A & A Jewellers Limited v. Royal Bank of Canada [Indexed as: A & A Jewellers Ltd. v. Royal Bank of Canada]

53 O.R. (3d) 97

[2001] O.J. No. 840

Docket No. C31253

Court of Appeal for Ontario

Doherty, Moldaver and MacPherson JJ.A.

March 9, 2001

Banks and banking--Liability of bank--Applicant and bank customer entered into consignment agreement and commission agreement--Commission agreement expressly provided that money received from sale of consigned merchandise was to be held in trust for applicant in separate trust account opened by bank customer for that purpose--Account set up by customer was not set up as trust account--Funds in account were automatically transferred by bank on daily basis to customer's general accounts in accordance with bank's consolidated off-set balance system--Funds impressed with trust in favour of applicant--Had bank complied with its own policy and with account agreement with customer it would have learned that funds in account were intended to be impressed with trust in favour of applicant --Bank had constructive knowledge of trust.

The applicant entered into a consignment agreement with Y Ltd. in which Y Ltd. agreed to receive on consignment, for retail sale in its store, jewellery owned by the applicant. Pursuant to the consignment agreement, the applicant was to retain title, ownership and all property rights in the consigned merchandise until it was sold in the ordinary course of business, at which time title was to pass directly from the applicant to the customer. It was further agreed that the money received from the sale of the consigned merchandise was to be held in trust for the applicant and that W Ltd. was to open separate trust accounts to segregate those funds from its own funds. At the same time, the applicant entered into a commission agreement with Y Ltd. which provided for the payment of commissions to the applicant for the sale of inventory belonging to Y Ltd. The commission agreement included an express acknowledgement that it created a trust in favour of the applicant and "Special Event Sales" ("SES") accounts would be opened and which would be controlled jointly by the applicant and W Ltd.

In accordance with the commission agreement, in 1994 W Ltd. opened an SES account with the respondent bank, where it also had a general account, a Visa account and a payroll account. Before opening the SES account, the respondent requested and received an executed account agreement which stated that any one of the President, CEO or CFO of Y Ltd. and any one of T or G (who were not identified, but who were representatives of the applicant) were authorized to, inter alia, order transfers of funds from Y Ltd.'s account. The respondent had entered into a lending agreement with Y Ltd., extending an operating line of credit. The respondent had established a consolidated off-set balance system ("COB") for W Ltd.'s three other accounts, which meant that the accounts would be automatically net positioned daily by use of the respondent's consolidated off-set balances control system, and advances made to Y Ltd. would revolve automatically on a daily basis, with the loan balance being adjusted daily. The cont roller of Y Ltd. assured the bank that the funds in the SES account were derived solely from the sale of Y Ltd. inventory, whereupon the SES account was added to Y Ltd.'s COB system. This enabled the respondent to appropriate automatically, by way of internal transfer, funds deposited into the SES account and use them to off-set moneys advances to Y Ltd. by way of loan under the credit facility. The respondent proceeded to do this with the money deposited into the 1994 SES accounts, even though, unbeknownst to the respondent, a large portion of it was attributable to the sale of merchandise supplied by the applicant in accordance with the 1994 consignment agreement. The applicant discovered in February 1995 that the 1994 SES account had not been set up as a trust account and that Y Ltd. could not pay the moneys owed under the 1994 consignment agreements because of the COB arrangements it had made with the respondent. The applicant passed this information along to the respondent.

The applicant brought an application for a declaration that it was the beneficial owner of funds held in SES accounts opened in 1994 and 1995. The respondent conceded that the funds in the 1995 accounts were trust funds belonging to the applicant. The applications judge dismissed the application in respect of the 1994 accounts, holding that the funds deposited into the 1994 SES account were not impressed with a trust in favour of the applicant because they were never intended to be, and that, even if the funds in issue were impressed with a trust in favour of the applicant, there was no basis for concluding that the respondent had actual or constructive knowledge of this before the February, 1995 meeting between the applicant and the respondent. The applicant appealed.

Held, the appeal should be allowed.

The applications judge failed to give sufficient weight to the express provisions in the 1994 consignment agreement. The language used was clear and precise and attested to the unequivocal intention of the parties to create a trust in favour of the applicant. In such circumstances, to alter the plain meaning of the language, extremely strong indications would have to be found to exist. The applications judge over- emphasized the significance of the evidence of commingling and failed to weigh it against the specific term in the agreement requiring the consignee to establish a separate trust account. When all of the relevant factors were taken into account and ascribed their proper weight, the evidence led inexorably to the conclusion that the applicant and Y Ltd. intended the funds in the 1994 SES account to be impressed with a trust in favour of the applicant and that they maintained this intention throughout, despite Y Ltd.'s failure to live up to its end of the bargain.

In cases such as this, where a bank is under a duty to make inquiries of its customers regarding a possible breach of trust, the bank will be found to have constructive knowledge of the breach of trust if it fails to make the appropriate inquiries. Whether the inquiries are appropriate or not will depend on the particular facts and circumstances of the case. The bank is not required to engage in an impractically extensive inquiry, but is required to act reasonably in the circumstances. In assessing whether the inquiries made by a bank in a particular case are reasonable, it is proper to measure them against the terms and conditions of the agreement with the customer, as well as the bank's policy. If the steps or measures taken do not accord with either, absent a valid explanation, the inquiries cannot pass the "reasonableness" test. In this case, the respondent did not receive the authorization of either T or G before incorporating the 1994 SES account into the COB system. Rather, in direct contravention of the account agreement, as well as the respondent's own policy, it chose to act on the authorization of the CFO alone. Had the respondent acted in accordance with the terms of the account agreement and its own policy and insisted on obtaining authorization from either G or T before incorporating the 1994 SES account into the COB system, it would have learned the true nature and source of the funds in issue. Its failure in this regard was the root cause of the problem. In these circumstances, the respondent could not escape a finding of constructive knowledge. The funds in the 1994 SES account were impressed with a trust in favour of the applicant, and the respondent wrongly appropriated them.

APPEAL from an order dismissing an application for a declaration that the applicant was the beneficial owner of certain funds.

Cases referred to Air Canada v. M. & L. Travel Ltd., 1993 CanLII 33 (SCC), [1993] 3 S.C.R. 787, 15 O.R. (3d) 804, 108 D.L.R. (4th) 592, 159 N.R. 1, 50 E.T.R. 225; Citadel General Assurance Co. v. Lloyds Bank Canada, 1997 CanLII 334 (SCC), [1997] 3 S.C.R. 805, 66 Alta. L.R. (3d) 241, 152 D.L.R. (4th) 411, [1999] 4 W.W.R. 135, 35 B.L.R. (2d) 153, 19 E.T.R. (2d) 93; Gold v. Rosenberg, 1997 CanLII 333 (SCC), [1997] 3 S.C.R. 767, 35 O.R. (3d) 736n, 152 D.L.R. (4th) 385, 219 N.R. 93, 35 B.L.R. (2d) 212, 19 E.T.R. (2d) 1; Stephens Travel Service International Pty. Ltd. v. Qantas Airways Ltd. (1988), 13 N.S.W.L.R. 331 (C.A.)

Peter J. Osborne, for appellant. Thomas M. Conway, for respondent.

The judgment of the court was delivered by

[1] MOLDAVER J.A.:--By Notice of Application dated November 8, 1996, A & A Jewellers Limited, formerly known as Silverman Jewellers Consultants Canada Inc. ("Silverman"), sought a declaration that it was the beneficial owner of certain funds held in trust by the Royal Bank of Canada (the "Bank") in five separate accounts opened in 1994 and 1995 at the Bank's Richmond Street Branch in London, Ontario.

[2] The application was heard by Pitt J. on October 19, 1998. By that time, the Bank had conceded that the funds in the 1995 accounts were trust funds belonging to Silverman and the only issue relating to them was whether the Bank owed a small amount of interest to Silverman for a period of time in which it had use of the funds but refused to turn them over to Silverman. The primary issue on the application was whether Silverman was the beneficial owner of the funds in the 1994 accounts.

[3] On December 1, 1998, Pitt J. released written reasons for judgment in which he dismissed the application in respect of the 1994 accounts and allowed it in respect of the 1995 accounts, ordering the Bank to pay interest to Silverman in the amount of $2,669.91.

[4] Silverman appeals from that order, except as it relates to the 1995 accounts, and requests that it be set aside and replaced with an order declaring Silverman to be the beneficial owner of the funds in the 1994 accounts totalling approximately $126,806. The Bank, on the other hand, seeks to uphold Pitt J.'s s order as it relates to the 1994 accounts. Alternatively, if it is found that the funds in those accounts were trust funds belonging to Silverman and further, that the Bank wrongly appropriated them, the amount owing to Silverman should not be the $126,806 claimed but instead, $51,806. In addition, the Bank cross-appeals and seeks to set aside Pitt J.'s order requiring it to pay interest to Silverman in respect of the trust funds held in the 1995 accounts.

The Facts

[5] Silverman carries on business in Canada and elsewhere as a retailing consultant in the jewellery business. In that capacity, it regularly assists jewellery retailers experiencing sluggish sales and cash flow problems by providing inventory on consignment and suggesting ways by which retailers can maximize the sale of their own inventory.

[6] In October 1994, Silverman agreed to provide such assistance to W.G. Young Co. Limited ("W.G. Young") and Heinrichs Jewellers Limited ("Heinrichs"), two retail jewellery stores owned by the Young Group of Companies (the "Young Group"). To that end, on June 10, 1994, Silverman entered into a Consignment Agreement with W.G. Young whereby W.G. Young agreed to receive on consignment, for retail sale in its store, jewellery owned by Silverman. On November 3, 1994, Silverman entered into a similar arrangement with Heinrichs.

[7] Pursuant to the Consignment Agreements, Silverman was to retain title, ownership and all property rights in the consigned merchandise until it was sold in the ordinary course of business, at which time title was to pass directly from Silverman to the third party purchaser. It was further agreed that the money received from the sale of the consigned merchandise was to be held in trust for Silverman and that W.G. Young and Heinrichs were to open separate trust accounts to segregate those funds from their own funds.

[8] At the same time, Silverman entered into Commission Agreements with W.G. Young and Heinrichs. Those agreements provided for the payment of commissions to Silverman in respect of the sale of inventory belonging to W.G. Young and Heinrichs. Each included an express acknowledgement that the Consignment Agreements created a trust in favour of Silverman, that "Special Event Sales" ("SES") accounts would be opened and that those accounts would be controlled jointly by Silverman and W.G. Young and Heinrichs respectively.

[9] In accordance with the 1994 agreements, W.G. Young opened SES Account No. 1000694 at the Bank in late June 1994 and Heinrichs opened SES Account No. 1019553 in early November 1994. Prior to opening those accounts, the Bank requested and received from each company specimen signature cards and an executed account agreement entitled "Resolution Regarding Banking and Security" ("Banking Resolution").

[10] Apart from the different company names, the opening documentation is identical and the salient features need not be duplicated. Suffice it to say that in the case of W.G. Young, clause 2(a) of the Banking Resolution provided as follows:

2. That any one of the President [William B. Young], CEO [Charles F. Gill], or CFO [Robert J. Browne], and any one of Michel Trudel or Cameron Gillies are authorized on behalf of the Company from time to time:

(Emphasis in original)

(a) to withdraw or order transfers of funds from the Company's accounts by any means including the making, drawing, accepting, endorsing or signing of cheques, promissory notes, bills of exchange, other orders for the payment of money or other instruments or the giving of other instructions.

(Emphasis added)

[11] As for the signature cards, the Bank was provided with two such cards, copies of which are reproduced below:

THE W.G. YOUNG CO., LTD. SES 100-069-4 Name of the Account Acct. No.

INSTRUCTIONS RE SIGNING OF CHEQUES __ ANY TO SIGN __ ALL TO SIGN

GROUP A ANY ONE TOGETHER WITH GROUP B NAME & TITLE SIGNATURE

PRESIDENT "W.B. YOUNG" C.E.O. "C.F. GILL" C.E.O. "R.J. BROWNE"

THE W.G. YOUNG CO., LTD. SES 100-069-4 Name of the Account Acct. No.

INSTRUCTIONS RE SIGNING OF CHEQUES __ ANY TO SIGN __ ALL TO SIGN

GROUP B ANY ONE TOGETHER WITH GROUP A NAME & TITLE SIGNATURE

MICHAEL TRUDEL "MICHAEL TRUDEL" CAMERON GILLIES "BLANK"

REGIONAL BUSINESS BANKING CENTRE 02692-003 383 RICHMOND ST., SUITE 700 LONDON, ONT. N6A 3C4

[12] Notably, apart from the fact that no signature appears beside the name Cameron Gillies (and none was requested by the Bank), it will be seen that the instruction on the cards regarding the signing of cheques accords with the instruction in the Banking Resolution requiring authorization by two persons, one from the individuals identified in Group A and the other from the individuals identified in Group B. At the same time, there is nothing on the face of the Banking Resolution or the signature cards that would have put the Bank on actual notice that the individuals identified as "Cameron Gillies" and "Michel Trudel" were in fact representatives of Silverman. As will be seen, it was not until February 1995 that this information was expressly disclosed to the Bank.

[13] Although it is unclear from the record whether in their prior dealings with the Bank going back to 1989, the Young Group had opened similar SES accounts, it is common ground that this was the first occasion that the Bank was required to obtain authorization by two individuals from separate groups before engaging in any of the transactions specified in clause 2 of the Banking Resolution, including the "transfer of funds" from the companies' accounts "by any means . . . including . . . the giving of other instructions". It is equally clear from the cross-examination of the Bank representatives, Ms. Kemp and Mr. Horton, each of whom filed affidavits on the application, that apart from complying with its contractual obligations to the client, it was the Bank's policy to follow the instructions of its clients.

[14] By way of example, Ms. Kemp agreed that when two signatures are required on a cheque and only one appears, as a general rule, the Bank will not honour the cheque. Likewise, in response to a question whether in this case, the Bank had approved cheques drawn on the SES accounts without a signature from either Cameron Gillies or Michel Trudel, Mr. Horton replied that although he did not know, he hoped "they didn't", adding that "in general the likelihood that the bank would violate the signature card is remote" and "the signature cards would spell out who could sign on the account and that is exactly what the situation was".

[15] Against this backdrop, I turn to the facts underlying the disputed funds in the 1994 accounts.

[16] As indicated, the Young Group's relationship with the Bank dated back to 1989. In February 1994, the Bank entered into a lending agreement with the Young Group wherein the Bank agreed to extend a $3,300,000 operating line of credit to W.G. Young and a $750,000 operating line of credit to Heinrichs, provided that the aggregate outstanding amount of both loan facilities did not exceed $3,300,000. As described by Ms. Kemp in her affidavit, the agreement also provided that the operating lines of credit would revolve as follows:

(a) if the balance in the general account is a credit the Bank may apply the amount of such credit, or any part thereof, rounded to the nearest $10,000, as repayment of borrowings; or

(b) if the balance in the general account is a debit the Bank shall make available a borrowing in an amount, rounded to the nearest $10,000, required to place the borrower in a minimum net credit position of zero, provided that sufficient funds were available under the credit facility.

According to Ms. Kemp, the Bank obtained general security agreements from both W.G. Young and Heinrichs to secure these loan facilities.

[17] Ms. Kemp went on to state that in 1989, W.G. Young maintained three accounts at the Bank's Richmond Street Branch: a general account, a Visa account and a payroll account. In November 1989, she deposed that upon W.G. Young's request, the Bank established a consolidated off-set balance system ("COB") for these accounts. In her words, this meant that "(a) the accounts would be automatically net positioned daily by use of the Bank's consolidated off-set balances control system; and (b) advances made to [W.G.] Young would revolve automatically on a daily basis, with the loan balance being adjusted daily". According to Ms. Kemp, in January 1990, a similar arrangement was made in respect of the general and Visa accounts operated by Heinrichs.

[18] As for the inter-relationship between the operating lines of credit and the COB system, Ms. Kemp explained that the operating lines continued to revolve through the general accounts of W.G. Young and Heinrichs respectively, "but [it was] based upon the net daily position of the [W.G.] Young COB and the Heinrichs COB".

[19] That is how matters stood in June 1994 when, as indicated, W.G. Young opened a fourth account at the Branch (the "1994 SES Account") in compliance with the terms of the Consignment Agreement. [See Note 1 at end of document] The opening documentation relating to that account has already been described and nothing more need be said about it.

[20] The only other document worthy of note is an internal Bank memo dated June 20, 1994. Although the author of the memo is unknown, it contains the following notation: "Not included in COB until advised by client as to source". When cross- examined on her affidavit, Ms. Kemp admitted that she was aware of this notation from the outset and although she could not recall specifically, she agreed that she also must have been aware of the Banking Resolution and the signature cards that had been executed on June 20, 1994 and presumably returned to the Bank that day.

[21] Apprised of this information, Ms. Kemp swore, both in her affidavit and on cross-examination, that some time in late June 1994, she spoke to Mr. Robert Browne, the controller of W.G. Young and Heinrichs, and upon his request, after being assured that the funds in the W.G. Young SES Account were being derived solely from the sale of W.G. Young inventory, she requested and received approval, pursuant to an internal Bank memo dated July 5, 1994, to have that account added to the W.G. Young COB system. Although she could not be certain, in cross- examination she testified that to the best of her recollection, contrary to the information provided in her affidavit, she believed that in the same conversation, Mr. Browne told her that Heinrichs would be opening a similar SES account in the future and that it too should be included in the Heinrichs COB system. As mentioned earlier, the Heinrichs SES was not opened until November 1994 and the request to have it included in the Heinrichs COB system is found in an internal Bank memo dated November 3, 1994.

[22] No issue is taken with the fact that the inclusion of the SES accounts in the COB systems was of singular importance to the Bank and the companies. In practical terms, it enabled the Bank to automatically appropriate, by way of internal transfer, funds deposited into the SES accounts and use them to off-set moneys advanced to the companies by way of loan under the credit facility. That is precisely what the Bank proceeded to do with the money deposited into the 1994 SES accounts even though, unbeknownst to the Bank, a large portion of it was attributable to the sale of merchandise supplied by Silverman in accordance with the 1994 Consignment Agreements.

[23] Early in 1995, Silverman entered into new Consignment and Commission Agreements with W.G. Young and Heinrichs, as a result of which, the two companies opened what have been referred to as the 1995 SES accounts. Because of the Bank's acknowledgement, prior to the hearing before Pitt J., that the moneys deposited into those accounts, or a portion of them, were trust funds belonging to Silverman, nothing more need be said about them.

[24] As for the 1994 SES accounts, it is common ground that on February 9 or 10, 1995, Charles Gill, an officer of the Young Group, admitted to Cameron Gillies, an officer of Silverman, that the 1994 SES accounts had not been set up as trust accounts and that the Young Group could not pay the moneys owed under the 1994 Consignment Agreements because of the COB arrangements it had made with the Bank. Gill went on to explain that regardless of the fact that the 1994 SES account statements showed a positive balance, this was illusory because under the COB system, the funds in those accounts had been used to off-set negative balances in other W.G. Young and Heinrichs accounts.

[25] In the face of this information, Silverman officials contacted the Bank and scheduled a meeting for February 14, 1995. At that meeting, Silverman told the Bank that it had been misled by the Young Group regarding the 1994 SES accounts and that it was taking the position that the funds on hand, as shown in the account statements, were trust funds belonging to it. The Bank, on the other hand, took the position that the funds which had been deposited into the SES accounts were not trust funds and in any event, even if they were, the Bank did not know and had no way of knowing this. Moreover, the Bank maintained that despite the positive balances showing in the account statements, those balances were illusory because under the COB arrangement, the funds had automatically been transferred out to off-set negative balances in the companies' other accounts.

[26] In cross-examination on his affidavit, Mr. Horton from the Bank testified that it was not until mid-February 1995 that he learned, for the first time, that Cameron Gillies and Michel Trudel, whose names appeared on the opening documentation for the 1994 SES accounts, were in fact Silverman representatives. Prior to that, the Bank simply assumed that they were employees of the Young Group. Likewise, he denied any prior knowledge of the 1994 Consignment Agreements between Silverman and W.G. Young and Heinrichs.

[27] On behalf of Silverman, Mr. Gillies, when cross-examined on his affidavit, conceded that as far as the 1994 SES accounts were concerned, Silverman had failed to follow its normal practice of ensuring that they were actually set up as trust accounts. He also knew that during the currency of those accounts, funds deposited into them belonging to Silverman were being commingled with funds belonging to W.G. Young and Heinrichs from the sale of their own inventory. He further agreed that Silverman had not collected the funds owing to it from the 1994 consignment sales in accordance with the terms of the Consignment Agreement. Nonetheless, he maintained that Silverman had been kept abreast of the consignment sales and that it constantly sought payment from the two consignees. According to Gillies, payments under the Consignment Agreements were made from time to time and he relied on the word of the consignees that they would make good on the moneys owing to Silverman.

[28] Following the February 14, 1995 meeting, the Bank took the immediate step of freezing the 1994 SES accounts. According to Mr. Horton, it did so as a precautionary measure to ensure that no further transactions would be conducted through them. Despite the positive balance showing in those accounts on February 14, 1995, Mr. Horton steadfastly maintained that as of that date, there were no funds on deposit in those accounts because under the COB arrangement, they had automatically been transferred out to off-set negative balances in the companies' other accounts.

[29] Apart from staking out their positions in the months following the February 14 meeting, nothing of consequence occurred until November 10, 1995, at which time, the Young Group made an assignment in bankruptcy and a trustee was appointed. On the same date, the Bank appointed an accounting firm as receiver and manager of the Young Group pursuant to the general security agreements held by it.

[30] It is common ground that in February 1995, well before making the assignment in bankruptcy, the Young Group acknowledged to Silverman, in writing, that the funds "on deposit" in the 1994 SES accounts were in fact trust funds belonging to Silverman. Moreover, it is accepted that following the assignment in bankruptcy, the trustee took no position in respect of the funds, if any, on deposit in the 1994 SES accounts or the funds on deposit in the 1995 SES accounts. Eventually, by letter dated June 25, 1996, the trustee made it known that he was not laying claim to the moneys on deposit in the 1995 SES accounts. Those funds were ultimately turned over by the Bank to Silverman on July 10, 1998.

[31] As for the 1994 SES accounts, on June 4, 1996, the Bank unfroze them and did the necessary paperwork to complete what it described as a "notional" transfer of the funds showing in those accounts to the companies' general accounts. According to the Bank, the June 4 transactions amounted to nothing more than bookkeeping entries, given that the funds in the 1994 SES accounts had, in fact, been automatically transferred on a daily basis to the companies' general accounts in accordance with the COB arrangements then in place.

Pitt J.'s Ruling

[32] Pitt J. rejected Silverman's application as it related to the 1994 SES accounts for three separate reasons, only two of which need be addressed to resolve this appeal. [See Note 2 at end of document]

[33] Commencing with the second of his reasons, Pitt J. found as a fact that the funds deposited into the 1994 SES accounts were not impressed with a trust in favour of Silverman because in his view, "they were never intended to be". His reasons in this regard are reproduced below:

A condition precedent to finding for the applicant is the finding of a consignor-consignee relationship between the applicant and the "Young Group."

The onus of establishing a consignment, as one would expect, is on the person seeking to benefit from the finding: see Seven Limers Coal & Fertilizer Co. Inc. v. Hewitt (1985), 1985 CanLII 1945 (ON CA), 52 O.R. (2d) 1 (Ont. C.A.).

It is not enough to look at the language of the consignment agreement in determining whether a true consignment exists. The conduct of the parties must be examined in conjunction with the written agreement before a final determination is made: see Re Stephanian's Persian Carpets Ltd. (1980), 1 P.P.S.A.C. 119 (H.C.J.).

The commingling of consignment proceeds (trust funds) with funds not impressed with a trust is a circumstance that tends to negative the existence of a true trust (consignment) arrangement: see B. Colburn, "Consignment Sales and the Personal Property Security Act", 6th Can. Bus. L.J., pages 48-51 and 75-76. Such a circumstance must be distinguished from the commingling of funds held in trust for several beneficial owners, for example, a lawyer's trust account.

It is not disputed that the applicant from the outset did not collect the proceeds of the sale of "consigned" goods in accordance with the agreement, on a timely basis, or indeed with any degree of regularity, so that a substantial obligation was at most times owed by the "Young Group" to the applicant.

It was agreed between the applicant and the "Young Group" that sale proceeds (trust funds) for the applicant's inventory were being deposited into the same accounts with proceeds (non-trust funds) from the sale of the "Young Group's" inventory. Commission payments were also deducted for the benefit of the "Young Group" from these accounts. In my view, funds were never impressed with a trust as they were never intended to be.

[34] As for the first reason, it was Pitt J.'s view that even if the funds in issue were impressed with a trust in favour of Silverman, there was no basis for concluding that the Bank had actual or constructive knowledge of this until the February 14, 1995 meeting between the Bank and Silverman. After outlining what he considered to be the pertinent facts and circumstances leading up to that meeting, including Silverman's failure to ensure that the 1994 SES accounts were set up as trust accounts, the fact that Gillies and Trudel were not identified as Silverman representatives in the opening documentation, and the evidence of Ms. Kemp to the effect that it was not uncommon for retailers to open SES accounts for a particular sale or promotion, he continued as follows:

Were these circumstances sufficient so as to put the bank on its inquiry to determine the exact nature of the funds before dealing further with them, as the court found in Potter (Carl B.) Ltd. v. Mercantile Bank of Canada (1980), 1980 CanLII 213 (SCC), 112 D.L.R. (3d) 88 (S.C.C.)?

From whom would the inquiries be made? The "Young Group" was the only potential source of information. The evidence is clear; indeed it is the foundation of the applicant's allegation of a breach of trust that the "Young Group" concealed the applicant's interest in the accounts, from the bank.

Putting it at its best for the applicant, the bank might have considered that Trudel and possibly Gillies were new partners or lenders to the "Young Group." Any lingering doubt the bank might have had about the manner in which the funds in those accounts were to be used would have been dispelled by the instruction from the "Young Group" in November 1994 to add those funds to the C.O.B. arrangement with the bank, thereby giving the "Young Group" more leverage and the bank more comfort. The basis for a finding of constructive notice was thereby removed.

(Emphasis added)

[35] With respect, I am of the view that Pitt J. committed a palpable and overriding error in finding that the funds derived from the sale of merchandise, made available by Silverman to W.G. Young and Heinrichs in accordance with the 1994 Consignment Agreements, were not impressed with a trust in favour of Silverman. I am further of the view that he erred in finding that prior to February 14, 1995, there was no basis for concluding that the Bank had constructive knowledge as to the true nature of the funds deposited into the 1994 SES accounts. As will become apparent, I am satisfied that the funds in question were impressed with a trust in favour of Silverman and that the Bank had constructive knowledge of this prior to February 14, 1995.

Analysis

Issue one: Were the funds "trust funds?"

[36] In concluding that the funds in the 1994 SES accounts were not trust funds because "they were never intended to be", I am of the view that Pitt J. failed to give sufficient weight to the express provisions in the 1994 Consignment Agreements and that he over-emphasized the significance of certain evidence and failed to take other relevant evidence into account.

[37] Commencing with the 1994 Consignment Agreements, there can be no doubt that the language used is clear and precise and it attests to the unequivocal intention of the parties to create a trust in favour of Silverman. In such circumstances, to alter the plain meaning of the language, extremely strong indications must be found to exist. (See Stephens Travel Service International Pty. Ltd. v. Qantas Airways Ltd. (1988), 13 N.S.W.L.R. 331 (C.A.) per Hope J.A. at p. 348; cited with apparent approval in Air Canada v. M. & L. Travel Ltd., 1993 CanLII 33 (SCC), [1993] 3 S.C.R. 787 at p. 805, 108 D.L.R. (4th) 592.)

[38] One of the indicators relied upon by Pitt J. to alter the plain meaning of the express language was the evidence of commingling. Although he was clearly entitled to take this into account, in my view, Pitt J. over-emphasized its significance and failed to weigh it against the specific term in the Agreements requiring the consignees to establish separate trust accounts at their bank. He further failed to consider the fact that W.G. Young and Heinrichs did establish separate accounts that called for authorization by both Young Group and Silverman representatives. (See Citadel General Assurance Co. v. Lloyds Bank Canada, 1997 CanLII 334 (SCC), [1997] 3 S.C.R. 805 at p. 817, 66 Alta. L.R. (3d) 241, in which La Forest J. held that commingling does not necessarily undermine a relationship of trust).

[39] Pitt J. also failed to refer to the conduct of the parties after February 15, 1995, when the Young Group made it known to Silverman that the funds in the 1994 SES accounts had not been preserved in trust. In addition to Silverman's immediate protestations to the Bank that the funds in question were indeed trust funds, in my view, it is of singular importance that the Young Group took the same position long before making an assignment in bankruptcy. This effectively amounted to an admission against interest on the part of the Young Group given the adverse impact it was likely to have on their outstanding loan positions with the Bank.

[40] Pitt J. also placed significance on the fact that Silverman "did not collect the proceeds of the sale of 'consigned goods' in accordance with the agreement, on a timely basis, or indeed with any degree of regularity . . .". While that is fair comment, it ignores the fact that Silverman was being kept abreast of the amounts owing under the 1994 Consignment Agreements, that some payments were being made and that the consignees continuously represented that they would make good on their commitments. Additionally, in this regard, Pitt J. failed to take account of clause 14 of the Consignment Agreements which provides as follows:

The failure of the Company [Silverman] to insist upon strict performance of any of the covenants or conditions of this Agreement or to exercise any right or option herein contained shall not be construed as a waiver or relinquishment of any of such covenant, condition, right or option, but same shall remain in full force and effect.

[41] In sum, when all of the relevant factors are taken into account and ascribed their proper weight, I am of the view that the evidence leads inexorably to the conclusion that Silverman and the two Young companies intended the funds in the 1994 SES accounts to be impressed with a trust in favour of Silverman and that they maintained this intention throughout, despite the failure of the two Young companies to live up to their end of the bargain.

Issue two: Did the Bank have constructive knowledge of the true nature of the funds?

[42] Pitt J. approached this issue, correctly in my view, from the perspective that the Bank was under a duty in the circumstances to make inquiries as to the nature of the funds in the 1994 SES accounts before incorporating those accounts into the COB system. He then went on to determine whether the inquiries made by the Bank were appropriate and he held that they were. Specifically, he found that the Bank was not required to do more than it did, namely, obtain the verbal assurance from Mr. Browne, an officer with the Young Group, that the funds being deposited into the 1994 SES accounts were derived solely from the sale of W.G. Young and Heinrichs inventory. With respect, I am of the view that Pitt J. erred in this regard.

[43] In cases such as this, where the Bank is under a duty to make inquiries of its customer regarding a possible breach of trust, the Bank will be found to be in constructive knowledge of the breach of trust if it "fails to make the appropriate inquiries". (See Citadel General Assurance Co., supra at p. 839.) Whether the inquiries are appropriate or not will depend on the particular facts and circumstances of the case. No bright line test can be fashioned. What can be said is that the Bank is not required to engage in an impractically extensive inquiry, nor is it to be held to a standard of perfection. All that is required of the Bank is that it act reasonably in the circumstances. (See Gold v. Rosenberg, 1997 CanLII 333 (SCC), [1997] 3 S.C.R. 767, 152 D.L.R. (4th) 385 per Sopinka J. for the majority at p. 802.)

[44] Although it is impossible to specify the types of inquiry that might be encompassed by the words "reasonable", at a minimum, they surely must include steps and measures that are part of the Bank's obligation under the terms of the agreement governing the account, not to mention the Bank's policy. In other words, in assessing whether the inquiries made by a Bank in a particular case are reasonable, it is proper to measure them against the terms and conditions of the agreement with the customer, as well as the Bank's policy. If the steps or measures taken do not accord with either, then absent a valid explanation, I fail to see how the inquiries can pass the "reasonableness" test.

[45] Therein lies the problem with Pitt J.'s analysis. In assessing the reasonableness of the inquiries made by the Bank, he failed to consider the terms and conditions of the agreement between the two Young Companies and the Bank and he also failed to consider the Bank's policy.

[46] It will be recalled that under clause 2 of the Banking Resolution, in order to transfer funds from the 1994 SES accounts, the Bank required authorization by any one of three officers from the Young Group and "any one of Michel Trudel or Cameron Gillies". And yet, on the Bank's own evidence, it did not receive the required authorization from either Mr. Gillies or Mr. Trudel before incorporating the 1994 SES accounts into the COB system which, as indicated, enabled the Bank to transfer funds from them to reduce the debit position in the companies' other accounts. Rather, Ms. Kemp, in direct contravention of clause 2 of the agreement, as well as the Bank's policy, chose to act on the authorization of Browne alone.

[47] In my view, had the Bank acted in accordance with the terms of the Banking Resolution and its own policy and insisted, as it should have, on obtaining authorization from one or the other of Gillies or Trudel before incorporating the 1994 SES accounts into the COB system, it would have learned the true nature and source of the funds in issue. Its failure in this regard is the root cause of the problem. Surely, in these circumstances, the Bank cannot escape a finding of constructive knowledge. To describe Ms. Kemp's inquiry of Mr. Browne as "reasonable" would be to place the Bank in the unique position of being able to ignore, with impunity, important contractual obligations designed to secure and protect the interest of its clients. In this regard, it is no answer to say that Gillies and Trudel were not clients of the Bank. Although they may not have been clients in the technical sense, it is apparent from the Banking Resolution that they were to have joint control over the 1994 SES accounts and the Bank had no warrant to ignore this.

Conclusion Re 1994 Accounts

[48] For the reasons stated, I am satisfied that the funds in the 1994 SES accounts were impressed with a trust in favour of Silverman and that the Bank wrongly appropriated them. Accordingly, I would set aside Pitt J.'s order and allow the Silverman application to that extent with costs here and below.

Damages

[49] As I indicated at the outset, Silverman claims damages in the amount of approximately $126,806. The Bank on the other hand, puts the figure at $51,806.

[50] Unfortunately, the state of the record is such that I am unable to resolve the amount owing to Silverman. Accordingly, if the parties cannot agree, an order will go referring the assessment of damages to a Master. The cost of the reference, if one is required, will be in the discretion of the Master.

The Cross-Appeal

[51] I see no basis for interfering with the award of interest made by Pitt J. in the amount of $2,669.91. Although I accept the Bank's position that it was concerned about paying the 1995 SES funds to Silverman before getting the green light from the trustee in bankruptcy, there is no suggestion that the Bank did not use the funds in the interim and obtain interest on them. Accordingly, I see no reason why the Bank should be enriched at Silverman's expense. I would therefore dismiss the cross-appeal with costs.

Appeal allowed.

Notes

Note 1: In her affidavit, Ms. Kemp deposed that it was not uncommon for retailers to open SES accounts in order to segregate funds from a particular promotion or sale.

Note 2: The third reason relates to Silverman's submission that the Bank wrongly appropriated the funds in the 1994 SES accounts on June 4, 1996, knowing full well by that time that they were impressed with a trust in favour of Silverman. Pitt J. rejected this argument, correctly in my view, on the basis that the funds had already been transferred pursuant to the COB arrangement and that the June 4 transaction amounted to nothing more than bookkeeping entries.