Remedies to pursue and how to handle fraud in a commercial real estate transaction

Certificates of pending litigation, cautions, constructive trusts, interim preservation of property orders, fraudulent conveyance actions, Mareva injunctions and receiverships are just some of the remedies in the litigator's tool box when responding to a commercial real estate fraud.

Deciding which remedy to pursue and when depends on each case and the nature of the fraud. Considerations include whether to secure the property in question, the ill-gotten gains, the fraudster itself or, as is commonly the case, a combination of all three. Additional factors that inform the decision are the available timelines, costs, the accessibility of assets and the likelihood of recovery.

This article looks briefly at receivership proceedings as a way to respond to a commercial real estate fraud. Considered by some to be a remedy devoted to the insolvency bar, receiverships commenced under s. 101 of the Courts of Justice Act and the Business Corporations Act are becoming more common. Given the complexity of commercial real estate transactions and the parties to them, an "investigative receivership" can be a useful way to obtain information quickly to verify a suspected fraud and support the recovery effort.

A receivership is an extraordinary and intrusive remedy. It must be carefully tailored to do what is required to assist in the recovery effort while protecting the defendant's interests

"Breathtakingly broad" receivership orders in Akaqi

Required reading for every lawyer seeking an investigative receivership is the Court of Appeal for Ontario's decision in Akagi v. Synergy Group (2000) Inc. 2015 ONCA 368. In Akagi, receivership orders were obtained ex parte pursuant to s. 101 of the Courts of Justice Act. Initially, the receivership was sought to enforce a $137,000 judgment. With each subsequent order, the receiver's powers were expanded and the proceeding "morphed into a wide-ranging 'investigative receivership,' freezing and otherwise reaching the assets of 43 additional individuals and entities," none of which was a party to the receivership proceeding.

The Court of Appeal set aside the receivership orders on the basis that they had proceeded on an entirely misguided course. While acknowledging the value of an investigative receivership if used properly, the Court of Appeal made clear that a receivership is an extraordinary and intrusive remedy. It must be carefully tailored to do what is required to assist in the recovery effort while protecting the defendant's interests.

The orders in question were "breathtakingly broad" and based on the faulty premise that they could be used to conduct the civil equivalent of a criminal investigation or public inquiry. Notably, the Court of Appeal awarded substantial indemnity costs against the receiver personally.

What about receivership in the commercial real estate context

A receivership in the commercial real estate context was obtained in DBCD Spadina Ltd. v. Walton 2013 ONSC 6833. In DBDC Spadina, the respondents obtained $6 million in mortgage proceeds against certain properties without the required agreement of the co-venturer. The respondents refused to disclose what use was made of the proceeds unless the disclosure was made on without prejudice at a mediation. This suspicious resistance was grounds for oppression and met the test for the appointment of an inspector, and subsequently a receiver/manager pursuant to the Business Corporations Act.

The inspector conducted a tracing analysis which revealed that the respondents misused the mortgage proceeds to invest in their own companies. The work of the receiver, to a significant extent, convinced the court that the respondents had defrauded the applicants. The receiver's investigation also supported an order for certificates of pending litigation to be registered against certain properties in question in what turned out to be a highly litigious proceeding.

How to handle fraud in a commercial real estate transaction

As with most cases of fraud, fraud in a commercial real estate transaction generally requires a rapid response to minimize the loss and maximize the chances of recovery. A receivership proceeding commenced in short order can be a useful way to obtain information to achieve these objectives. At the outset of a transaction, the risk of a fraud loss can be mitigated by due diligence and commercial title insurance. However, the risk cannot be eliminated entirely, necessitating the ability and know-how to respond when the risk materializes.

A version of this article originally appeared on The Lawyer’s Daily website published by LexisNexis Canada Inc.