When a Ponzi scheme collapses, how does a bankruptcy trustee with limited resources and hundreds of innocent investors — some winners, some losers — address all the competing issues in an equitable and cost-effective way? The Supreme Court of British Columbia recently offered an answer.
The Supreme Court of British Columbia in My Mortgage Auction Corp. (Re) granted a successful application for a judgment clawing back amounts paid to more than 500 investors in a multi-million dollar Ponzi scheme perpetrated by Gregory Joseph Martel through My Mortgage Auction Corp (MMAC). This represented the first application of its kind in British Columbia.
Background
MMAC was registered as a mortgage broker. Mr. Martel was MMAC’s sole owner and director. MMAC’s business included soliciting funds for the purported purpose of funding bridge loans for parties needing short-term financing. In reality, no bridge loans ever existed. Instead, MMAC had all the hallmarks of Ponzi scheme, including the promise of high returns with little risk and the use of funds from new investors to pay prior investors. From 2018 until 2023, MMAC operated a massive Ponzi scheme at the behest of Mr. Martel that raised over C$300-million from investors on false pretenses. In the end, more than 1,200 investors lost money to the scheme.
PwC was appointed receiver of MMAC in May 2023 and assigned MMAC into bankruptcy in June. Mr. Martel was petitioned bankrupt in August. Despite significant losses from certain investors, the Trustee identified approximately 500 parties who were “net winners” because they received a return of funds in excess of their investment. These winners had no knowledge of the Ponzi scheme. It was self-evident that the cost of commencing separate actions against each of those net winners for return of funds would be costly and lengthy, and result in minimal, if any, recovery for the estate.
Accordingly, in May 2025 the Trustee brought a single application seeking to recover: (i) amounts paid to all investors in the scheme in excess of the principal those creditors invested (Excess Funds); and (ii) payments that constituted preferences pursuant to section 95(1)(a) of the Bankruptcy and Insolvency Act (BIA) (Preference Payments).
Decision
The Court granted the Trustee’s application and accepted that it stood as the most practical, effective and efficient process to recover the Excess Funds and Preference Payments. In contrast, the Court concluded that the lengthy and involved process of having the Trustee commence separate actions, as suggested by certain net winners in opposing the Trustee’s application, was a delay tactic aimed at exhausting the limited financial resources remaining in the estate to avoid liability.
Preliminary Findings
The Court was satisfied that Mr. Martel was running a Ponzi scheme through MMAC. It also reaffirmed the well-accepted principle in Canadian law that such schemes are insolvent from the outset.
The Court was equally satisfied that the Trustee’s application, which was akin to a summary trial, was the appropriate procedure to deal with the issues raised, holding that such process is expressly contemplated by the BIA and supported by both the B.C. Supreme Court Civil Rules and case law.
Preference Payments
The Court held that the Preference Payments constituted preferences pursuant to section 95(1)(a) of the BIA. It found:
- The Preference Payments were made three months before the date of the initial bankruptcy event and ending on the date of the bankruptcy
- The Preference Payments were made with a view to giving their recipients a preference over other creditors
- The recipients of the Preference Payments met the definition of a “creditor” under the BIA
As such, the statutory requirements were satisfied and the Preference Payments were void and required to be repaid to the estate.
Fraudulent Conveyances
The Court also held that the payment of the Excess Funds to net winners constituted fraudulent conveyances contrary to the British Columbia Fraudulent Conveyance Act. It found:
- The transfers of the Excess Funds to net winners constituted dispositions of property
- The payments of the Excess Funds were made with the intent to delay, hinder or defraud MMAC’s creditors and others
- The payment of the Excess Funds had the actual effect of delaying, hindering and defeating MMAC’s creditors
Accordingly, the statutory requirements were satisfied and those payments were void and had to be repaid to the estate.
Unjust Enrichment
In addition, the Court affirmed that the law of unjust enrichment requires the return of Ponzi profits regardless of the innocence of the recipients. It noted:
- The net winners had been enriched by the Excess Funds
- The estate had suffered a corresponding deprivation because those funds would otherwise have been available to address the claims of all of MMAC’s creditors, including net winners
- There was no juristic reason that could justify net winners keeping Excess Funds that were “false profits”
Money Had and Received
Finally, the Court found that the Excess Funds constituted money had and received (funds that a party has received but which the law says it would be unjust and against conscience to keep). It stated:
- It was not just to allow recipients of “profits” from a Ponzi scheme to keep those false profits in the face of the substantial losses incurred by net losers
- The defence of hardship or change of position could not be advanced by net winners in isolation from the entire circumstances and, in any event, was not available in the context of a Ponzi scheme
Key Takeaways
This decision confirms that ill-gotten profits received from a Ponzi scheme can be recovered from multiple investors by way of a single, consolidated application. This decision also addresses important principles regarding the nature of Ponzi schemes and the causes of action available in the wake of their collapse. It is likely to be of significant assistance to court officers seeking to effectively and efficiently manage the difficulties that arise when insolvent persons have engaged in fraudulent activity.
Blakes represented PricewaterhouseCoopers (PwC) in its capacity as trustee in bankruptcy of the consolidated estates of My Mortgage Auction Corp. and Mr. Martel before the Supreme Court of British Columbia.
For more information, please contact the authors or any other member of our Restructuring & Insolvency group.
