Court Dismisses Class Action Proceeding that Alleged Charity Defrauded Donors
April 2022 Charity & NFP Law Update
Published on April 28 2022

By Terrance S. Carter & Jacqueline M. Demczur
   
 

A donor brought a class action proceeding against a Canadian charity alleging that the charity acted fraudulently and misappropriated charitable donations. In the matter of Zentner v GFA World, a decision handed down from the Ontario Superior Court of Justice on March 17, 2022, Mr. Zentner alleged that GFA World (referred to as “GFA Canada” throughout the decision) “defrauded thousands of individuals and churches from across Canada […] by diverting those funds to improper purposes.” GFA Canada’s affiliate, Gospel for Asia, Inc. (“GFA USA”) and four individuals who were directors and officers of GFA Canada and GFA USA (the “four directors”) were also named in the proposed class action. Notably, GFA USA and the four directors had previously settled a class action brought by American donors (the “American class action”), though with no admission of liability. While the Ontario court ultimately dismissed Mr. Zentner’s claim and refused to certify the class, the analysis of the court will be of interest to charities and donors. This is because the court sets out the factors that it will consider in class action claims brought by donors alleging misuse of charitable funds. The ultimate impact of this decision will depend upon how persuasive other lower court judges may treat it and if it is adopted (in whole or in part) at the appellate court level. It is also not known at the time of writing whether the decision will be appealed.

Mr. Zentner, a resident of Nova Scotia and a former regular donor to GFA Canada, sought a declaration from the court that he be appointed as the representative of the class and that the requirements for certification under Nova Scotia’s Class Proceedings Act, 2007 had been satisfied. If the class action was allowed to proceed, Mr. Zentner’s claim was for $100 million in damages for fraud, breach of fiduciary duty, negligent misrepresentation, and conspiracy; as well as $50 million in punitive damages and the return of $20 million in donations made to GFA Canada that was allegedly used by GFA USA in the construction of a 350-acre corporate headquarters and personal residence in Texas. Essentially, Mr. Zentner asserted that GFA Canada made two promises to donors that it failed to keep: 1) that donors had the ability “to direct the specific charitable purpose that their donation would be used to support”; and 2) “that 100% of all donations designated by donors for a purpose in the mission field or the field[i.e. South Asia] would actually be spent in the field”. Four months after Mr. Zentner first commenced his class action claim, GFA Canada filed for protection under the Companies’ Creditors Arrangement Act (an act that facilitates compromises and arrangements between companies and their creditors).

The court’s analysis considered whether Mr. Zentner’s claim satisfied the requirements for certification as a class action in Nova Scotia under the Class Proceedings Act, 2007. There were three requirements that were at issue in this matter: 1) whether the claim disclosed a cause of action; 2) whether the claim raised a common issue amongst class members; and 3) whether a class proceeding would be the preferable procedure for a fair and efficient resolution of the dispute.

GFA Canada argued that the claim did not disclose a cause of action because all of Mr. Zentner’s pleadings were based on “a fundamental misconception of a right to recovery of an unencumbered gift”. GFA Canada took the position that once funds are donated to a charity, the funds are the property of the charity rather than the donor. Sometimes a donor may attach certain requirements to a gift which engages the duties and obligations of trust law. But in this case, GFA Canada submitted, the donors did not attach any express trust conditions to their gifts. Therefore, there was no harm or injury to the donors, because even if the funds had been misappropriated, the funds were no longer the donors’ property, but rather belonged to the charity.

Mr. Zentner’s response was that “there is no fraud exception for charities”, and that when a donor’s donated funds were “dishonestly misappropriated from the charity and not used for the charitable objects of the charity”, then the donor is not precluded from commencing an action to recover the misappropriated donated funds. Further, he submitted that it was not necessary for him to plead the existence of a trust in order to have a legitimate cause of action arising out of property rights and trust law. In the alternative, Mr. Zentner submitted that even where donors may not have a claim for the return of donated money based on the property rights and obligations manifested in trust law, donors would “still have a legal right to sue for misappropriation of donated funds in tort.”

The court agreed with Mr. Zentner that it was not necessary for him to plead the legal conclusion that a trust was created. However, he did need to plead facts that, if true, plausibly supported the legal conclusion that a charitable purpose trust was created when he donated funds to GFA Canada. Based on the facts, the court concluded that Mr. Zentner’s donations were unencumbered gifts and there was, therefore, no trust and no ability to ground a civil claim on the basis of any property rights.

With regard to the ability to claim in tort rather than make a proprietary claim, the court did not think there was a meaningful distinction between the two. Whether a claim is framed as a proprietary claim for breach of trust (which Mr. Zentner did not make) or as a claim in tort, the claimant “must have a compensable loss.” Therefore, the court concluded that “[a]bsent a claim for a compensable loss, Zentner’s statement of claim does not disclose a cause of action against the defendants.” In situations where donated funds may have been misused or misappropriated, the court set out that the proper remedies would be through “regulatory or enforcement measures”, such as those found in the Charities Accounting Act (Ontario) or possibly through criminal proceedings.

The court did not need to go into further analysis after finding that Mr. Zentner’s claim failed to meet the requirement of disclosing a cause of action. Nevertheless, it addressed the other two requirements that were at issue, namely whether the claim raised a common issue amongst class members, and whether a class proceeding would be the preferable procedure for a fair and efficient resolution of the dispute. The court ultimately concluded that Mr. Zentner’s evidence failed to show that there was a common issue amongst class members, stating that “suspicion, based on speculation, is not enough.”

With regard to the “preferable procedure”, GFA Canada submitted that an investigation under the Charities Accounting Act (Ontario) or by the Canada Revenue Agency followed by a judicially supervised claims process under the Companies’ Creditors Arrangement Act would be best. The court did not directly comment on involvement by the Canada Revenue Agency and noted that investigation under the Charities Accounting Act (Ontario) might not necessarily be effective because, for example, it would have no bearing on a civil claim in tort. Therefore, if Mr. Zentner’s claim had met all of the other requirements to be certified as a class action, the court would have accepted that a class action would be “the preferable procedure” as compared with proceedings under the Companies’ Creditors Arrangement Act. A class action would promote access to justice and judicial economy which would be preferable to individualized claims in proceedings under the Companies’ Creditors Arrangement Act.

While the court dismissed Mr. Zentner’s class action claim against GFA Canada, this case nevertheless provides important insights to charities and donors about remedies available under the law when there are allegations of mismanagement of charitable funds. The court affirmed that once unrestricted gifts are made, donors cease to have proprietary rights over the donated funds. However, the court did not rule out the possibility that donors might be able to bring a class action claim if the gifts in question were restricted charitable purpose trusts. However, presumably any such claim of this kind would need to be based on an allegation of breach of trust and/or brought by an application under section 10 of the Charities Accounting Act (Ontario), which permits a claim to be brought by two or more individuals alleging breach of a trust created for a charitable purpose. In addition, the court indicated that there may be instances where it could consider a class action claim to be a more efficient use of judicial resources than other types of claims against charities.

This case is a good wake up call for charities in understanding that, depending upon the nature of their fundraising campaigns, what is communicated during their campaigns to potential donors, and how they have used the funds raised, the possibility of a class action proceeding being commenced and possibly certified is not outside of the realm of possibility. The court has made clear in this decision that charities are not exempt from class action proceedings. As such, it will be important to monitor future caselaw to see if class actions regarding charitable donations may become a developing trend or not and what potential impact such developments might have on charities.

   
 

Read the April 2022 Charity & NFP Law Update