Rouge Valley Health System v. TD Canada Trust

108 O.R. (3d) 561

2012 ONCA 17

Court of Appeal for Ontario,

Laskin, Goudge and Gillese JJ.A.

January 12, 2012

Banks and banking -- Cheques -- Payee -- Fictitious or non- existing person -- Employee of plaintiff defrauding plaintiff by arranging to have cheques issued to made-up entity through automatic cheque-issuing system -- Cheques deposited by employee's accomplice at defendant bank -- Plaintiff suing defendant for conversion -- Defence under s. 20(5) of Bills of Exchange Act available to defendant -- Made-up entity being "non-existent person" -- Made-up entity not having name that might plausibly be identified by plaintiff as being real creditor -- Bills of Exchange Act, R.S.C. 1985, c. B.4, s. 20(5).

One of the plaintiff's employees, M, defrauded the plaintiff by causing it to pay nearly $700,000 worth of invoices rendered by a made-up entity for services that were never provided. The cheques were issued through an automatic cheque-issuing system, payable to "S.M.R.", and were deposited by M's accomplice, R, at the defendant bank. Originally, M established a vendor code for R's then-employer, Delisle, and R submitted fraudulent invoices to the plaintiff for services that Delisle did not in fact provide. After Delisle fired R, the vendor code was transferred to S.M.R. When the fraud was discovered, the plaintiff sued the defendant for conversion. The defendant maintained that it had a valid defence under s. 20(5) of the Bills of Exchange Act, which provides that where the payee is a "fictitious or non-existing person, the bill may be treated as payable to bearer" so that the bank is not liable for negotiating the cheque. On motions for summary judgment by both parties, the motion judge held that S.M.R. was both a non- existing and a fictitious person. The plaintiff's motion was dismissed and the defendant's motion was granted. The plaintiff appealed.

Held, the appeal should be dismissed.

S.M.R. was a non-existing person. The plaintiff conceded that S.M.R. did not in fact exist and was made up by M and R to defraud the plaintiff, but argued that the motion judge ought to have found that S.M.R. was plausibly a real person because it provided services similar to those provided by Delisle, which was a real person. That argument could not succeed for several reasons. First, the plausibility notion is limited to cases where the payee named on the cheque is not a real entity known to the drawer, but has a name similar to that of an actual person with whom the drawer has done business. In this case, the name S.M.R. bore no similarity to Delisle. Second, Delisle was not in fact a real creditor of the plaintiff, as it never provided services to the plaintiff, but rather was a tool of the fraud perpetrated by M and R. Third, no one responsible for running the plaintiff considered any of the cheques authorized by M. Therefore, no one at the plaintiff could say that the cheques were being issued to a known entity with whom the plaintiff had previous legitimate business dealings. Because S.M.R. was a non-existing person, the defendant could avail itself of the defence contained in s. 20(5) of the Act. It was unnecessary to decide whether S.M.R. was also a fictitious person.

APPEAL by the plaintiff from the judgment of Grace J., [2010] O.J. No. 5302, 2010 ONSC 4717 (S.C.J.) granting a motion for summary judgment and dismissing an action.

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, 140 D.L.R. (4th) 463, 203 N.R. 321, [1997] 2 W.W.R. 153, 82 B.C.A.C. 161, 27 B.C.L.R. (3d) 203, 66 A.C.W.S. (3d) 1127, EYB 1996-67134, J.E. 96-2218; [page562] Westboro Flooring and Décor Inc. v. Bank of Nova Scotia (2004), 2004 59980 (ON CA), 71 O.R. (3d) 723, [2004] O.J. No. 2464, 241 D.L.R. (4th) 257, 187 O.A.C. 357, 131 A.C.W.S. (3d) 703 (C.A.), consd

Other cases referred to

Bank of Nova Scotia v. Toronto Dominion Bank, 2001 8531 (ON CA), [2001] O.J. No. 1717, 200 D.L.R. (4th) 549, 145 O.A.C. 106, 105 A.C.W.S. (3d) 110 (C.A.)

Statutes referred to

Bills of Exchange Act, R.S.C. 1985, c. B-4, s. 20(2), (5)

Authorities referred to

Crawford, Bradley, The Law of Banking and Payment in Canada (Aurora: Canada Law Book, 2008) Falconbridge, John Delatre, Banking and Bills of Exchange, 6th ed. (Toronto: Canada Law Book, 1956)

Lincoln Caylor and Ranjan Agarwal, for plaintiff (appellant). Martin Greenglass, for defendant (respondent).

The judgment of the court was delivered by

LASKIN J.A.: --

A. Overview

[1] The appellant, Rouge Valley Health System, and the respondent, TD Canada Trust, were the innocent victims of a fraud orchestrated by a senior employee of Rouge Valley. The general question on this appeal is whether the motion judge erred in determining that Rouge Valley should bear the loss for that fraud.

[2] In brief, Uwe Marshner, a manager at Rouge Valley, caused his employer to pay nearly $700,000 worth of invoices rendered by Scarborough-York Mobile Rehabilitation, a made-up entity, for services that were never provided. Cheques were issued, payable to "S.M.R.", also a made-up entity. These cheques were deposited by Marshner's associate, Sheldon Reinsilber, at TD Canada Trust. Reinsilber put the cheques in an account for SMR and Associates, which was his sole proprietorship.

[3] When the fraud came to light, Rouge Valley sued TD Canada Trust for conversion. The bank maintained that it had a valid defence under s. 20(5) of the Bills of Exchange Act, R.S.C. 1985, c. B-4 (the "Act"), which provides that "[w]here the payee is a fictitious or non-existing person, the bill may be treated as payable to bearer". [page563]

[4] The parties agreed to resolve their dispute by motion for summary judgment. Rouge Valley moved for summary judgment on its claim and TD Canada Trust sought summary judgment dismissing that claim. The motion judge, Grace J., held that Scarborough-York (S.M.R.) was both a non-existing and a fictitious person. [See Note 1 below] On either basis, TD Canada Trust was not liable in conversion. Accordingly, he dismissed Rouge Valley's motion for summary judgment and granted TD Canada Trust's motion, summarily dismissing the claim against it.

[5] Rouge Valley argues three points on its appeal: (1) The motion judge erred in finding that Scarborough-York (and therefore S.M.R.) was non-existing because it was not a "real" person. Instead, the motion judge ought to have found that Scarborough-York was not non-existing because it was plausibly real. (2) The motion judge erred in finding that Scarborough-York was non-existing because its relationship with Rouge Valley was not "real". (3) The motion judge erred in finding that Rouge Valley had no intent to pay Scarborough-York.

[6] Rouge Valley's first two arguments are related, and challenge the motion judge's finding that S.M.R. was a non- existing person. Its third argument challenges the motion judge's finding that S.M.R. was a fictitious person. I would reject Rouge Valley's first two arguments and uphold the motion judge's finding that S.M.R. was a non-existing person under s. 20(5) of the Act. For that reason, I would dismiss Rouge Valley's appeal. It is therefore unnecessary to consider Rouge Valley's third argument and the motion judge's finding that S.M.R. was also a fictitious person.

B. The Legal Context

(a) Cheques payable to order, bearer cheques and s. 20(5) of the Bills of Exchange Act

[7] Under s. 20(2) of the Bills of Exchange Act, a cheque may be payable either to order or to bearer. A bank may validly [page564] negotiate a cheque payable to order only if the cheque is both delivered and endorsed. In contrast, a bank may validly negotiate a cheque payable to bearer if the cheque is simply delivered to the bank. Even if a bearer cheque has a forged or missing endorsement, the bank can negotiate it on delivery.

[8] In most cheque transactions, the payor (the drawer) issues a cheque on its bank account, which instructs its bank (the drawing bank) to pay the stated amount to the person named on the cheque (the payee). Ordinarily, if the cheque is made payable to a specific payee it is payable to order, and the payee can negotiate the cheque. The payee deposits the cheque at its own bank (the collecting bank), which collects the money from the drawing bank and credits the payee's account. A collecting bank will be liable in conversion if it credits the account of someone other than the intended payee.

[9] Conversion -- the wrongful interference with the goods of another -- is a tort of strict liability. That the wrongful interference may have been innocent does not afford the bank a defence. In the present case, Rouge Valley claims that TD Canada Trust wrongfully, albeit innocently, converted its money by negotiating the cheques in question.

[10] However, s. 20(5) of the Bills of Exchange Act provides banks with some reprieve from the harsh result of an innocent conversion. That section stipulates that a cheque payable to a specific payee that is either a fictitious or non-existing person may be treated as payable to bearer, not to order. The person delivering the cheque to the collecting bank (the bearer) is deemed to be the rightful payee and the bank is not liable for negotiating the cheque. A defence under s. 20(5) is available to both a drawing bank and a collecting bank such as, in this case, TD Canada Trust: see Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce, 1996 149 (SCC), [1996] 3 S.C.R. 727, [1996] S.C.J. No. 111, at para. 52.

[11] Section 20(5) thus protects a bank from fraud on the drawer committed by a third party, including an insider in the drawer organization. The section allocates the loss to the drawer, who typically is better positioned to discover the fraud or to insure against it: see Bank of Nova Scotia v. Toronto Dominion Bank, 2001 8531 (ON CA), [2001] O.J. No. 1717, 145 O.A.C. 106 (C.A.), at para. 15.

[12] In the present case, TD Canada Trust claims that it is not liable in conversion because S.M.R. is a non-existing and a fictitious person under s. 20(5). It submits that the loss is properly allocated to Rouge Valley. [page565]

C. The Fraud

(a) Marshner's position and authority at Rouge Valley

[14] Rouge Valley is an acute-care community hospital servicing patients in Toronto, Ajax and Pickering. Marshner was one of five program managers employed by Rouge Valley. He managed the hospital's mental health program. Though not an officer or director at Rouge Valley, Marshner nonetheless had significant responsibility. He oversaw a budget of more than $10 million and, on his own, could authorize the payment of invoices of up to $10,000. None of the invoices in question in this litigation were for more than $10,000.

[15] Rouge Valley used an automated system for issuing cheques. So, for example, when Marshner approved an invoice, an accounts payable clerk would input the amount and name of the supplier into the system, and a cheque containing mechanical signatures would be produced electronically. Marshner did not need anyone's approval to issue cheques of less than $10,000.

(b) The previous fraud involving Delisle Youth Services

[16] Delisle Youth Services is a community agency and a member of the United Way. It provides counselling and treatment programs for troubled youth. As well, it provides children with mental health problems access to group homes and their resources.

[17] Reinsilber was the executive director of Delisle until April 2003, when he was fired. For several years, Marshner and Reinsilber used Delisle to defraud Rouge Valley of over $1.3 million. Although that amount is not in issue in this litigation, the fraud involving Delisle provides an important context for the issues on this appeal.

[18] The fraud worked this way: Marshner established a vendor code for Delisle (which was later changed to S.M.R.) at Rouge Valley. Reinsilber sent Marshner a series of fraudulent invoices, each one for less than $10,000. The invoices were purportedly for mental health treatment services rendered to young Rouge Valley patients. In fact, Delisle never provided any services to Rouge Valley; however, Marshner authorized the payment of these invoices. Eventually, Reinsilber forwarded a portion of the money paid to Delisle back to Marshner. [page566]

(c) The fraud involving Scarborough-York and S.M.R.

[19] After Delisle fired Reinsilber, he and Marshner concocted a new plan to defraud Rouge Valley. Reinsilber wrote to Marshner at Rouge Valley to advise him that in the future a new company -- Scarborough-York Mobile Rehabilitation -- would be providing services to Rouge Valley. That letter, and the others that followed requesting payment, contained the Delisle logo but not the name Delisle or Delisle's address. Instead, they contained the acronym S.M.R. followed by the name Scarborough-York Mobile Rehabilitation, an address and a telephone number. Reinsilber signed each letter and asked Rouge Valley to send a cheque for the alleged service to S.M.R.

[20] Scarborough-York Mobile Rehabilitation did not exist; it was a made-up entity. S.M.R. also did not exist, though the acronym bore some resemblance to Reinsilber's sole proprietorship, SMR and Associates.

[21] In all, Marshner approved the payment of 78 cheques to S.M.R., each for less than $10,000. Reinsilber deposited the cheques in his account for S.M.R. and Associates at TD Canada Trust. He then gave Marshner the bulk of the funds. The aggregate fraud amounted to $688,511. The fraud was discovered in 2007 through the efforts of a diligent employee of Rouge Valley.

D. Did the Motion Judge Err in Determining that S.M.R. Was a Non-Existing Person Under s. 20(5) of the [Bills of Exchange Act](https://www.canlii.org/en/ca/laws/stat/rsc-1985-c-b-4/latest/rsc-1985-c-b-4.html)?

[22] A good deal of case law and commentary has considered the meaning of a non-existing person and a fictitious person for the purpose of s. 20(5) of the Bills of Exchange Act. The main authority remains the majority judgment of Iacobucci J. in Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce. There, with some modification, he approved of four propositions taken from John D. Falconbridge's Banking and Bills of Exchange, 6th ed. (Toronto: Canada Law Book, 1956), at pp. 468-69. The four propositions -- of which propositions 1 and 4 are relevant to my analysis -- are as follows: (1) If the payee is not the name of any real person known to the drawer, but is merely that of a creature of the imagination, the payee is non-existing, and is probably also fictitious. (2) If the drawer for some purpose of his own inserts as payee the name of a real person who was known to him but whom he knows to be dead, the payee is non-existing, but is not fictitious. [page567] (3) If the payee is the name of a real person known to the drawer, but the drawer 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 the payee is the name of a real person, intended by the drawer to receive payment, the payee is neither fictitious nor non-existing, notwithstanding that the drawer has been induced to draw the bill by the fraud of some other person who has falsely represented to the drawer that there is a transaction in respect of which the payee is entitled to the sum mentioned in the bill.

[23] Two important principles structure these propositions:

-- whether the payee is non-existing is a simple question of fact not depending on anyone's intention; [and]

-- whether the payee is fictitious depends upon the intention of the drawer of the instrument, that is, the drawer of a bill or cheque or the maker of a note.

[24] In the present case, for the purpose of Falconbridge's four propositions, the payee is S.M.R., and the drawer is Rouge Valley, the entity out of whose bank account the 78 cheques in issue were drawn: see Boma, at para. 59. Rouge Valley contends that this case falls under Falconbridge's fourth proposition: S.M.R is neither non-existing nor fictitious. TD Canada Trust contends that this case falls under proposition 1: S.M.R. is both non-existing and fictitious. I propose to deal with whether S.M.R. is a non-existing person because, in my view, it is, and that disposes of the appeal.

[25] On its face, S.M.R. seems to be, beyond doubt, a non- existing person. Falconbridge states that whether a person is non-existing is a question of fact. Rouge Valley conceded that Scarborough-York and S.M.R. did not exist, but were entities made up by Marshner and Reinsilber to defraud Rouge Valley. In other words, they were non-existing. And they certainly were not known to the drawer, Rouge Valley. Falconbridge's first proposition thus seems applicable. Moreover, the motion judge found as a fact that S.M.R. was non- existing. That finding is entitled to deference in this court.

[26] However, as I said earlier, in Boma, Iacobucci J. approved Falconbridge's four propositions with some modification, and it is this modification or gloss on which Rouge Valley relies -- a gloss that imports the notion of "plausibility". [page568]

[27] Boma Manufacturing Ltd. and Panabo Sales Ltd. were two small family-owned companies controlled by a husband and wife, Mr. and Mrs. Mange. Over a five-year period, their bookkeeper, Ms. Alm, defrauded the companies. Although she was not an officer, director or shareholder of either company, Ms. Alm had signing authority on cheques, and she signed or had a senior officer sign numerous cheques payable to a "J. Lam" or "J.R. Lam", neither of whom existed. She then deposited the cheques in her bank account at the CIBC. In the companies' action to recover their money, the bank relied on s. 20(5) of the Bills of Exchange Act. It claimed that the payees on the cheques were fictitious and non-existing.

[28] The majority of the Supreme Court of Canada held otherwise. Iacobucci J. considered whether "J. Lam" and "J.R. Lam" were non-existing or fictitious payees. He acknowledged that as the cheques were made payable not to actual persons associated with the companies, but to persons with whom the Manges had no dealings, Falconbridge's first proposition seemed to dictate that "J. Lam" and "J.R. Lam" were non-existing persons.

[29] However, the companies had had dealings with a subcontractor named Van Sang Lam. Iacobucci J. concluded Mr. Mange honestly believed that the cheques were being made out for an existing obligation to a real person known to them. He therefore held that the payees "J. Lam" and "J.R. Lam" were not non-existing and hence not fictitious. The cheques thus fell under Falconbridge's fourth proposition. He wrote, at paras. 60-61:

Many of the cheques, however, were made payable not to actual persons associated with the companies, but to "J. Lam" and "J. R. Lam". The appellants had no dealings with any persons of such names. According to the criteria set out in Falconbridge, supra, such a person would be categorized as "non-existing", and hence, fictitious. But in my view, it seems that Boris Mange was reasonably mistaken in thinking that "J. Lam" or "J. R. Lam" was an individual associated with his companies. Mange knew that one of the subcontractors retained by the companies was a "Mr. Lam". He did not specifically recall Lam's first name, which, incidentally, was Van Sang. However, when Mange approved the cheques to "J. Lam" and "J. R. Lam", he honestly believed that the cheques were being made out for an existing obligation to a real person known to the companies. The trial judge's comments in this regard were tantamount to a finding of fact, and were not disturbed on appeal; as these are concurrent findings of fact, this Court should not intervene.

Accordingly, the cheques made out to "J. Lam" and "J. R. Lam" also fall within the fourth category, and could not be treated by the CIBC as payable to bearer. Rather, the cheques were payable to order, and in order to be negotiable to the bank, delivery alone was not sufficient. Valid, non-forged endorsements were required. [page569]

[30] In his text, The Law of Banking and Payment in Canada (Aurora: Canada Law Book, 2008), Bradley Crawford summarizes the effect of Iacobucci J.'s gloss on Boma (at pp. 22-34):

[T]he law appears to be that if the name of the payee is a pure invention of the drawer of a cheque (or the maker of a note), the payee may be "non-existing" within the meaning of BEA, s. 20(5), but only if it is also true that the name is of a person having no real connection with the drawer's business, or semble, is not a name that plausibly might be identified by the drawer as being a real creditor of his business. (Emphasis in original)

[31] In the present case, Rouge Valley relies on the notion of plausibility to submit that although S.M.R. may in fact be a non-existing person, it is not in law, under s. 20(5), a non- existing person. In support of this submission, Rouge Valley makes two related arguments.

[32] The first argument is that the motion judge ought to have found Scarborough-York and therefore S.M.R. was plausibly a real person because it provided services similar to those provided by Delisle, which was a real person. The second argument is that even though Rouge Valley's relationship with S.M.R. may not have been "real", S.M.R. was not non-existing because Rouge Valley honestly believed that cheques were being made out for an existing obligation to an entity associated with Delisle, a real community agency with whom it did business.

[33] The motion judge rejected these arguments, and in my view, he was entirely correct in doing so. Rouge Valley's arguments fail for any one of at least three reasons.

[34] First, the gloss on Falconbridge based on the notion of plausibility is limited to cases where the payee named on the cheque is factually non-existent, in other words is not a real entity known to the drawer, but has a name similar to the name of an actual person with whom the drawer has done business. In those situations, the drawer might plausibly maintain that it believed it was writing a cheque to a real creditor of its business.

[35] Boma itself illustrates this limitation. "J. Lam" and "J.R. Lam" were creatures of Ms. Alm's imagination, but each bore a name similar to that of a real creditor of the companies, Van Sang Lam. Thus, the owner of the companies, Mr. Mange, could plausibly maintain that he honestly believed he was paying a real creditor of his business.

[36] This court's decision in Westboro Flooring and Décor Inc. v. Bank of Nova Scotia (2004), 2004 59980 (ON CA), 71 O.R. (3d) 723, [2004] O.J. No. 2464 (C.A.) also shows the limited reach of the notion of plausibility. There, the court was asked to decide whether a made-up entity, "Ottawa-Hull Carpet", was nonetheless not a [page570] non-existing person under s. 20(5) because the drawer, Westboro, believed it had been approving cheques to an existing supplier named "Terry Govas Ottawa-Hull Carpet Ltd.". This court upheld the trial judge's finding that "Ottawa-Hull Carpet" was not a non-existing payee. Simmons J.A. wrote, at para. 25, that "[e]ven 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."

[37] Here, the names Scarborough-York Mobile Rehabilitation and S.M.R., both admittedly made-up names, bear no similarity to the name of Rouge Valley's alleged real creditor, Delisle. Indeed, Rouge Valley has not even argued that in paying S.M.R., it intended to pay Delisle.

[38] The situation might be different if, for example, Rouge Valley did business with a supplier named M.R.S. and made a cheque to S.M.R. honestly but mistakenly thinking that it was paying for services M.R.S. had rendered. That, however, is not what occurred. To extend the notion of plausibility in the way Rouge Valley contends is antithetical to the principles of negotiability, certainty and finality that govern cheque transactions: see Boma, at para. 91.

[39] Second, Rouge Valley's arguments must fail because they rest on a false premise: that just as Van Sang Lam was a real creditor of the companies in Boma, Delisle was a real creditor of the hospital. However, Delisle was anything but a real creditor of Rouge Valley. It was a real agency, but it had never provided services to Rouge Valley. Instead, it was a tool of the fraud perpetrated by Marshner and Reinsilber. The motion judge put it this way in a passage with which I agree, and which by itself is fatal to Rouge Valley's position (at para. 71):

Second, in Boma the relationship between the intended payee and the drawer was a real one. Van Sang Lam was a supplier. There had been real transactions. There was, in other words a factual foundation for a finding that the drawer's intention to pay Van Sang Lam was "honest" and "reasonable" or at least "plausible". Here there is no such foundation. The entire "relationship" between Rouge Valley and Delisle was a façade. No services were rendered. No amounts were due. Ever. It seems to me there was a shocking systemic failure within Rouge Valley which allowed a middle level employee to perpetrate a fraud based on a relationship that had never existed. It affronts my view of common sense to suggest that this case is analogous to Boma because Delisle was the type of organization with whom Rouge Valley often partnered. The fact is it never partnered with Delisle. Surely any due diligence by someone in authority at Rouge Valley would have revealed that fact. (Emphasis in original) [page571]

[40] Third, as the trial judge noted in Boma, Mr. Mange, who ran the companies, actually considered the name of the payee when the cheques in question were drawn. The court could therefore find that he honestly believed he was paying a legitimate creditor of his business. Here, in contrast, no one responsible for running Rouge Valley considered any of the cheques authorized by Marshner. Therefore, no one at Rouge Valley could say that the cheques were being issued to a known entity with whom the hospital had previous legitimate business dealings.

[41] For these three reasons, I reject Rouge Valley's arguments. I would affirm the motion judge's finding that S.M.R. is a non-existing person under s. 20(5) of the Bills of Exchange Act. The purpose of this section is to protect banks from fraud on the drawer, even fraud committed, as in this case, by an employee of the drawer. As between the drawer and the collecting bank, s. 20(5) allocates the loss to the drawer who usually is better able to detect the fraud or insure against it. Allocating the loss to Rouge Valley is consistent with the purpose of s. 20(5).

[42] Because S.M.R. is a non-existing person, TD can avail itself of the defence contained in s. 20(5) of the Bills of Exchange Act. It is therefore unnecessary to address the question whether S.M.R. is also a fictitious person.

E. Conclusion

[43] The motion judge correctly decided that S.M.R. was a non-existing person under s. 20(5) of the Bills of Exchange Act and that, therefore, TD Canada Trust is not liable in conversion.

[44] I would dismiss Rouge Valley's appeal with costs fixed at $16,000, inclusive of disbursements and applicable taxes.

Appeal dismissed.

Notes

Note 1: The motion judge seems to have used the names Scarborough-York and S.M.R. interchangeably. Although this does not affect his analysis, the payee was S.M.R.