Ontario Court of Appeal in Buduchnist Credit Union Affirms Broad Jurisdiction to Address Breaches of Mareva Orders

March 15, 2024

Written By Robert Staley, Nathan Shaheen, Doug Fenton and Asif Zalfckruddin

In Buduchnist Credit Union Limited v. 2321197 Ontario Inc., 2024 ONCA 57 (Buduchnist), the Court of Appeal for Ontario has affirmed that superior courts have broad and flexible jurisdiction to address breaches of interlocutory Mareva orders granted to freeze a defendant's assets pending trial. The Court of Appeal has also affirmed a broad approach to the assets captured by Mareva injunctions issued based on the Commercial List Model Mareva Order. Individual assets do not need to be specifically listed or identified in the text of the order to be captured and frozen; it is sufficient if the assets are subject to the direct or indirect control of the Mareva defendant.

Buduchnist stands as an important reminder to exercise considerable care in pursuing transactions with individuals or entities that might be related to defendants subject to Mareva orders.

Background

The appellant, Trade Capital, was the victim of a fraud perpetrated by its president, Peter Cook, and his associate Carlo De Maria (De Maria).

In 2015, Trade Capital obtained a Mareva order against De Maria and certain of his companies freezing their assets. The Mareva order followed the standard form Commercial List Model Mareva Order and was stated to apply to any assets the defendants had "the power, directly or indirectly, to disposes of or deal with" as if it were their own, including if a "third party holds or controls the assets in accordance with the defendant's direct or indirect instructions."

De Maria was the director of several other companies—not named in the Mareva order—that held properties mortgaged with the Buduchnist Credit Union Limited (BCU). After the Mareva order was granted, BCU made several mortgage advances to those companies.

The mortgages later went into default. BCU sued, obtaining judgment and the appointment of a receiver over the mortgaged properties. Once the properties were sold, BCU moved for an order varying the Mareva order and distributing the sales proceeds to it.

The motion judge found that BCU had breached the Mareva order by advancing funds on the mortgage. While the corporations that held the mortgages were not named or identified in the Mareva order, they fell within the scope of the Mareva order because the corporations were subject to De Maria's direct or indirect control.

The motion judge held that because of that breach, BCU could not claim priority payment as a secured creditor for the post-Mareva advances. The motion judge did allow BCU to enforce its judgment against De Maria and the related companies, emphasizing BCU's status as a secured creditor of De Maria and the related companies. Among other things, since Trade Capital had not yet pursued its action to trial, the motion judge was of the view that the court lacked jurisdiction to require the Receiver to hold the sale proceeds as security for Trade Capital's "unproven claims."

The effect of that determination was that BCU could immediately enforce its judgment against De Maria and his related companies, which would reduce the funds that could be recovered by Trade Capital if ultimately successful on its action. Trade Capital appealed.

The Court of Appeal's Decision

The Court of Appeal allowed Trade Capital's appeal, holding that the motion judge had correctly identified the scope of the Mareva order and disallowed BCU's priority claim on the mortgage advances, but had erred in allowing BCU to immediately enforce its judgment.

Scope of the Mareva Order

As a preliminary matter, the Court of Appeal held that the motion judge was correct in concluding that BCU had breached the Mareva order. The Mareva order, premised on the Commercial List Model Mareva Order, was stated to apply to all De Maria's assets, as well as assets under his direct or indirect control. It stated, on its face, that all persons with notice of the Mareva order were bound to obey it.

Since BCU had been served with a copy of the Mareva order and had sufficient information to determine that De Maria was in control of the companies that held the mortgaged properties, the Court of Appeal affirmed that BCU had breached the Mareva order by advancing funds.

Broad Jurisdiction to Address Breaches of Mareva Orders

Next, the Court of Appeal affirmed that the court has broad jurisdiction to respond to a breach of a court order, which can include an order delaying enforcement of judgment.

As the Court of Appeal explained, this broad jurisdiction flows from the equitable nature of Mareva orders, which affords considerable discretion to deny relief if a party has acted inequitably. When a party asks the court to vary a Mareva order, it must come with "clean hands": A party cannot be allowed to take advantage of the "existence of a state of affairs produced by their own wrong." On this basis, while any request to modify a Mareva order requires the Court to consider the competing interests of all involved parties, a variation should not be allowed to undermine the core purpose of the Mareva order (i.e., the preservation of assets).

As a result, the Court of Appeal concluded that the motion judge had the jurisdiction to require the Receiver to continue to hold the sales proceeds while both the Mareva order and Trade Capital's litigation remained outstanding.

Here, the motion judge had erred by focusing his analysis on BCU's status as secured creditor, which disregarded the very important fact that that BCU's claims would not have arisen but for its own breach of the Mareva order. The relevant inquiry was whether it would be equitable to vary the Mareva order to enforce a judgment that stems from a willful breach.

In the Court of Appeal's view, permitting BCU to collect on its judgment would contradict the Mareva order's initial objective of asset preservation. Delaying the enforcement of BCU's judgment would not result in unfairness to BCU, as its claim would not exist had it not violated the Mareva order. On the other hand—Trade Capital, having invested significant time and resources to secure the order—would be at a disadvantage if BCU were allowed to collect immediately.

Key Takeaways

The Court of Appeal's decision affirms that courts will take a broad approach to the assets captured by a Mareva order. The freezing order will generally capture not only assets and entities specifically identified in the order, but also any other corporate assets or entities subject to common control. As a result, considerable care must be exercised in pursuing transactions with individuals or corporate entities that may be controlled by, directly connected to, or hold assets on behalf of Mareva defendants.

Similarly, the Court of Appeal's decision affirms that the court retains broad equitable discretion to fashion an appropriate remedy upon breach of a Mareva order, regardless of the particular context. Parties should not assume that breaches of court orders will be addressed only through contempt proceedings or similar motions. Whenever a party seeks a variation of a Mareva order—particularly to facilitate the distribution of funds—that moving party's prior conduct will always be relevant.

For further information about this case, or injunctions or related orders more generally, please contact a member of Bennett Jones' Commercial Litigation practice group or Fraud Law practice group.

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