Westboro Flooring and Décor Inc. v. Bank of Nova Scotia et al.

[Indexed as: Westboro Flooring and Décor Inc. v. Bank of Nova Scotia]

71 O.R. (3d) 723

[2004] O.J. No. 2464

Docket No. C39299

Court of Appeal for Ontario,

Goudge, Simmons and Juriansz JJ.A.

June 10, 2004

Banks and banking -- Negotiable instruments -- Cheques -- Conversion --Liability of collecting bank for conversion -- Defences -- Plaintiff drawing cheques prepared by employee as part of fraudulent scheme -- Employee depositing cheque in bank account he had opened at CIBC -- Collecting bank clearing cheques -- Collecting bank liable for conversion -- Fictitious or non-existing person defence not available -- Holder in due course defence not available -- Bills of Exchange Act, R.S.C. 1985, c. B-4, ss. 20(4), (5), 48(3), 165(3).

Negotiable instruments -- Cheques -- Conversion -- Liability of collecting bank for conversion -- Defences -- Plaintiff drawing cheques prepared by employee as part of fraudulent scheme -- Employee depositing cheque in bank account he had opened at CIBC -- Collecting bank clearing cheques -- Collecting bank liable for conversion -- Fictitious or non- existing person defence not available -- Holder in due course defence not available -- Bills of Exchange Act, R.S.C. 1985, c. B-4, ss. 20(4), (5), 48(3), 165(3).

Edgar Duarte was employed as the bookkeeper/accountant and subsequently as the controller of the plaintiff Westboro Flooring and Décor Inc. ("Westboro"). Westboro was the victim of a fraud perpetrated by Duarte. Westboro was supplied goods by a supplier named Terry Govas Ottawa-Hull Carpet Ltd. and, for the purposes of making payments, Westboro abbreviated its supplier's name to "Ottawa Hull Carpets" on company cheques. In 1994, Duarte registered a business name "Ottawa Hull Carpet Sales" for himself and opened a bank account at the defendant Canadian Imperial Bank of Commerce ("CIBC"). Terry Govas Ottawa-Hull Carpet Ltd. was dissolved in 1995; however, Westboro continued to write cheques in favour of Ottawa Hull Carpet after that date in the ordinary course of business. Between 1994 and 1996, Duarte prepared 36 Westboro cheques payable to Ottawa Hull Carpet which were signed by Westboro's signing officers as legitimate payables. Duarte deposited the cheques in his Ottawa Hull Carpet Sales bank account. Whe n the cheques were presented at the CIBC, there was either no endorsement or the CIBC teller applied a stamp, which read: [page724]

Deposited to the Credit of

PAYEE

Canadian Imperial Bank of Commerce

All of the cheques cleared the Ottawa Hull Carpet Sales account at the CIBC and later Westboro's account at the Bank of Nova Scotia. When Westboro received its bank statements, Duarte removed the cancelled cheques.

Westboro sued the Bank of Nova Scotia and the CIBC. The action against the Bank of Nova Scotia was dismissed on consent. Relying on the Supreme Court of Canada's judgment in Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce ("Boma"), Cusson J. found the CIBC liable for conversion and required it to pay damages of $222,928.71. The CIBC appealed.

Held, the appeal should be dismissed.

CIBC's submission that proof of blameworthy conduct is essential to establishing conversion was incorrect. The facts of the case fell squarely within the Boma conversion analysis, and the judgment in Boma makes it clear that the "wrongful" aspect of the tort of conversion consists of acting in a manner that is inconsistent with the owner's right of possession. A bank converts an instrument by dealing with it under the direction of one not authorized either by collecting or paying it and in either case making the proceeds available to someone other than the person rightfully entitled to possession.

Cusson J. did not err in holding that the CIBC was not entitled to rely on the fictitious payee defence set out in s. 20(5) of the Bills of Exchange Act ("BEA"), which provides that "where the payee is a fictitious or non-existing person, the bill may be treated as payable to bearer." With respect to the non-existing person category, Boma establishes that it is relevant that the drawer honestly believe that cheques were being made out for an existing obligation to a real person known to the drawer. Assuming that Ottawa Hull Carpet would otherwise fall within the non-existing payee category, the finding that in drawing the cheques Westboro intended to pay Terry Govas Ottawa-Hull Carpet Ltd. for legitimate debts brought the case within the Boma reasoning. In any event, Cusson J. did not make any palpable and overriding error in holding that Ottawa Hull Carpet was not a non-existing payee. Westboro had an existing supplier that it referred to as Ottawa Hull Carpet. Even if the name that Westboro used to refer to its supplier was not precisely accurate, the error was one of misnomer and did not make the payee non-existing.

Cusson J. did not err in rejecting CIBC's submission that it was entitled to the "holder in due course defence" under s. 165(3) of the BEA. Section 165(3) operates only when a cheque is "delivered" to a bank, and delivery is only effective when made by an authorized party. The purpose of s. 20(4) is to protect a recipient of a bill against misnomer where the bill is received from a legitimate payee, not to facilitate conversion.

Finally, Cusson J. did not err in holding that the stamps affixed by the CIBC tellers were not "forged endorsements" that would trigger the one-year notice requirement set out in s. 48(3) of the BEA. Nor did he err in finding that the CIBC failed to prove lack of mitigation. Accordingly, the appeal should be dismissed.

APPEAL from a judgment of Cusson J., [2002] O.J. No. 5091, [2002] O.T.C. 1045 (S.C.J.) requiring the Canadian Imperial Bank of Commerce to pay damages for conversion.

Cases referred to

Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce, 1996 149 (SCC), [1996] 3 S.C.R. 727, [1996] S.C.J. No. 111, 27 B.C.L.R. (3d) 203, 140 D.L.R. (4th) 463, 203 N.R. 321, [1997] 2 W.W.R. 153, revg (1994), 1994 247 (BC CA), 99 B.C.L.R. (2d) 201, 120 D.L.R. (4th) 250, [1995] 2 W.W.R. 435, 19 B.L.R. (2d) 166 (C.A.), revg in part (1993), 1993 536 (BC SC), 81 B.C.L.R. (2d) 197, [1993] 7 W.W.R. 368 (S.C.); [page725] Gough Electric Ltd. v. Canadian Imperial Bank of Commerce, 1986 752 (BC CA), [1986] B.C.J. No. 784, 7 B.C.L.R. (2d) 39, 31 D.L.R. (4th) 307, 34 B.L.R. 17 (C.A.); Westboro Flooring & Decor Inc. v. Bank of Nova Scotia, [2002] O.J. No. 5091, [2002] O.T.C. 1045 (S.C.J.)

Statutes referred to

Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 Bills of Exchange Act, R.S.C. 1985, c. B-4, ss. 20, 39, 48, 165

Authorities referred to

Crawford, B. and J.D. Falconbridge, Banking and Bills of Exchange, 8th ed., vol. 2 (Toronto: Canada Law Book, 1986) Falconbridge, J.D., Banking and Bills of Exchange, 6th ed. (Toronto: Canada Law Book, 1956)

John P. O'Toole, for appellant. Martin Z. Black, for respondent.

The judgment of the court was delivered by

[1] SIMMONS J.A.: -- The issues on this appeal relate to the application of the Supreme Court of Canada's decision in Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce, 1996 149 (SCC), [1996] 3 S.C.R. 727, [1996] S.C.J. No. 111 ("Boma"), which deals with the circumstances in which a collecting bank (a bank which accepts a cheque in deposit) is liable to the drawer of a cheque for conversion, and the defences available to a collecting bank under the Bills of Exchange Act, R.S.C. 1985, c. B-4 ("BEA").

I. Background

[2] The Canadian Imperial Bank of Commerce ("CIBC") appeals from a judgment of Cusson J., [2002] O.J. No. 5091, [2002] O.T.C. 1045 (S.C.J.), finding the CIBC liable to Westboro Flooring and Décor Inc. ("Westboro") for conversion, and requiring the CIBC to pay damages to Westboro in the amount of $222,928.71. [See Note 1 at the end of the document]

[3] Westboro's claim against the CIBC arose as the result of a fraudulent scheme perpetrated by a Westboro employee. Westboro [page726] hired Edgar Duarte as its bookkeeper/ accountant in 1986, and subsequently appointed him as its controller. In 1994, Duarte devised a scheme whereby he registered a business name "Ottawa Hull Carpet Sales" for himself and opened a bank account at the CIBC in that name. Westboro had a supplier named "Terry Govas Ottawa-Hull Carpet Ltd.". When the parties first started doing business, the supplier presented its invoices in the name Ottawa-Hull Carpet Installations. In order to fit the name into the payee field of its computer software, Westboro abbreviated its supplier's name to "Ottawa Hull Carpet" on company cheques. Terry Govas Ottawa- Hull Carpet Ltd. was dissolved in December 1995. However, Westboro continued to write cheques in favour of Ottawa Hull Carpet after that date in the ordinary course of its business.

[4] Between 1994 and 1996, Duarte prepared a total of 36 Westboro cheques payable to "Ottawa Hull Carpet" (the "Duarte cheques"), presented them to Westboro's signing officers for signature as legitimate Ottawa Hull Carpet payables, and then deposited them in person at the CIBC into his "Ottawa Hull Carpet Sales" bank account. All of the Duarte cheques cleared the Ottawa Hull Carpet Sales account at the CIBC, and later, Westboro's account at the Bank of Nova Scotia.

[5] Duarte did not endorse the Duarte cheques when presenting them at the CIBC for deposit. In many instances, there was no endorsement on the cheques at all. In other instances, a stamp was applied by the CIBC teller, which read:

Deposited to the Credit of

PAYEE

Canadian Imperial Bank of Commerce

[6] When Westboro received its bank statements, Duarte removed the cancelled Duarte cheques. In each of the relevant years, external auditors reviewed Westboro's financial affairs, and no accounting irregularities were brought to Westboro's attention.

[7] On May 28, 1998, Duarte confessed the details of his scheme to Westboro's secretary-treasurer. After discovering the misappropriation, Westboro conducted investigations into Duarte's assets and determined that his home was registered in his wife's name and that he had been heavily fined for failing to report taxable income and wilfully evading income taxes. Duarte subsequently made a proposal under the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3. The proposal received court approval on June 30, 1999. However, Westboro did not become [page727] aware of it until October 2000, and was not listed in the proposal as one of Duarte's creditors.

[8] Westboro accordingly sued its own bank, the Bank of Nova Scotia, and the CIBC to recover its losses. As noted, Westboro's action against its own bank was dismissed on consent. The essence of Westboro's claim against the CIBC was that the CIBC committed conversion by accepting and endorsing the Duarte cheques for deposit into the Ottawa Hull Carpet Sales account when Ottawa Hull Carpet Sales was not the payee of the cheques.

[9] Relying on Boma, the trial judge noted that conversion is a tort that imposes strict liability, even if the tortfeasor is "an innocent wrongdoer". He found that, because the cheques were not created for legitimate debts, Westboro remained their true owner, and that when the CIBC processed the cheques, it paid out moneys to Duarte to which Westboro was entitled. He therefore concluded, [at para. 12] "CIBC is prima facie liable in conversion to [Westboro] for the face value of these cheques." The trial judge then went on to consider and reject various defences advanced by the CIBC.

II. Analysis

[10] The CIBC raises five issues on appeal.

[11] First, although conceding that conversion is a tort of strict liability, the CIBC contends that the trial judge made several errors in determining the elements of the tort and applying them to the facts of this case: (i) he failed to read Boma in light of its facts; (ii) he failed to hold that proof of a wrongful act, in the sense of some form of blameworthy conduct going beyond mere dealings with another's property, is essential to establishing conversion; and (iii) he failed to find that, on the facts of this case, the CIBC did not commit a wrongful act.

[12] The CIBC submits that Boma does not stand for the proposition that a wrongful act is not a required element of conversion. In particular, it points out that Iacobucci J. was careful to use the term "wrongful" in describing conversion as "a wrongful interference with the goods of another". Moreover, there were circumstances in Boma that triggered a duty of inquiry on the collecting bank. In that case, the collecting bank's failure to inquire constituted the wrongful act that is a necessary element of conversion.

[13] By contrast, the CIBC claims that no similar duty of inquiry arose in this case. The CIBC exercised appropriate diligence in reviewing its customer's identification and business registration when it opened the Ottawa Hull Carpet Sales account [page728] and in subsequently accepting its customer's cheques for deposit. Unlike the situation in Boma, there were no forged or missing third-party endorsements on the Duarte cheques to trigger a duty of inquiry by the CIBC. On the contrary, it was Westboro that created a climate conducive to fraud by delegating complete cheque authorization authority to Duarte. In the circumstances, the Boma conversion analysis should not be extended to the facts of this case.

[14] I reject the CIBC's submission that proof of a wrongful act, in the sense of blameworthy conduct, is essential to establishing conversion. At para. 31 of Boma, Iacobucci J. makes it clear that the "wrongful" aspect of the tort of conversion consists of acting in a manner that is "inconsistent with the owner's right of possession" and that blameworthy conduct going beyond that is not an essential requirement:

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. Diplock LJ asserted this principle in Marfani & Co. v. Midland Bank, Ltd., [1968] [2] All E.R. 573, at pp. 577-78:

. . . the moral concept of fault in the sense of either knowledge by the doer of an act it is likely to cause injury, loss or damage to another, or lack of reasonable care to avoid causing injury, loss or damage to another, plays no part. . . .

If the customer is not entitled to the cheque which he delivers to his banker for collection, the banker, however, innocent and careful he might have been, would at common law be liable to the true owner of the cheque for the amount of which he receives payment, either as damages for conversion or under the cognate cause of action, based historically on assumpsit, for money had and received.

[15] Further, at para. 36 of Boma, Iacobucci J. adopts a discussion of conversion in relation to cheques from B. Crawford and J.D. Falconbridge, Banking and Bills of Exchange, 8th ed., vol. 2 (Toronto: Canada Law Book, 1986), at p. 1386, which does not include the requirement contended for by the CIBC:

Conversion is the remedy of the lawful possessor of chattels to have their value paid to him by a wrongful dispossessor. . . . It has been repeatedly held that a bank converts an instrument by dealing with it under the direction of one not authorized, either by collecting it or, semble (although this is not yet actually been decided) by paying it and in either case, making the proceeds available to someone other than the person rightfully entitled to possession.

Iacobucci J. then summarized the elements of conversion in relation to cheques at para. 83 of Boma as follows: [page729]

A bank converts an instrument, including a cheque, by dealing with it under the direction of one not authorized, by collecting it and making the proceeds available to someone other than the person rightfully entitled to possession. It should be noted that the tort of conversion is one of strict liability.

[16] On my reading of Boma, the Supreme Court of Canada's determination that the collecting bank was liable for conversion did not involve an assessment of whether the collecting bank committed a wrongful act, in the sense contended for by the CIBC. I conclude that the facts of this case fall squarely within the Boma conversion analysis. Accordingly, I would not give effect to the CIBC's first ground of appeal.

[17] The CIBC's second submission is that the trial judge erred in holding that the CIBC was not entitled to rely on the fictitious payee defence set out in s. 20(5) of the BEA. Section 20(5) of the BEA provides that "[w]here the payee is a fictitious or non-existing person, the bill may be treated as payable to bearer."

[18] Two excerpts from the trial judge's reasons are important to this issue. At para. 18 of his reasons the trial judge said:

There can be no doubt that when the cheques were signed, the intention of the plaintiff/drawer of the cheques was to pay Terry Govas' business for legitimate debts they owed him. . . . The name used was recognized by these parties as the name of the Govas' business, in shortened form, prior to and continues on to this day.

[19] At para. 22, the trial judge said the following:

. . . [T]he fact that the exact business shortened name of Terry Govas' business was not one that was registered . . . does not make the business a fictitious one. It is exactly because such a business existed that the account was opened at CIBC by Duarte with the exact name plus an add on "Sales" moniker.

[20] The trial judge therefore concluded that the Duarte cheques could not be considered payable to bearer on the basis of s. 20(5) of the BEA.

[21] The CIBC submits that Ottawa Hull Carpet was not an individual or a corporation, but was a non-existing person. Accordingly, the CIBC was entitled to treat the Duarte cheques as being payable to bearer. The CIBC contends that the trial judge made two errors in dealing with this issue: (i) he blurred the distinction between a non-existing payee and a fictitious payee, and therefore improperly took account of the drawer's intention in deciding whether the payee was non- existing; and (ii) he equated the informal business name that Westboro used to describe its supplier with a true corporate identity.

[22] I disagree.

[23] The CIBC relies on an extract from J.D. Falconbridge, Banking and Bills of Exchange, 6th ed. (Toronto: Canada Law Book, 1956), [page730] at pp. 468-69, cited at para. 46 of Boma, in support of its contention that the question of whether a named payee is non-existing is a simple issue of fact not depending on anyone's intention:

Whether a named payee is non-existing is a simple question of fact, not depending on anyone's intention. The question whether the payee is fictitious depends upon the intention of the creator of the instrument, that is, the drawer of a bill or the maker of a note.

In the case of a bill drawn by Adam Bede upon John Alden payable to Martin Chuzzlewit, the payee may or may not be fictitious or non-existing according to the circumstances:

(1) If Martin Chuzzlewit is not the name of any real person known to Bede, but is merely that of a creature of the imagination, the payee is non-existing, and is probably also fictitious.

(2) If Bede for some purpose of his own inserts as payee the name of Martin Chuzzlewit, a real person who was known to him but whom he knows to be dead, the payee is non- existing, but is not fictitious.

(3) If Martin Chuzzlewit is the name of a real person known to Bede, but Bede names him as payee by way of pretence, not intending that he should receive payment, the payee is fictitious, but is not non-existing.

(4) If Martin Chuzzlewit is the name of a real person, intended by Bede to receive payment, the payee is neither fictitious nor non-existing, notwithstanding that Bede has been induced to draw the bill by the fraud of some other person who has falsely represented to Bede that there is a transaction in respect of which Chuzzlewit is entitled to the sum mentioned in the bill.

[24] However, when applying the foregoing criteria to a payee in Boma with whom the drawer had no dealings and who therefore seemed to fall into the non-existing category, Iacobucci J. considered it relevant that the drawer "honestly believed that the cheques were being made out for an existing obligation to a real person known to the companies". Iacobucci J. accordingly concluded that the cheques made payable to that payee fell within the fourth Falconbridge category set out above, namely, a cheque payable to a real person in circumstances where the drawer is fraudulently induced to believe that there is a real transaction.

[25] Assuming that Ottawa Hull Carpet would otherwise fall within the non-existing payee category, the trial judge's finding that, in drawing the Duarte cheques, Westboro intended to pay Terry Govas' business for legitimate debts, brings this case squarely within the Boma reasoning. In any event, I am not persuaded that the trial judge made any palpable and overriding error of fact in holding that Ottawa Hull Carpet was not a non- existing payee. The trial judge found correctly that Westboro had [page731] an existing supplier that it referred to as Ottawa Hull Carpet. Even if the name that Westboro used to refer to its supplier was not precisely accurate, the error was one of misnomer and did not make the payee non-existing under the Falconbridge criteria.

[26] The CIBC's third submission is that the trial judge erred in rejecting its claim that it was entitled to the "holder in due course defence" under s. 165(3) of the BEA, which is a section aimed at protecting collecting banks against the absence of an endorsement. Section 165(3) provides:

Where a cheque is delivered to a bank for deposit to the credit of a person and the bank credits him with the amount of the cheque, the bank acquires all the rights and powers of a holder in due course of the cheque.

[27] The CIBC concedes that in Boma, Iacobucci J. determined that "person" in s. 165(3) must mean a person who is entitled to the cheque, i.e., the payee or the legitimate endorsee of the payee. It also concedes that the trial judge made a finding that the named payee on the Duarte cheques and the name of the Duarte account at CIBC were not the same and that this was "a significant difference".

[28] However, the CIBC contends that the trial judge made these findings without taking account of s. 20(4) of the BEA, which provides that "[w]here a bill is not payable to bearer, the payee must be named or otherwise indicated therein with reasonable certainty." The CIBC submits that the trial judge's findings would render s. 20(4) meaningless and would require collecting banks to obtain an endorsement in every instance where the name of the payee does not correspond exactly with the name on the customer's account.

[29] I reject the CIBC's submission. Section 165(3) operates only where a cheque is "delivered" to a bank. I agree with the holding in Gough Electric Ltd. v. Canadian Imperial Bank of Commerce, 1986 752 (BC CA), [1986] B.C.J. No. 784, 7 B.C.L.R. (2d) 39 (C.A.), that delivery is only effective when made by an authorized party: see also s. 39(1) of the BEA. The obvious purpose of s. 20(4) is to protect a recipient of a bill against misnomer where the bill is received from a legitimate payee, not to facilitate conversion. In other words, the cumulative effect of ss. 20(4) and 165(3) is to afford protection to a collecting bank where the collecting bank deposits a cheque without an endorsement from a legitimate, albeit misdescribed, payee.

[30] I find no merit in the CIBC's fourth submission. The trial judge was correct in holding that the stamps affixed by CIBC tellers were not "forged endorsements" that would trigger the one-year notice requirement set out in s. 48(3) of the BEA. [page732]

[31] Finally, I would not give effect to the submission that the trial judge erred in finding that the CIBC failed to prove lack of mitigation. Even assuming that the trial judge underestimated Westboro's potential recovery in the Duarte insolvency, the potential for recovery was not so large as to undermine the trial judge's central finding that the expenses and complications involved in proving a contingent claim militated against compelling Westboro to take the risk of proving it.

[32] For the foregoing reasons, I would dismiss the appeal with costs to the respondent on a partial indemnity basis fixed at $12,000 inclusive of disbursements and applicable GST.

Appeal dismissed with costs.

Notes

Note 1: Westboro's action against the Bank of Nova Scotia was dismissed on consent prior to trial.