Court Information

Court of Appeal for Ontario

Date: 2017-12-21

Docket: C63278, C63280, C63281, C63282

Judges: Simmons, Brown and Fairburn JJ.A.

Parties

Between

TD Bank, N.A. Plaintiff/Respondent

and

"Lloyd's Underwriters" that subscribe to policy number MMF/1710, primary London reference number B0509QA025509 and excess London reference numbers QA025609, QA025709, QA025809, and QA025909, Antares Underwriting Limited for itself and on behalf of all members of Lloyd's Syndicate 1274 (Aul) for the operating year of 2009, Catlin Syndicate Limited for itself and on behalf of all members of Lloyd's Syndicate 2003 (SJC) for the operating year of 2009, Novae Corporate Underwriting Limited and/or Novae Syndicates Limited for themselves and on behalf of all members of Lloyd's Syndicate 2007 (NVA) for the operating year of 2009, Ace Capital Limited, ACE Capital IV Limited, and Ace Capital V Limited for themselves and on behalf of all members of Lloyd's Syndicate 2488 (AGM) for the operating year of 2009, Brit UW Limited for itself and on behalf of all members of Lloyd's Syndicate 2987 (Brit) for the operating year of 2009, Chaucer Corporate Capital (No. 3) Limited (formerly known as Pembroke 4000 Limited) and/or Pembroke 4000 Limited, Chaucer Corporate Capital (No. 2) Limited, and/or Ironshore Corporate Capital Ltd. for themselves and on behalf of all members of Lloyd's Syndicate 4000 (Pem) for the operating year of 2009, Aspen Insurance UK Limited, Great Lakes Reinsurance (UK) PLC, Lexington Insurance Company, AIG Insurance Company of Canada (formerly known as AIG Commercial Insurance Company of Canada) and/or AIG Commercial Insurance Company of Canada, Chartis Excess Limited (formerly known as AIG Excess Liability Insurance International Limited) and/or AIG Excess Liability Insurance International Limited, Allied World Assurance Company Ltd., Arch Insurance Company and/or Arch Insurance Canada Ltd., Axis Specialty Insurance Company and/or Axis Specialty Limited, Chubb Insurance Company of Canada, Endurance Speciality Insurance Ltd., Houston Casualty Company, Liberty Mutual Insurance Company, Markel Bermuda Limited (formerly known as Max Bermuda Ltd.) and/or Max Bermuda Ltd. and XL Insurance Company PLC (formerly known as XL Insurance Company Limited) and/or XL Insurance Limited

Defendants/Appellants

Counsel

Gary H. Luftspring and Sam R. Sasso, for the appellants London Underwriters and Axis

Jamieson Halfnight and Anne Juntunen, for the appellants Chubb Insurance Company of Canada and Liberty Mutual Insurance Company

Christopher Reain and Clarence Lui, for the appellant Arch Insurance Company and Arch Insurance Canada Ltd.

Peter Greene and David Vaillancourt, for the appellant AIG Insurance Company of Canada and/or AIG Commercial Insurance Company of Canada and/or AIG Excess Liability Insurance International Limited

William Blakeney and Thomas Galligan, for the appellants XL Insurance Company PLC and/or XL Insurance Limited, Endurance Speciality Insurance Ltd., Houston Casualty Company and Markel Bermuda Limited and/or Max Bermuda Ltd.

Eric A. Dolden and Gerry J. Gill, for the appellants Allied World Assurance Company Ltd.

William G. Scott and Housep Afarian, for the respondent TD Bank, N.A.

Hearing and Appeal Information

Heard: November 28 and 29, 2017

On appeal from: the judgment of Justice S.F. Dunphy of the Superior Court of Justice, dated December 22, 2016 and April 20, 2017.

Reasons for Decision

OVERVIEW

[1] The issues on appeal relate to a partial summary judgment granted in relation to an insurance policy.

[2] TD Bank, N.A. (the "Bank") is a named insured under a "Bankers Comprehensive Crime, Professional Indemnity and Directors' and Officers' Liability Programme" (the "insurance policy") issued by the appellants, a syndicate of insurers (the "insurers").

[3] The insurance policy is divided into two parts. The second part provides directors and officers liability coverage. The first part is divided into two sections: a financial institutions bond ("fidelity coverage", for, among other things, claims involving employee dishonesty) and a financial institutions professional liability policy ("professional liability coverage", for, among other things, claims involving errors or omissions by the financial institution).

[4] A Florida lawyer and customer of the Bank ran a Ponzi scheme involving the fraudulent sale of non-existing interests in structured settlements supposedly handled by his law firm. Substantial funds placed by investors in the scheme flowed through the law firm's accounts at the Bank. After the scheme collapsed, about 19 investor groups sued the Bank. One investor group obtained judgment against the Bank based on claims for fraudulent misrepresentations by Bank employees and conduct by Bank employees that aided and abetted the fraudster.

[5] Following that judgment, the Bank settled the other investor claims. The Bank then sought indemnity under both the professional liability coverage and fidelity coverage sections of the insurance policy for amounts paid to the investor groups. The appellants have denied coverage under both sections.

[6] In this action, the Bank seeks a declaration that it is entitled to indemnity under the professional liability section of the insurance policy for loss relating to the Ponzi scheme and damages for breach of contract in the amount of $300,000,000, the amount of the available coverage. Further, to the extent that coverage is excluded under that section of the policy, the Bank seeks a declaration that it is entitled to indemnity and damages under the fidelity coverage section of the policy.

[7] The Bank brought a motion for partial summary judgment while documentary production was underway and prior to oral discovery. In its motion, the Bank sought a declaration concerning the interpretation of one element of the preamble to the fidelity coverage section of the insurance policy. The interpretation sought related to the conduct of one former employee in relation to three of the investor groups. In support of its motion, the Bank asserted that resolution of these "test claims" would contribute to the resolution of the coverage issues. The element at issue is the underlined portion of the second paragraph of the preamble set out below:

NOW WE the Underwriters hereby undertake and agree, subject to the following terms, exclusions, limitations and conditions, to make good to the Assured, as stated in the Insuring Clauses … such direct financial loss sustained by the Assured ….

[8] The motion judge granted partial summary judgment. He declared that the Bank "sustained 'direct financial loss' within the meaning of the second paragraph of Section One (A) of the Policy regarding at least some of the funds deposited [in the law firm's] accounts at [the Bank] by [three of the investor groups]."

[9] The insurers appeal from the partial summary judgment.

[10] In our view, this appeal must be allowed. In granting partial summary judgment, the motion judge made four material errors, rendering the judgment fundamentally flawed.

FIRST ERROR: FAILING TO PROPERLY INTERPRET RULE 20

[11] First, the motion judge erred in entertaining and then granting the kind of summary judgment sought by the Bank. Rule 20 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, permits a party to seek summary judgment "on all or part of the claim in the statement of claim": r. 20.01(1). The Bank's motion did not seek judgment on all or part of any of the claims set out in the prayer for relief in its Statement of Claim. Instead, the Bank broke down its claim for indemnity under the fidelity coverage section of the insurance policy into its constituent elements and sought partial summary judgment on only one of the elements. Further, it sought an interpretation of that element only as it might apply to the damages it paid out to just three of the 19 investor groups.

[12] Such a request for an order in respect of only one of several constituent elements of a claim for which relief is sought, and then only as it might affect a portion of that claim, is not a proper request for summary judgment on "part of the claim in the statement of claim"; it is merely a request to determine one of several issues of fact or mixed fact and law necessary to establish entitlement to relief in respect of a pleaded claim under the fidelity coverage section of the insurance policy. (The rules recognize an exception where the element involves a question of law.) The result of the judgment is that no claim for which the Bank has sought relief has been granted, nor have any of its claims been dismissed. All of its claims for indemnification remain for determination at trial – on what will likely be a more fulsome factual record. And no party has been released from the action. Given this result, the kind of partial summary judgment granted by the motion judge was not available under Rule 20: CIBC v. Deloitte & Touche, 2016 ONCA 922, 133 OR (3d) 561, at para. 39. Accordingly, the motion judge failed to properly interpret the scope of relief available under Rule 20.

SECOND ERROR: FAILING TO INTERPRET THE POLICY AS A WHOLE

[13] Second, the motion judge ignored the fundamental principle of contractual interpretation that a provision in a contract must be interpreted in light of the contract as a whole: Ventas, Inc. v. Sunrise Senior Living Real Estate Investment Trust, 2007 ONCA 205, 85 O.R. (3d) 254, at para. 24; Dumbrell v. The Regional Group of Companies, 2007 ONCA 59, 85 O.R. (3d) 616, at paras. 52-56. This led him to commit two interpretive errors.

[14] Error one is that the Bank claims indemnification for the amounts it paid to investors pursuant to the American jury verdict and settlements under both the professional liability coverage and fidelity coverage sections of the insurance policy. Its claim under the fidelity coverage section is pleaded as an alternative to that under the professional liability coverage section. Given that structure of the Bank's claim, an interpretation of part of one insuring clause in one section of the insurance policy to ascertain whether it would afford coverage would require taking into account the provisions of both sections of the policy. The motion judge failed to do so. He completely ignored how the provisions of the professional liability coverage section of the insurance policy might inform the interpretation of the insuring clause in the fidelity coverage section.

[15] Error two is that the Bank's claim for indemnity under the fidelity coverage section of the insurance policy would require establishing several constituent elements of a claim under the first insuring clause. The motion judge limited his analysis to only some of those elements. He further confined his analysis to how those elements might apply to only three of the 19 investors' settlements. His interpretive analysis failed to take into account how the remaining elements of the insuring clause might inform the interpretation of the few elements put in issue by the Bank on the motion. In so doing, the motion judge failed to interpret one provision of the contract by reading the text of the insurance policy as a whole.

THIRD ERROR: ADOPTING A THEORY OF LIABILITY NOT ADVANCED BY THE PARTIES

[16] The third material error committed by the motion judge concerns a matter of procedural fairness. In concluding that the judgment and settlements paid to three of the investor groups constituted a "direct financial loss sustained by the Assured" in that it was a "loss of funds or Property" of the Bank within the meaning of the fidelity coverage section's "ownership" clause, the motion judge adopted a theory not pleaded or advanced by the parties – that the Bank held the funds deposited by investors into the law firm's accounts as a constructive trustee. The motion judge raised this theory on his own during the course of oral argument of the motion, without affording the parties an opportunity to properly brief the theory or develop the record to address the theory. That resulted in material unfairness to the appellants: Rodaro v. Royal Bank of Canada, 59 O.R. (3d) 74, at paras. 60-63. In this regard, the motion judge's theory went well beyond the Bank's reliance on the doctrines of knowing assistance in a breach of trust and knowing receipt of trust funds.

FOURTH ERROR: MISCONSTRUING THE RELIEF SOUGHT BY THE APPELLANTS

[17] Fourth, in determining this was an appropriate case in which to grant partial summary judgment, the motion judge relied on his view that the insurers were asking him to grant reverse summary judgment – in other words, to hold that the Bank did not suffer "a direct financial loss" – and thus were effectively acknowledging that this was an appropriate case for summary judgment.

[18] In reaching this conclusion, the motion judge relied on the "Order Requested" section of the insurer's joint factum filed on the summary judgment motion, which reads as follows:

For all the above reasons, the Insurers respectfully request an Order denying TD's summary judgment, with costs, on the basis that TD has not shown it suffered any "direct financial loss" within the meaning of that term as used in the preamble ".

[19] We do not accept that the emphasized language gives rise to a conclusion that the insurers were seeking a reverse summary judgment in their favour. The immediately preceding section of the insurers' factum is titled "The Issues on this Motion should be left for determination on a fuller record or at trial." Read in context, the only reasonable conclusion is that the only order the insurers sought was the one they asked for – an order denying the Bank's request for summary judgment with costs on the basis that the Bank failed to meet its burden on the motion.

[20] This finding by the motion judge, too, was procedurally unfair to the Bank.

DISPOSITION

[21] Cumulatively, the errors we have identified resulted in the motion judge granting partial summary judgment of a kind not available under Rule 20, following a procedurally unfair motion process, which was characterized by the motion judge ignoring a fundamental principle of contractual interpretation. As a result, we allow the appeals, set aside the order, and direct the action proceed to trial subject to any further order in the court below.

[22] The insurers are awarded their costs of the appeal on a partial indemnity scale fixed in the global amount of $45,000 inclusive of disbursements and applicable taxes.

"Janet Simmons J.A." "David Brown J.A." "Fairburn J.A."

Footnotes

[1] Where one element of a cause of action involves a question of law, such as the existence of a duty of care in a negligence claim, the rules provide a summary mechanism by which to determine that legal issue before trial, either by way of r. 21.01(1)(a) "where the determination of the question may dispose of all or part of the action, substantially shorten the trial or result in a substantial savings of costs," or under r. 20.04(4), where on a summary judgment motion "the court is satisfied that the only genuine issue is a question of law."

[2] The factual record in this case consisted of two affidavits. One was from a Bank employee who accessed the Bank's archived wire transfer database to confirm that four wire transfers at issue were made. The second was from a law clerk employed by the Bank's solicitors. She attached numerous documents to her affidavit without identifying, in many instances, the source of her knowledge of the origins of the document and without asserting a belief in the truth of the contents. Although the authenticity of many of the documents was uncontested, the truth of the contents of some of the documents could be disputed at trial.

In relying on the factual record, the motion judge noted that: the insurers did not file responding material; neither of the affiants was cross-examined; and many of the public record documents were referenced and relied on by the insurers in their pleadings. These comments contrasted with those made by the motion judge on an earlier preliminary motion to stay the summary judgment motion. At that time, the motion judge stated that given the early stage of the proceedings "an exceptional degree of caution" would be required to avoid imputing an adverse inference from the failure to call evidence that the insurers did not yet have.

Based on our review of the record and the outstanding issues, we are far from persuaded that inconsistent findings of fact would be unlikely to occur if this judgment were to stand and if this case were to proceed to trial.

[3] Insuring Clause Number 1 in the fidelity coverage section, when read together with the Preamble, provides, in part:

NOW WE the Underwriters hereby undertake and agree, subject to the following terms, exclusions, limitations and conditions, to make good to the Assured, … such direct financial loss sustained by the Assured … [b]y reason of and directly caused by dishonest or fraudulent acts by Employees of the Assured….

[4] The Ownership provision, Clause Number 39 of the fidelity coverage section reads as follows:

This Policy shall apply to loss of funds or Property (1) owned by the Assured, (2) held by the Assured in any capacity, (3) for which the Assured is legally liable and/or responsible or for which the Assured has instructions to insure….