Ontario Superior Court of Justice (Divisional Court)

Royal Bank of Canada v. Société Générale (Canada)

Date: 2006-02-20

Docket: 18/06, 24/06, 25/06

Counsel: R. Paul Steep, Lara S. Teoli, Heather Meredith for Moving Parties, Société Générale (Canada), Bert Coish David C. Rosenbaum, Jonathan F. Lancaster for Moving Party, CitiCapital Limited Kenneth Crofoot, Jason Wadden for Moving Party, Bank of Montreal Michael Osborne for American Home Assurance Company James Thomson for Lloyd’s & Gulf Insurance Company UK Ltd. Robert J. Morris, George S. Glezos, Lisa C. Munro, David Cherepacha for Responding Party, Royal Bank of Canada

Swinton J.:

[1] Three motions have been brought by Société Générale and Bert Coish (together “SoGen”), CitiCapital (“CCL”) and the Bank of Montreal (“BMO”) seeking leave to appeal parts of the decision of Ground J. dated November 18, 2005 in which he refused to grant summary judgment and dismiss the action brought by Royal Bank of Canada (“RBC”) against them.

[2] Loren Koval and her company BACC (Banker’s Acceptance Capital Corporation) carried on business as a lessor and financier of equipment used in hospitals and by corporations. CCL had issued four cheques payable to Picker International Canada Inc. or its successor Marconi Medical Systems Canada Inc. drawn on its bank account at BMO. The cheques were delivered to Koval to give to the payee for ostensible leasing transactions, which turned out to be fictitious. Koval forged the endorsement of the payee and deposited it to the account of BACC at the Royal Bank. When the forgeries were discovered, CCL asked BMO, as the drawee of the cheques, to return the cheques in accordance with the Clearing Rules of the Canadian Payments Association. Those rules permit a drawee bank to reverse-clear a cheque where the cheque contains a forged endorsement.

[3] SoGen had issued 35 bank drafts for equipment purchases to Koval, and again, she forged the endorsements of the payees and deposited the drafts to the RBC account of BACC. When the forgeries were discovered, SoGen, through its clearing bank the CIBC, caused the bank drafts to be reverse-cleared.

[4] As noted by the motions judge, the reverse-clearing was in accordance with the Bills of Exchange Act, R.S.C. 1985, c. B-4 (“the BEA”), which imposes liability for forged instruments on the collecting bank as the last endorser of the forged instruments.

[5] RBC brought an action against both its insurers and the moving parties (the “defendant banks”) to recover $80,658,064.26 from SoGen and $8,723,442.50 from BMO and CCL. In the summary judgment motions brought by SoGen, CCL, and BMO, the motions judge granted the motions in part and dismissed the following claims: the negligence claims against SoGen and CCL; the claims for money had and received and unjust enrichment against SoGen, CCL and BMO; and the preclusion claim against BMO. RBC has appealed this part of the decision to the Court of Appeal as of right.

[6] However, the motions judge refused to grant summary judgment and dismiss the claims based on conversion and preclusion against CCL and SoGen and the claim in conversion against BMO. It is this part of his decision which has led to these motions for leave to appeal.

The Test for Leave to Appeal

[7] The parties seek leave to appeal under both parts of rule 62.02(4), arguing (a) that there is a conflicting decision by another judge or court in Ontario or elsewhere on the matter involved, and it is desirable that leave to appeal be given; or (b) that there is good reason to doubt the correctness of the order in question, and the appeal raises matters of such importance that leave to appeal should be granted.

[8] When applying the standard of “reason to doubt the correctness of the decision”, the motions judge need not determine if the decision is wrong or probably wrong, but whether “the correctness of the decision is open to very serious debate” (Ash v. Corp. of Lloyd’s (1992), 1992 7652 (ON SC), 8 O.R. (3d) 282 (Ont. Gen. Div.), at 284; Canadian Egg Marketing Agency v. Sunnylea Foods Ltd. (1977), 3 C.P.C. 348 (Ont. H.C.), at 350).

[9] Matters are sufficiently important to grant leave when they are matters of general or public importance which transcend the interests of the parties and contemplate “issues of broad significance or general application that are felt to warrant resolution by a higher level of judicial authority” (Rankin v. McLeod, Young, Weir Ltd. (1986), 1986 2749 (ON SC), 57 O.R. (2d) 569 (Ont. H.C.), at 575).

The SoGen Motion — File 24/06

The Conversion Claim

[10] The motions judge described the conversion claim as resting on the alleged negligence of SoGen and CCL (para. 29 of the reasons), although that is not how the claim is pleaded. The pleading with respect to conversion against SoGen alleges that BACC had authority to endorse the bank drafts on behalf of the named payee, or that Loren Koval had actual or implied authority from the named payee to endorse the drafts on the payee’s behalf. For each returned bank draft bearing an endorsement authorized by the named payee, it is pleaded that SoGen had no right to return the drafts and, in removing monies from RBC, it committed the tort of conversion.

[11] The motions judge went on to decide that there was a genuine issue for trial with respect to conversion because the claim raised a novel legal issue — namely, whether a claim in conversion may proceed against drawers/drawees of forged instruments who reverse-clear such instruments pursuant to the Canadian Payments Association Rules to the collecting bank (at para. 39 of his reasons).

[12] In order to succeed on a claim in conversion, the plaintiff will have to prove that SoGen wrongfully interfered with its property. In Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce (1996), 1996 149 (SCC), 140 D.L.R. (4th) 463 (S.C.C.), the Supreme Court of Canada described the tort of conversion as follows (at para. 31):

The tort of conversion involves a wrongful interference with the goods of another, such as taking, using or destroying these goods in a manner inconsistent with the owner’s right of possession. The tort is one of strict liability, and accordingly, it is no defence that the wrongful act was committed in all innocence.

[13] The Court also went on to say (at para. 39):

The trial judge, in finding the respondent liable for conversion, correctly affirmed, in my view, that where a collecting bank pays out on a forged endorsement, the collecting bank will be liable for conversion.

[14] In my view, there is good reason to doubt the correctness of the decision that there is a genuine issue for trial with respect to the claim in conversion pleaded against SoGen.

[15] The motions judge stated that the motion for summary judgment was to proceed on the basis that the cheques and bank drafts bore forged endorsements (see paras. 13 and 30 of the reasons, as well as para. 6 of his endorsement of May 13, 2005). This was consistent with the evidence on discovery of the representative of RBC, who stated that it was RBC’s information that the cheques bore forged endorsements.

[16] Given that the motion proceeded on the assumption that the endorsements were forged, there is reason to doubt the correctness of the conclusion that there is a novel question of law with respect to conversion that should be left to a trial judge to determine on a full record. There are no material facts in dispute between RBC and SoGen with respect to whether the endorsements of the payees were forged or whether there was authorization for them.

[17] SoGen argued that the taking of funds by electronic transfer is not a taking of a chattel, relying on Clansmen Resources Ltd. v. Toronto Dominion Bank, [1990] B.C.J. No. 549 (B.C. C.A.), at 81). I do not read that case as clear authority that there can be no conversion when money is taken (see, for example, Pop N’ Juice Inc. v. 1203891 Ontario Ltd., [2004] O.J. No. 3085 (Ont. S.C.J.) at para. 19).

[18] Assuming that the taking of funds from RBC’s settlement account at the Bank of Canada is a taking of goods, there appears to be no basis for concluding that there was a “wrongful” interference with RBC’s property when the account was debited in accordance with the CPA rules on reverse-clearing because an instrument bore a forged endorsement.

[19] The law is clear that when a bank accepts drafts or cheques bearing a forged endorsement, as RBC did in this case, it is liable in conversion (see Borna, supra, paras. 39 and 83). Given the forged endorsements, RBC did not acquire an interest in the drafts or in the funds underlying the drafts, and thus could not subsequently bring a claim in conversion with respect to those funds.

[20] Moreover, as the motions judge observed, no action lies in conversion for consensual interference with goods, which consent can be express or implied from the circumstances. In the face of RBC’s agreement to the CPA rules and its knowledge of and participation in the reverse-clearing of the drafts at issue, RBC put forward no evidence to demonstrate that it did not consent to the reverse-clearing.

[21] Finally, there was no evidence before the Court on the summary judgment motion that the endorsements were authorized or not forged, an issue that I will discuss in more detail in relation to the BMO motion. In any event, the motions judge held that the conversion claim against SoGen raised a novel issue of law that required a full factual record. Given the facts before him and the law on conversion, there is good reason to doubt the correctness of the decision that there is a genuine issue for trial with respect to the claim of conversion, as pleaded.

The Preclusion Issue

[22] Subsection 48(1) of the Bills of Exchange Act provides:

Subject to this Act, where a signature on a bill is forged, or placed thereon without the authority of the person whose signature it purports to be, the forged or unauthorized signature is wholly inoperative, and no right to retain the bill or give a discharge therefore or to enforce payment thereof against any party thereto can be acquired through or under that signature, unless the party against whom it is sought to retain or enforce payment of the bill is precluded from setting up the forgery or want of authority.

[23] The motions judge held that there were evidentiary issues and questions of law which were genuine issues for trial with respect to the issue of preclusion. In particular, he said at para. 87 of his reasons:

I am of the view that, that there is not a full factual record before this court as to the manner in which the bank accounts of SoGen and CitiCapital were operated, the manner in which the subject bank drafts and cheques were drawn, issued and delivered to BACC and the lack of due diligence on the part of SoGen and CitiCapital with respect to the lease transactions. There would have to be further evidence before the court in this regard. There would also have to be additional expert evidence to determine whether such conduct constituted negligence on the part of SoGen and CitiCapital and to determine whether such conduct was “in the transaction itself” and whether it was the proximate cause of RBC’s loss.

[24] RBC argued that the case law interpreting the preclusion defence largely deals with the relationship of customer and bank, whereas this case raises the novel issue of the preclusion defence as it applies to a collecting bank and the drawer of a negotiable instrument.

[25] Appellate authority has defined the defence of preclusion narrowly, holding that a party can be precluded from alleging forgery or lack of authority when there has been negligence on his or her part in the transaction — that is, in the mode of drawing the instrument — and when that negligence is the proximate cause of the loss (Canadian Pacific Hotels Ltd. v. Bank of Montreal (1987), 1987 55 (SCC), 40 D.L.R. (4th) 385 (S.C.C.), at 403).

[26] The Supreme Court in the CP case also referred to Agricultural Savings & Loan Assn. v. Federal Bank (1881), 6 O.A.R. 192 (Ont. C.A.), where the Court of Appeal stated preclusion will operate only if there is a duty owing to the person claiming the loss and “not merely neglect of what would be prudent in respect to the party himself” (at p. 200).

[27] More recently, in Nesbitt Burns Inc. v. Canada Trustco Mortgage Co., [2000] O.J. No. 868 (Ont. C.A.), Feldman J.A. discussed s. 48(1) of the BEA and the CP case in the following terms:

The Canadian Pacific case dealt with the duty owed by a customer under its contract with its own bank and not with any duty which may arise between a drawer of a cheque and a collecting bank which acts on a forged endorsement. Any such duty would arise in tort alone on the basis of the test set out in Anns v. Merton London Borough Council, [1978] A.C. 728 (H.L.) requiring a relationship of proximity or neighbourhood between such parties.

[28] The motions judge, in considering the negligence claim, held that there was no duty of care owed by drawers of negotiable instruments to collecting banks, both because of the lack of close and direct proximity and for policy reasons (at paras. 63 and 64 of his reasons). Given that he found no duty of care in negligence, there is good reason to doubt the correctness of his decision that there is a genuine issue for trial with respect to the issue of preclusion. That defence has been narrowly interpreted, and rests on the existence of a duty of care - here, to the collecting bank. As there is no duty of care to the collecting bank by SoGen, there appears to be no basis for the preclusion claim.

[29] There is a second reason to doubt the correctness of his decision that there is a genuine issue for trial with respect to preclusion. Even if there were negligence on the part of the defendants, that negligence must be the proximate cause of the loss by RBC. On the evidence before him, there was no reliance by RBC on the conduct by SoGen or CCL. The evidence is that RBC did not attempt to verify the endorsements, accepting the instruments for deposit because they relied on their customer BACC. Indeed, the motions judge stated at para. 85 of his reasons, that there was “no evidence of any conduct by SoGen and CitiCapital which was relied upon by RBC in accepting the subject bank drafts and cheques for deposit”.

[30] Therefore, there is good reason to doubt the correctness of the decision that there is a genuine issue for trial on preclusion, both because of the lack of a duty of care and because of the evidence of causation.

The CitiCapital Motion - File 18/06

[31] While the prayer for relief in the Amended Statement of Claim seeks damages from CCL for negligence, money had and received, and conversion, there are no particulars pleaded with respect to money had and received nor conversion. Nor is there any mention of preclusion in the pleadings with respect to CCL. This is in contrast to the pleadings against SoGen and BMO.

[32] In its Notice of Motion, CCL asked that the claims of conversion and money had and received be struck, as there were no material facts pleaded with respect to these claims. The motions judge held that there had been a failure to plead material facts to support those claims (at para. 18 of his reasons), but he refused to dismiss the claim on the basis of the pleadings, given that CCL had notice of these claims and, were leave to amend sought, it would likely be given. He then went on to conclude that there were serious issues to be tried in conversion and preclusion for the reasons set out above in relation to SoGen’s motion.

[33] In my view, there is good reason to doubt the correctness of this decision on the conversion and preclusion claims for the reasons I have given above with respect to SoGen’s motion. However, there is a further reason to doubt the correctness of the decision, given the deficiencies in the Amended Statement of Claim. A summary judgment motion is to be determined on the basis of the pleadings and the evidence before the motions judge (Gutierrez v. Tropic International Ltd. (2002), 2002 45017 (ON CA), 63 O.R. (3d) 63 (Ont. C.A.) at paras. 23 and 40). In the case of CCL, there are no material facts pleaded with respect to conversion or preclusion. Therefore, there is good reason to doubt the correctness of the decision to send these claims against CCL to trial when they have not been properly pleaded.

The Bank of Montreal Motion — File 25/06

[34] BMO seeks leave to appeal on the ground that the motions judge erred in dismissing its motion for summary judgment in respect of the claim in conversion.

[35] The claim in conversion rests on a pleading that the four CCL cheques that were reverse-cleared by BMO were not forged. RBC confirmed on discovery that this claim is based solely on the premise that a document known as the Picker Authorization might have given BACC the authorization to endorse the cheques.

[36] The motions judge proceeded to hear and decide the motions for summary judgment on the basis that the endorsements on the cheques and drafts had been forged. Nevertheless, he went on to hold that there was a genuine issue for trial “as to the circumstances surrounding the Picker Authorization or any other purported authorization given to BACC to execute endorsements on the instruments”.

[37] Even if it was proper for him to consider evidence in respect of the Picker Authorization, given his earlier ruling on forgery, there is good reason to doubt the correctness of his conclusion that there is a genuine issue for trial, because the Picker Authorization, on its face, did not apply to the transactions in question. It does not provide a blanket authorization to BACC to endorse any cheque on behalf of Picker or its successor Marconi. Rather the authorization provided a limited authority in respect of certain legitimate lease and assignment agreements.

[38] Moreover, the uncontradicted evidence from the representative of Picker and from Loren Koval was that the Picker Authorization did not apply to the CCL cheques. During discovery, Allan McGale, the representative of RBC, stated that RBC accepted that the endorsements of the payees on the cheques were forged (pp. 1170-71). As well, RBC acknowledged that Loren Koval had given sworn testimony that she did not have authority from Picker or Marconi to place their endorsements on the cheques, and RBC had no evidence to the contrary (at pp. 1173-74).

[39] Therefore, there is good reason to doubt the correctness of the summary judgement order as it applies to BMO, as there does not appear to be any genuine issue of fact with respect to the Picker authorization. For the reasons set out earlier, there is good reason to doubt the correctness of the decision that there is a genuine issue for trial with respect to the conversion claim against BMO.

The Importance of the Issues

[40] In my view, leave to appeal should be granted, as the issues are of general importance that go beyond the interests of the immediate parties. In particular, there are legal issues of importance for the banking industry — namely, the availability of a claim in conversion by a collecting bank against the drawers where cheques and bank drafts have been forged, and the applicability of s. 48(1) of the BEA where there is no duty of care in negligence by the drawer to the collecting bank.

[41] The BMO and CCL appeals also raise issues concerning the application of Rule 20 that are of general importance. In particular, the CCL appeal raises the important issue whether summary judgment can be denied and a party can be required to proceed to trial on issues which have not been pleaded properly. BMO’s motion raises the important issue of whether summary judgment can be denied when there is no genuine issue of material fact.

[42] Moreover, it will serve the interests of judicial economy if leave is granted. This is not a case where the granting of leave to appeal will delay a trial. The plaintiff and the defendant insurers have appealed the order of the motions judge to the Court of Appeal as of right. The questions of law at issue in this leave motion are tightly bound up with the issues that will be determined by the Court of Appeal on those appeals, and if the moving parties are successful, a potentially unnecessary trial can be avoided. All the moving parties have indicated that they will seek leave pursuant to s. 6(2) of the Courts of Justice Act to have their appeals heard by the Court of Appeal. In my view, it would be unjust in the circumstances to deny leave to appeal to the moving parties.

[43] For these reasons, the three motions for leave to appeal are granted. Normally, the issue of the costs of the leave motions would be left to the panel hearing the appeal. However, if the parties wish to make submissions on costs, the moving parties may make written submissions within 21 days of the release of this decision and the responding parties may make submissions within 14 days thereafter.

Motions granted.