On April 18, 2018, the Ontario Superior Court of Justice released its reasons in Ontario Securities Commission v. Bluestream Capital Corporation which is a useful illustration of the Ontario Securities Commission (OSC)'s power to garnish funds held by victims of investment fraud that are payable as debts to the perpetrator of the fraud.
The Background
Peter Balazs solicited a number of people to invest in his companies. However, neither Mr. Balazs nor any of the companies were registered with the OSC, as required by the Ontario Securities Act, and the majority of the "invested" funds were used by Mr. Balazs for personal expenditures. The OSC made a number of orders against Mr. Balazs and his companies, including that they jointly and severally disgorge over $1,500,000 to the OSC which was to be allocated for the benefit of third parties.
One of the victims of Mr. Balazs's investment scheme was an electrician living in Vaughan named Fred Camerlengo. Mr. Camerlengo and his sons invested significant sums of money in one of Mr. Balazs's companies, Bluestream International Investments (Bluestream). Mr. Camerlengo was required to participate in a compelled interview with OSC investigators pursuant to s. 13 of the Ontario Securities Act where the OSC learned the details of a $200,000 loan made by Bluestream to Camerlengo Holdings Inc., a company controlled by Mr. Camerlengo. In his interview, Camerlengo said that the loan had nothing to do with his investments with Bluestream, but was a favour to him. He had not repaid the loan because Mr. Balazs had disappeared.
Upon learning of the loan, the OSC issued a Notice of Garnishment to Camerlengo Holdings requiring it to pay its debts to Bluestream to the Sheriff. Mr. Camerlengo argued that him and his family were owed $622,008.01 by Bluestream and that this amount ought to be set-off against the debt owed by Camerlengo Holdings. The OSC brought a motion seeking to enforce its garnishment.
The Decision
Justice Schreck granted the OSC's motion for a declaration that Camerlengo Holdings owed a debt of $200,000 to Bluestream and an order that Camerlengo Holdings pay that debt to the Sheriff.
The chief issue was whether Mr. Camerlengo and his company were entitled to set-off. There was no dispute that Mr. Camerlengo was not entitled to contractual set-off, leaving only claims for legal and equitable set-off.
In order to claim legal set-off, Schreck J. held that the law is clear that "[f]or a valid claim of legal set-off there must be mutuality which requires that the debts be between the same parties and that the debts be in the same right". In this case, Schreck J. found that the debts were not between the same parties. The loan was from Bluestream to Camerlengo Holdings. None of the investments funds came from Camerlengo Holdings.
Turning to Mr. Camerlengo's claim for equitable set-off, Schreck J. held that it could not be said that the equitable ground goes to "the very root of the plaintiff's claim" or that the cross-claim is "clearly connected with the demand of the plaintiff" as required for a claim of equitable set-off. To the contrary, while he attempted to reverse this position on the motion, Mr. Camerlengo told the OSC investigators under oath that the loan to Camerlengo Holdings had "nothing to do with the investment". Further, the monies said to be owed by Bluestream are to Mr. Camerlengo, his sons, and two numbered companies, while the loan from Bluestream was to Camerlengo Holdings. Justice Schreck held that the absence of mutuality was further evidence that the claims were not "clearly connected".
Finally, Schreck J. held that permitting set-off would be unfair to other investors who suffered losses due to their investments with Mr. Balazs. If Camerlengo Holdings was permitted to set-off its losses against the loan owed to Bluestream, this would have the practical effect of giving the Camerlengo family priority over other investors with equally valid claims for compensation. Justice Schreck held that the Camerlengo family should not be in a better position than other investors simply because they had the benefit of a loan from Bluestream while others did not.
The Takeaway
While the decision in Bluestream is a fairly straightforward application of the principles of set-off, Justice Schreck's holding that discretionary remedies like equitable set-off should not be exercised to protect defrauded investors in a manner that puts them in a better position than other defrauded investors – even if that means defrauded investors have to repay loans arranged with the fraudster, is of interest. If justice is fairness, it may not always feel that way to everybody.
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