Her Majesty the Queen v. Canadian Imperial Bank of Commerce [Indexed as: R. v. Canadian Imperial Bank of Commerce]

51 O.R. (3d) 257

[2000] O.J. No. 4149

Docket No. C32240

Court of Appeal for Ontario

Carthy, Abella and Feldman JJ.A.

November 6, 2000

Criminal law--Proceeds of crime--Forfeiture order--Accused guilty of perpetrating fraudulent telemarketing scheme--Victims induced to purchase gemstones at inflated prices--Proceeds deposited in bank account in respect of which bank held security interest--Accused's interest in funds voidable but not void ab initio--Security interest of bank could attach to funds --Bank had "valid interest" in bank account for purposes of s. 462.41(3) of Criminal Code--Trial judge erred in including bank account in forfeiture order under s. 462.37 of Code without considering whether to exercise his discretion under s. 462.41 of Code and allow bank to retain balance in account --Criminal Code, R.S.C. 1985, c. C-46, ss. 462.37, 462.41.

Personal property security--Security interest--Accused guilty of perpetrating fraudulent telemarketing scheme--Victims induced to purchase gemstones at inflated prices--Proceeds deposited in bank account in respect of which bank held security interest--Accused's interest in funds voidable but not void ab initio--Security interest of bank could attach to funds --Personal Property Security Act, R.S.O. 1990, c. P.10, s. 11.

O pleaded guilty to perpetrating a massive fraudulent telemarketing scheme wherein many victims in the United States were induced to purchase gemstones at inflated prices. The trial judge made a forfeiture order under s. 462.37 of the Criminal Code. One of the assets forfeited to the Crown was a U.S. dollar bank account, in the amount of U.S. $28,809.37, in respect of which the appellant bank claimed a security interest under the Personal Property Security Act. The appellant appealed that portion of the forfeiture order. The bank argued that the judge erred in that because the "proceeds" in the account are the proceeds of crime, they could not be given as security by the perpetrator of the fraud. The Crown took the position that s. 11 of the PPSA provides that a security interest only attaches when the debtor acquires rights in the collateral, and that O never acquired rights in the funds of the victims because the funds were acquired by fraud.

Held, the appeal should be allowed in part.

O's interest in the funds in this case was voidable, but not void ab initio, as the victims of the gem scam did not know that they were victims and intended to forward their funds to O's company in exchange for the gemstones which they received. The appellant's security interest was therefore able to attach to the funds deposited into the account. The appellant had a "valid interest" in the bank account for the purposes of s. 462.41(3) of the Code. The trial judge erred in holding that because the "proceeds" in the account were proceeds of crime, they could not be given as security by the perpetrator of the fraud. Because of that error, he did not go on to consider whether to exercise his discretion under s. 462.41 of the Code and allow the appellant to retain for itself the balance in the bank account. Section 462.41 gives the court a discretion whether to return part of any proceeds of crime to an innocent person with an interest in those proceeds. Although the appellant had a security interest in all the moneys in the account, the court's discretion should not be exercised in favour of the appellant in respect of the U.S. $27,374.08 in the account, which was clearly proceeds of crime and which represented the cheques of six identifiable victims.

APPEAL from a forfeiture order.

Chrysler Credit Canada Ltd. v. MVL Leasing Ltd. (1993), 5 P.P.S.A.C. (2d) 92 (Ont. Gen. Div.), distd Statutes referred to Criminal Code, R.S.C. 1985, c. C-46, ss. 462.37, 462.41, 462.44 [as am.], 686(8) Personal Property Security Act, R.S.O. 1990, c. P.10, s. 11

Benjamin Frydenberg, for appellant. John Corelli, for respondent.

[1] BY THE COURT:--The appellant served as the banker to Mr. A. Obront, the perpetrator of a massive fraudulent telemarketing scheme wherein many victims in the United States were induced to purchase gemstones at inflated prices. Mr. Obront pled guilty and received a sentence of four years in penitentiary. A forfeiture order was also made. One of the assets ordered forfeited to the Crown was a U.S. dollar bank account at the Canadian Imperial Bank of Commerce (C.I.B.C.) in the amount of U.S. $28,809.37 in the name of Royal International Collectibles (R.I.C.), the corporate vehicle of Mr. Obront. The bank account had been frozen by order of Roberts J. made on January 20, 1997 and served on the bank on January 21, 1997. The bank appeals that portion of the forfeiture order.

[2] The forfeiture order was made by Kelly J. on October 30, 1998. The portion of his reasons dealing with the issue are as follows:

As far as the U.S. account is concerned, I must confess, this gave me more difficulty than some of the other issues. There is a Personal Property Security Act security which was taken by the bank, apparently in good faith, and among other assets, this U.S. account, formed part of the security. On the other hand, there is no doubt that the proceeds, which the bank is claiming out of this account, are proceeds of crime and as such, cannot be given or dealt with given as security by Mr. Obront.

[3] The sections of the Criminal Code, R.S.C. 1985, c. C-46, which allow these orders to be made are ss. 462.37(1) and (2) which provide:

462.37 (1) Subject to this section and sections 462.39 to 462.41, where an offender is convicted, or discharged under section 730, of an enterprise crime offence and the court imposing sentence on the offender, on application of the Attorney General, is satisfied, on a balance of probabilities, that any property is proceeds of crime and that the enterprise crime offence was committed in relation to that property, the court shall order that the property be forfeited to Her Majesty to be disposed of as the Attorney General directs or otherwise dealt with in accordance with the law.

(2) Where the evidence does not establish to the satisfaction of the court that the enterprise crime offence of which the offender is convicted, or discharged under section 730, was committed in relation to property in respect of which an order of forfeiture would otherwise be made under subsection (1) but the court is satisfied, beyond a reasonable doubt, that that property is proceeds of crime, the court may make an order of forfeiture under subsection (1) in relation to that property.

[4] Section 462.41 requires that before a forfeiture order is made, notice must be given to any person "who, in the opinion of the court, appears to have a valid interest in the property." Section 462.41(3) says:

462.41 (3) Where a court is satisfied that any person, other than

(a) a person who is charged with, or was convicted of, an enterprise crime offence or a designated substance offence, or

(b) a person who acquired title to or a right of possession of that property from a person referred to in paragraph (a) under circumstances that give rise to a reasonable inference that the title or right was transferred for the purpose of avoiding the forfeiture of the property,

is the lawful owner or is lawfully entitled to possession of any property or any part thereof that would otherwise be forfeited pursuant to subsection 462.37(1) or 462.38(2) and that the person appears innocent of any complicity in an offence referred to in paragraph (a) or of any collusion in relation to such an offence, the court may order that the property or part thereof be returned to that person.

[5] The appellant's position is that it has a valid interest in the bank account and that Kelly J. erred by ordering the moneys in the account forfeited to the Crown. First, the bank submits that Kelly J. erred by holding that because the "proceeds" in the account are proceeds of crime, they could not be given as security by the perpetrator of the fraud.

[6] The appellant's submission is correct. The bank was a secured creditor of R.I.C. pursuant to a security agreement dated May 2, 1995 and registered under the Personal Property Security Act, R.S.O. 1990, c. P.10 (P.P.S.A.), which agreement secured credit facilities provided to R.I.C. by the bank. The Crown's submission is that s. 11 of the P.P.S.A. provides that a security interest only attaches when the debtor acquires rights in the collateral, and that R.I.C. never acquired rights in the funds of the victims because the funds were obtained by fraud, an application of the nemo dat rule, which says essentially that you cannot give what you do not have. The argument is that R.I.C. never acquired any interest in the funds of the victims because they were obtained by fraud.

[7] The Crown relies on the case of Chrysler Credit Canada Ltd. v. MVL Leasing Ltd. (1993), 5 P.P.S.A.C. (2d) 92 (Ont. Gen. Div.). That case involved a stolen car, and is distinguishable from the case at bar. There was never any intent by the owner of the car to transfer ownership to the rogue. In this case, the victims of the gem scam did not know they were victims and intended to forward their funds to R.I.C. in exchange for the gemstones which they received. The interest of R.I.C. in the funds was voidable but not void ab initio. The security interest of the bank was therefore able to attach to the funds deposited into the account.

[8] Because of the trial judge's error, he did not go on to consider whether to exercise his discretion under s. 462.41 of the Code and allow the bank to retain for itself the balance in the bank account. On appeal, this court may exercise the discretion conferred by that section on the sentencing judge: (s. 686(8) and s. 462.44 of the Code).

[9] The appellant further submits that the funds in the account are not proceeds of crime or at least part are not. The evidence disclosed that the way the account operated was that the cheques from the victims in U.S. funds were deposited into the account, and R.I.C. was permitted by the bank to immediately withdraw the funds, usually by transferring them first to its Canadian dollar operations account. If a cheque from a victim was subsequently dishonoured, R.I.C. would then owe that amount as a debt to the bank. That debt was secured by the general security agreement in respect of whatever funds were in the account.

[10] At the close of the day on the date that the order was made freezing the account, January 20, 1997, the account balance stood at U.S. $1,491.27. The order was served on the bank on January 21, 1997. The time of service is not in evidence. On January 21, the account went into a debit balance as the amount represented by one returned cheque, presumably from a victim, was deducted (U.S. $13,664.50), together with U.S. $7,000 as a debit in error, corrected the next day by a credit memo. However, there was also a deposit into the account on January 21, in the amount of U.S. $41,014.08. This deposit included cheques from seven victims. At the end of January 21, the balance in the account was U.S. $21,860.77, rising to U.S. $28,860.77 the next day after the credit memo for U.S. $7,000. The bank deducted some service charges by the end of the month, leaving the total showing in the frozen account as U.S. $28,809.37 on January 31, 1997.

[11] However, one of the victims' cheques in the amount of U.S. $13,640, which was deposited on January 21, 1997 as part of the U.S. $41,014, was subsequently dishonoured. The bank submits that that amount, U.S. $13,640, although shown as in the account as of the date the account was frozen, was not victims' money, but the bank's money, in effect loaned to R.I.C. in accordance with the normal operation of the account, and is therefore not proceeds of crime. That analysis was also accepted by the forensic accounting expert called by the Attorney General to give evidence at the forfeiture hearing.

[12] Because the U.S. $13,640 is not proceeds of crime, we agree that it cannot be the subject of a forfeiture order. However, the balance of the funds deposited into the account on January 21, 1997, U.S. $27,374.08, is clearly proceeds of crime and represents the cheques of six identifiable new victims.

[13] The bank takes the position that the most that can be forfeited is the closing account balance at January 21 of U.S. $28,809.37, minus U.S. $13,640 for the dishonoured cheque, leaving U.S. $15,169.37. That approach effectively allows the bank to use part of the new victims' money, deposited on January 21, 1997, to make up the overdraft into which the account had fallen on that day, as a result of the dishonour of another cheque from an earlier date (U.S. $13,644.50).

[14] The court has a discretion under s. 462.41 of the Code whether to return part of any proceeds of crime to an innocent person with an interest in those proceeds. Although we are satisfied that the bank has a security interest in all the moneys in the account pursuant to its security agreement, we would not exercise the court's discretion in favour of the bank in these circumstances in respect of any of the U.S. $27,374.08 of new victims' money deposited on January 21, 1997. Those moneys are identifiable proceeds of crime which should be returned to the victims.

[15] In the result, the order of Kelly J. is set aside, and instead, an order will go forfeiting to the Crown the amount of U.S. $27,374.08. The balance shown in the account of U.S. $1,435.29 is to be returned to the bank.

Appeal allowed in part.