B.C. judge reluctantly enforces 2 contracts 'tainted by illegality'

Canadian cash is shown. (Shutterstock.com)

A B.C. Supreme Court judge has reluctantly upheld two agreements, despite finding that both were likely made for the purpose of tax avoidance and thus "tainted by illegality."

Justice Lisa A. Warren issued her ruling in the dispute between Christos Georgas and Terrance Ball on Monday, and it was published online Tuesday. 

Georgas sued Ball – along with Ball's wife and a numbered company – seeking repayment of amounts he claimed he was owed under the agreements.

In his defence, Ball argued that he did not owe Georgas any money, that Georgas had breached the agreements, and that – even if he did owe Georgas more money under the agreements – the contracts were unenforceable because they were entered into for illegal purposes.

Warren determined that Ball did, in fact, owe Georgas a total of more than $200,000 across the two agreements. The judge found each agreement to be "tainted by illegality," but nevertheless determined that enforcing each one, at least in part, was the appropriate remedy.

The agreements

Warren's decision refers to the agreements between Georgas and Ball as "the lending venture" and "the cash transfer venture."

The lending venture came about first. According to the decision, Georgas met Ball through a mutual friend, Russell Serion. Georgas and Serion operated a vape shop together, and they contracted Ball – a retired accountant – to perform accounting services for the store.

At the same time, Ball was operating what the decision describes as "a financing business of sorts."

"He made short-term loans to clients at high rates of interest, which were financed by investors, who in turn received high rates of interest on their investments," the decision reads. "Mr. Serion was such an investor and he told Mr. Georgas about the opportunity. Mr. Serion testified that many investors were involved and it was highly lucrative."

Georgas became involved in this lending venture between February and July of 2018, making several loans to Ball during that period, according to the decision. Ball prepared promissory notes stipulating the due date and the interest amount, in dollars, rather than a percentage.

Expressed as a percentage, the interest rate "was about 240 per cent per year," according to the court decision. That's well above the maximum legal interest rate under the Criminal Code, which is 60 per cent per year.

Ball did not repay any of the principal by the stated due dates, according to the decision. Rather, the loans were "rolled over," but interest payments were made periodically to Georgas, who insisted on receiving them in cash.

The cash transfer venture came about in June 2018, when Georgas met Ball at a Starbucks and asked him for help moving cash from Toronto to Vancouver.

While the decision indicates disagreement between the parties about some of the specifics of what was agreed at the meeting, the end result was that Ball gave Georgas access to two bank accounts, in exchange for a fee.

In June and July 2018, Georgas made several deposits – all in cash – into Ball's accounts at TD Bank locations in Toronto. The plan, according to the decision, was for Ball to withdraw the cash in Vancouver and give it to Georgas, less his fee. This happened on one occasion with an amount totalling just under $45,000.

Both the lending venture and the cash transfer venture stopped in August 2018, when Ball informed Georgas that he would no longer be making interest payments on the lending venture loans because TD had frozen his bank accounts involved in the cash transfer venture, allegedly because Georgas had made his deposits in cash, rather than by cheque.

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What were the transfers for?

Warren found both Georgas and Ball to lack credibility as witnesses. Her decision describes Georgas as "a person who is prepared to engage in dishonesty to advance his own interests."

"Mr. Georgas essentially admitted that he insisted on receiving interest payments in cash pursuant to the lending venture to facilitate tax evasion," it reads.

Likewise, the judge found Ball's testimony to be "internally inconsistent" and described him as "a person who is prepared to profit from his participation in schemes that are designed to assist other people to engage in dishonest conduct."

"It must have been obvious to him that Mr. Georgas insisted on receiving interest payments in cash pursuant to the lending venture to facilitate tax evasion, and that at least one purpose of the cash transfer venture was to assist Mr. Georgas with moving large amounts of cash income in a manner that would conceal it from tax authorities and currency regulators," the decision reads.

Warren found Georgas's stated reasons for the cash transfer venture to be "peculiar."

He told the court he was buying cryptocurrency with cash in Vancouver, then selling it in Toronto for cash, which he then needed to get back to Vancouver to buy more cryptocurrency.

"He did not provide a coherent explanation as to why he was conducting this business in cash," the decision reads. "He did not provide a rational explanation for not using his own bank accounts to deposit cash in Toronto and withdraw it in Vancouver, but rather chose to pay someone a fee to use their accounts."

Ball claimed the actual reason for Georgas's cash transfers was because he was buying cannabis in Vancouver for sale in Toronto, and growers in the B.C. city would only take cash. The decision notes the transfers occurred before cannabis legalization, but does not make a conclusion on the reason for the transfers one way or the other.

'Two wrongdoers'

Whatever their purpose, the transfers totalled $170,500, according to the decision. Of that total, Ball repaid Georgas only the aforementioned $45,000, less his fee, leaving $125,500, minus Ball's fees, outstanding.

Having reached a conclusion on how much Ball owed Georgas for the cash transfer venture, Warren turned to the question of whether the agreement undermining the venture should be declared void because it facilitated illegal activity.

While the judge could not determine whether the transfers were made to facilitate a legal cryptocurrency venture or an illegal cannabis one, she had no trouble concluding that the agreement was "tainted by illegality."

"The evidence as a whole leads to the inescapable conclusion that one of the objectives, if not the primary objective, was to assist Mr. Georgas move large amounts of cash income in a manner that would conceal it from tax authorities and currency regulators," the decision reads.

"At least one of the objectives of the concealment was to allow Mr. Georgas to evade income taxes. Evasion of or an attempt to evade the payment of income tax is an offence."

Despite this finding, Warren concluded that the apparent illegality of the agreement should not preclude Georgas from recovering his outstanding deposits, a finding the decision notes she reached "somewhat reluctantly."

"While the misconduct (participating in a tax evasion scheme) is serious, the evidence fails to demonstrate that any third party, the Canada Revenue Agency in particular, in fact suffered a loss from the deception and, if so, to assess the magnitude of that loss," the decision reads.

"Failing to require Mr. Ball to return the outstanding deposits would be a disproportionate and unbalanced result that would unjustly enrich Mr. Ball. Unjustly rewarding Mr. Ball, who is appropriately viewed as one of the two wrongdoers, would undermine the integrity of the law."

Accordingly, Warren ordered Ball to pay Georgas $122,990, plus pre-judgment interest. That total represents the outstanding deposits Georgas made into Ball's accounts, less a two-per-cent fee.

Ruling on the lending venture

The parties agreed that none of the principal Georgas loaned to Ball had been repaid, but they disagreed on the amount of principal that had been loaned in the first place, as well as the amount of interest Ball had paid on it.

Warren concluded that the outstanding principal amounted to $91,700, and ordered Ball to repay that amount, plus pre-judgment interest, to Georgas.

The judge declined, however, to allow Georgas to recover the full amount of interest he would have been owed under the promissory notes, which would have been a criminal rate of roughly 240 per cent per year. Nor did she order Ball to pay the maximum legal interest rate of 60 per cent per year, again finding that the parties' contract was "tainted by illegality."

"I am satisfied that the lending venture was tainted by illegality because it was clearly Mr. Georgas’ objective to receive the interest payments in cash for the purpose of evading income taxes," the decision reads.

"I have concluded that the appropriate remedy in this case is to notionally strike out the contractual interest provisions of the promissory notes and allow Mr. Georgas to recover only the principal (plus pre-judgment interest) … But for the illegality that tainted the lending venture, I would have allowed interest to be recoverable at 60 per cent."

The final amount Ball owes to Georgas will be reduced by the amount of interest he already paid on the loans. That amount is disputed and will be subject to "an inquiry, assessment or accounting" by an associate judge or registrar of the court, according to the decision.

Warren dismissed Georgas's allegations against Ball's wife, who denied ever having met the plaintiff before the court case began. Because Georgas's testimony – which the judge did not find credible – was the only evidence connecting Ball's wife to the case, there was no justification for finding her jointly liable for the amounts her husband owes.