Judges should be given a wide berth to deal with breaches of a Mareva order, the Court of Appeal has confirmed.
The freezing orders, which are designed to keep assets within the court’s reach by restraining parties from improperly disposing of them, are often issued in cases of alleged fraud where there is a fear that the perpetrators could otherwise spirit the money out of the country.
Judges typically have little patience and take a dim view of anyone who violates any kind of court order, but the circumstances surrounding Mareva orders can often be messy because of the number of parties and competing interests involved, as well as the opaque nature of the transactions.
Messiness was certainly a feature of the case in Buduchnist Credit Union Limited v. 2321197 Ontario Inc., an appeal court decision that affirmed judges’ broad and flexible discretion to address Mareva violations.
The facts
Trade Capital — the company at the heart of the case — was the victim of an elaborate fraud, allegedly perpetrated by its former CEO and a man named Carlo De Maria.
In 2015, the company obtained a comprehensive Mareva order freezing assets connected to De Maria, his wife and corporations controlled by the pair, including several clients of Buduchnist Credit Union Limited (BCU).
According to court rulings, BCU continued to make advances under mortgages to these clients before obtaining consent judgments against them for payments made both before and after the Mareva injunction went into force.
A Superior Court judge found that BCU’s advances to certain companies owned by De Maria constituted breaches of the Mareva order, even though they were not explicitly named as defendants to the injunction.
As a result of the breach, the judge ruled that BCU was not entitled to claim priority payment as a secured creditor for the post-Mareva advances. However, the judge did allow the BCU to immediately enforce its judgment against De Maria for the pre-Mareva advances, finding that the court lacked jurisdiction to require the funds to be held by a receiver until Trade Capital’s claims were proven at trial.
In practical terms, the judge’s approach would give priority to BCU at the expense of Trade Capital by reducing the total pot of funds available for recovery. This prompted Trade Capital to appeal the judgment, arguing that it should be able to collect on its losses on an equal footing with BCU. BCU also launched a cross-appeal challenging the judge’s finding that it had breached the Mareva order.
The results
The unanimous three-judge appeal panel sided with Trade Capital, upholding the motion judge’s findings about the Mareva breaches. In addition, they concluded the lower court judge had “unnecessarily limited the scope of his jurisdiction and discretion in relation to the appropriate order he could make” in response to the breach.
In its decision, the panel rejected BCU’s claim that the two companies it advanced funds to were not captured by the Mareva order because they were neither named in the order nor under De Maria’s direct or indirect control. The appeal court agreed with the motion judge, who found that the broad terms of the order plainly extended to unnamed affiliates of the named defendants and that BCU was well aware of De Maria’s connection to the companies it paid out to.
Since its breach of the Mareva order brought BCU to court without “clean hands,” it would “undermine the due administration of justice and offend the rule of law” if it were allowed to “reap the fruits of its improper actions” by collecting immediately on its consent judgement, the appeal court concluded.
Balancing the competing parties’ interests, the panel wrote that the “appropriate and proportionate” order in the circumstances was to delay the enforcement of BCU’s until Trade Capital’s underlying action was complete. Assuming Trade Capital is successful at trial, the two companies will then collect on their judgments on an equal footing.
The lessons
The drastic impact on defendants and the high threshold for obtaining one make a Mareva order one of the most difficult (and expensive) motions to bring in an Ontario Superior court.
Once imposed, judges will have no patience for anyone who breaches one of these orders, and they certainly will not allow a party to potentially profit from its violation. When a breach has been identified, this Appeal Court decision sends a clear message that judges are empowered to craft an appropriate remedy in response.
The bottom line is that anyone dealing with parties who are — or may be — covered by a Mareva order must take considerable care when engaging in transactions to ensure they stay on the right side of the court.