow it to attach liability directly against the individual defendants, who had assets.
The only defendant to be found to have engaged in fraud was Kendrick. Kendrick's fraud involved creating misleading or incorrect accounting and stock information for 828326, and intentionally destroying 828326's electronic records. While the Court did not find that Fuss and Thuna knew of the details of Kendrick's fraudulent activities, he found that they were aware of, endorsed, and played a part in the transfer of 828326's business to 1100336.
Unlawful Conduct Conspiracy
The legal elements of unlawful conduct conspiracy were set out by the Supreme Court of Canada in Cement Lafarge v. B.C. Lightweight Aggregate,  1 S.C.R. 452, and recently affirmed in Agribrands Purina Canada Inc. v. Kasamekas,  ONCA 460. To be successful in a claim for the tort of unlawful conduct conspiracy, the following elements must be present:
- The parties acted in combination or in concert, by agreement or with a common design;
- The conduct complained of is unlawful;
- The conduct is directed towards the complainants;
- The parties know that, in the circumstances, injury to the complainants is likely to result; and
- The conduct causes injury to the complainants.
The Court found that the last three elements of the test were satisfied, and the bulk of the Court's decision focuses on the first two elements of the test: agreement or common design, and unlawful conduct. Of interest for our purposes, however, is the Court's discussion of the first element – the agreement or common design that must be present to prove unlawful conduct conspiracy.
Agreement or Common Design
The Court noted that in unlawful conduct conspiracy, the “agreement” or “common design” does not have to be formal, but the parties must actually enter into an agreement, as opposed to merely being in agreement – a common intention independently arrived at by several persons is insufficient to establish the existence of an agreement in conspiracy. The Court further held that in order to be a party to conspiracy, one must know the facts of the alleged agreement or common design, and have intended to be a party to the common design. Knowledge of, or acquiescence to, the impugned course of conduct is not, in itself, sufficient to render one a party to the conspiracy.
In this case, the Court concluded that Kendrick and Fuss actively conspired to defeat HSBC's ability to recover 828326's assets and funds by agreeing to operate 828326's business through the EWE TD account and incorporating 1100336 to continue the sale of the inventory and collect receivables of 828326. Thuna was also found to have conspired against HSBC because she was aware that 828326 was in trouble and that its business was operating as EWE and 1100336, willingly carried out Fuss's instructions, and knew their effect.
After considering the remaining four elements of the test, the Court concluded that HSBC proved all elements of civil conspiracy, and found Kendrick, Fuss and Thuna liable to HSBC, along with the corporate Defendants.
While the outcome of this case was positive for HSBC, the decision is a strong reminder that parties must be cautious in pursuing claims of conspiracy in a fraud recovery context. In this case, the Court suggests that the tort of unlawful conduct conspiracy requires a complainant to prove that 1) the conspiring parties knew of the facts of the “agreement” or “common design” and, 2) they intended to be a party to the common design. According to the Court, mere knowledge of or acquiescence to the impugned conduct is not sufficient to render someone party to a conspiracy. The standard is high.
Victims of fraud must be careful in pursuing claims of conspiracy in the fraud context where it is inevitable that there will be individuals involved in the fraudulent scheme who are not the “masterminds” of the scheme but whose actions are clearly integral to the success of the scheme. While these individuals may not be privy to all of the details of the fraudulent scheme, they would certainly be aware that their actions are unlawful, assist in perpetrating the fraud, and cause injury to the victims.
The Court's decision in this case seems to suggest that the mere fact of knowing the “mastermind” is perpetuating a fraud is not sufficient to prove conspiracy. As a result, the decision might be read to suggest that all of the parties involved in the fraudulent scheme have to acknowledge in some fashion that they are undertaking a conspiracy to defraud. This may be an unattainable standard in practice.
Consequently, it is important that fraud victims be careful when pleading conspiracy and collecting evidence to support the claim in order to ensure that all the parties to the fraud can be shown to have been party to a common design or agreement to defraud, regardless of their actual role in the fraudulent scheme.