COURT OF APPEAL FOR ONTARIO
CITATION: Kayani v. Toronto-Dominion Bank, 2014 ONCA 862
DATE: 20141203
DOCKET: C58265, C58266
Hoy A.C.J.O., Epstein and Hourigan JJ.A.
BETWEEN
Raza Kayani LLP
Plaintiff/Respondent
and
The Toronto-Dominion Bank, Amaras Gem and Jewel
and Nithiyakalyaani Jewellers
Defendants/Appellant
AND
BETWEEN
Jack Sheldon Zwicker
Plaintiff/Respondent
and
The Toronto-Dominion Bank
Defendant/Appellant
Martin Greenglass, for the appellant
Martin Sclisizzi, for the respondents
Heard: November 5, 2014
On appeal from the judgment of Justice Susan Greer of the Superior Court of Justice, dated December 27, 2013, with reasons reported at 2013 ONSC 7967.
Hourigan J.A.:
Introduction
[1] The appellant, The Toronto Dominion Bank appeals the judgment of the trial judge awarding damages for conversion to the respondents, Raza Kayani LLP and Jack Sheldon Zwicker.
[2] The respondents commenced separate actions against the Bank. However, given the similar facts and legal issues between the two cases, the actions were heard together at trial and the appeals were also heard together in this court.
[3] For the following reasons, I conclude that the trial judge erred in law in finding that the Bank was liable in conversion to the respondents. I would allow the appeal, except as it relates to the counterclaim, and set aside the judgment below on the main action.
Facts
[4] Both actions arose out of a fraud perpetrated against the respondents, who are lawyers. The scheme worked as follows.
[5] The respondents were each retained to act on a rush commercial transaction on behalf of a purchaser and a finance company that was providing funding for the transaction. In each transaction, the vendor was identified as Nithiyakalyaani Jewellers, with an address of 1487 Gerrard Street East in Toronto.
[6] On the eve of the closing, the finance company provided each respondent with a counterfeit certified cheque to be deposited into their respective trust accounts for the purpose of funding the transaction. The finance company directed the respondents in writing to issue a trust cheque or obtain a bank draft made payable to Nithiyakalyaani Jewellers for the amount of the transaction.
[7] Mr. Zwicker and Kayani respectively released a trust cheque and a bank draft (the “instruments”) payable to Nithiyakalyaani Jewellers to their purchaser client, on the understanding that the client would hand deliver it to the vendor as payment for the goods’ being purchased.
[8] The instruments were deposited into an account the Bank maintained under the name Nithiyakalyaani Jewellers. The account had been opened by an individual named Alaudeen Shaik, who provided the Bank with a Master Business Licence issued by the Province of Ontario, indicating that he had registered, as a sole proprietorship, the name Nithiyakalyaani Jewellers.
[9] In essence, the fraud consisted of inducing the respondents to issue a trust cheque or obtain a bank draft on the strength of a counterfeit cheque deposited into their trust accounts. As part of the scheme, the fraudsters had appropriated the descriptive portion of the name and address of a corporation that had previously carried on business but was no longer doing so at the date of the fraud. That company was Nithiyakalyaani Jewellers Ltd., as opposed to the named payee, Nithiyakalyaani Jewellers.
[10] The respondents sued the Bank in negligence and conversion. At trial, the case proceeded only on the conversion allegation. The Bank counterclaimed for monies held in accounts maintained by its co-defendants, Nithiyakalyaani Jewellers and Amaras Gem and Jewel.
Decision of the Trial Judge
[11] The trial judge was satisfied that the Bank committed the tort of conversion. She noted that the tort is one of strict liability and that it was no defence that the Bank exercised the appropriate degree of care in negotiating the instruments or that the respondents may have been negligent in the manner in which they handled the transactions.
[12] The focus of the trial judge’s analysis was whether the Bank could avail itself of the defence in s. 20(5) of the Bills of Exchange Act, R.S.C. 1985, c. B-4, (the “Act”) which provides that “where the payee is a fictitious or non-existing person, the bill may be treated as payable to the bearer.” Pursuant to s. 20(2) of the Act, where an instrument is payable to the bearer, a bank may validly negotiate the instrument delivered to the bank, and the bank has no liability for its negotiation.
[13] The trial judge found that the payee was not fictitious as both Mr. Zwicker and Kayani made their instruments payable to Nithiyakalyaani Jewellers, which they believed was an existing entity, and which was an existing entity at the time the instruments were negotiated.
[14] The trial judge went on to rely upon Rouge Valley Health System v. TD Canada Trust, 2012 ONCA 17, 108 O.R. (3d) 241, for the proposition that a payee will not be found to be non-existing if the payee name is similar to the name of an actual person, such that the drawer of an instrument might plausibly maintain that it believed it was paying a real entity.
[15] The trial judge found that Mr. Zwicker and Kayani honestly believed that the instruments were being made out for an existing obligation to a real company, despite the fact that the name of the payee was not precisely accurate as it did not include the abbreviation “Ltd.”. They were fraudulently induced to believe these were real transactions. The trial judge concluded, therefore, that the defence in s. 20(5) of the Act was not available to TD, making it liable for damages in conversion.
Positions of the Parties
[16] The appellant submits that the trial judge made five significant errors.
[17] First, the trial judge erred in failing to find that the payee was non-existing pursuant to s. 20(5) of the Act. The appellant submits that the payee must be non-existing because the respondents had no knowledge of Nithiyakalyaani Jewellers Ltd. at the time the instruments were created.
[18] Second, the trial judge erred in failing to find that a bank is entitled to assume the drawer of an instrument intended that the named payee receive the proceeds of the instrument. The Bank cannot be faulted for effecting payment to an entity that is a licensed business and whose name matches the name of the payee.
[19] Third, the trial judge erred in failing to find that the payee was fictitious pursuant to s. 20(5) of the Act. Since the respondent lawyers followed their client’s directions, the client (i.e. the fraudster) was the true maker of the instruments. Accordingly, it is the client’s intention – that the instruments be paid to Nithiyakalyaani Jewellers – that governs.
[20] Fourth, the trial judge erred in failing to find that an essential element of the tort of conversion was not established, namely, that the Bank dealt with the plaintiff’s chattel in a manner inconsistent with the respondents’ right of possession. Here, the Bank did as the respondents asked and, therefore, acted in a manner consistent with the respondents’ right of possession.
[21] Fifth, in her judgment on the counterclaim, which was made on consent, the trial judge improperly allocated the damages as between Mr. Zwicker and Kayani.
[22] The respondents take the position that the trial judge made no error in concluding that the elements of the tort of conversion had been established and that the payee was neither non-existing nor fictitious.
[23] The respondents submit that the Bank, as the collecting financial institution, is liable for conversion if it credited the instruments to someone other than the intended payee. Therefore, the issue is who the respondents, as the drawers of the instruments, intended to pay.
[24] According to the respondents, the trial judge made clear findings of fact on this issue, which are subject to review on the standard of palpable and overriding error. In particular, she found that the respondents believed an entity called Nithiyakalyaani Jewellers (with or without Ltd.) existed at the address where Nithiyakalyaani Jewellers Ltd. had previously operated. On this basis, the respondents submit that it can be inferred that Nithiyakalyaani Jewellers Ltd. was the entity the respondents intended to pay.
[25] Further, the respondents submit that the trial judge correctly concluded that the payee was not fictitious, as both Mr. Zwicker and Kayani believed the payee was an existing entity.
[26] As for the counterclaim, the respondents submit that the trial judge simply made a technical error that is of no consequence, and therefore, the appeal of the judgment with respect to the counterclaim should be dismissed.
Analysis
(i) Legal Principles
[27] 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”: Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce, 1996 CanLII 149 (SCC), [1996] 3 S.C.R. 727, at para. 31; 373409 Alberta Ltd. (Receiver of) v. Bank of Montreal, 2002 SCC 81, [2002] 4 S.C.R. 312, at para. 8.
[28] An authorized interference is not wrongful and, therefore, cannot amount to conversion. As Major J. stated in 373409 Alberta Ltd., at para. 9,
An owner’s right of possession includes the right to authorize others to deal with his or her chattel in any manner specified. As a result, dealing with another’s chattel in manner authorized by the rightful owner is consistent with the right of possession, and does not qualify as wrongful interference.
[29] Section 20(5) of the Act protects a bank from fraud committed by a third party on the drawer of an instrument. Pursuant to that section, an instrument payable to a payee that is either non-existing or fictitious may be treated as payable to the bearer and not to order. The bearer is deemed to be the rightful payee and, consequently, the bank is not liable for negotiating the instrument: Rouge Valley, at para. 10.
[30] Given that the tort is one of strict liability, banks sued in conversion frequently rely upon the defence available in s. 20(5). Not surprisingly, the critical issue in such cases is whether a payee is non-existing or fictitious. Justice Laskin summarized the case law on this point in Rouge Valley, at paras. 22-23:
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.
(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.
Two important principles structure these propositions:
- Whether the payee is non-existing is a simple question of fact not depending on anyone's intention.
*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.
[31] Justice Laskin then explained, at para. 26, that Iacobucci J.’s reasons in Boma imported the notion of “plausibility” as a modification to or “gloss” on the four propositions. He elaborated on the plausibility doctrine, at para. 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:
[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]: at p. 22-34.
(ii) Non-existing Payee
[32] The trial judge concluded, at para. 72, that “in my view this case comes surely within Falconbridge’s fourth proposition. Both Mr. Zwicker and Kayani saw their transactions as legitimate. I have found that the tort of conversion applies.”
[33] In my view, the trial judge erred in failing to find that the payee of the instruments was a non-existing person and thus concluding that this case comes within Falconbridge’s fourth proposition. I reach this conclusion for the following reasons.
[34] With respect, the trial judge did not conduct a proper analysis of the respondent’s knowledge of Nithiyakalyaani Jewellers Ltd. at the time the instruments were drawn.
[35] In an agreed statement of facts filed at trial, both Mr. Zwicker and Junaid Kayani, the principal of Kayani, admitted that, prior to the matters in issue, they had no dealings with and no knowledge of Nithiyakalyaani Jewellers Ltd. or Nithiyakalyaani Jewellers.
[36] Mr. Zwicker conducted a Canada 411 search prior to closing but all he knew as a result of that search was that “there was a business with that name at the address, whether incorporated or not.” He did not keep a copy of the search. According to Mr. Zwicker, he did not direct his mind to whether it was a limited company and, at the time of preparing the instrument, it was not significant to him whether the payee was incorporated.
[37] Mr. Kayani candidly testified that, “I’m not going to say that my cheque was intended to be paid to Nithiyakalyaani Limited. My cheque was clearly payable to Nithiyakalyaani Jewellers and upon instruction of the financing corporation.” He went on to state that, at the time of drawing the instrument, he did not know whether Nithiyakalyaani Jewellers was a sole proprietorship or an incorporated entity.
[38] Mr. Kayani also testified that he relied upon the invoice provided to him by the finance company to support his assertion that his bank draft should have gone to Nithiyakalyaani Jewellers Ltd. However, the name on that invoice was Nithiyakalyaani Jewellers and not Nithiyakalyaani Jewellers Ltd.
[39] Based on this evidence, the respondents could not possibly establish that “the payee is the name of a real person, intended by the drawer to receive payment”, as required to bring themselves within Falconbridge’s fourth proposition.
[40] As Laskin C.J. noted in Royal Bank of Canada v. Concrete Column Clamps (1961) Ltd., 1976 CanLII 192 (SCC), [1977] 2 S.C.R. 456, at p. 472, in Falconbridge’s fourth proposition, the drawer of the instrument must have knowledge of the payee, “at least in the sense of the awareness of the payee and who he is.”
[41] There is no evidence that the respondents knew of the existence of Nithiyakalyaani Jewellers Ltd. at the time the instruments were drafted. At its highest, the evidence establishes that the respondents knew of an entity they believed operated at the address listed on the invoice and in the Canada 411 directory. Neither respondent testified that they had actual knowledge of Nithiyakalyaani Jewellers Ltd. until after the fraud was discovered.
[42] The respondents submit that the intended payee was Nithiyakalyaani Jewellers Ltd. However, this was not the name of the payee on the respondents’ instruments. The trial judge appears to have relied on the plausibility doctrine to find that the payee was not non-existing, although she makes no explicit statement to that effect. Under that doctrine, an incorrectly named payee will not be found to be non-existing if it could plausibly be identified by the drawer of the instrument as being a real creditor.
[43] However, resort to the plausibility doctrine does not negate the requirement that the drawer must have knowledge of the payee. Justice Laskin described the knowledge requirement in Rouge Valley, at para. 34:
[T]he gloss on Falconbridge based on the notion of plausibility is limited to cases where the payee named on the cheque is factually non-existing, 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. [Emphasis added.]
[44] Here, the respondents had no previous business relationship with Nithiyakalyaani Jewellers Ltd. Therefore, it cannot be said that when they prepared the instruments naming Nithiyakalyaani Jewellers as the payee, they plausibly believed they were paying Nithiyakalyaani Jewellers Ltd. How could they when they did not even know that company existed until after the fraud was discovered?
[45] This situation is factually distinct from that in Boma, where the drawer had an existing business relationship with a party with a name similar to the payee and had actually considered the name of the payee when the instruments were drawn.
[46] The respondents have not pointed to a single case where the plausibility doctrine or Falconbridge’s fourth proposition has been found to apply where the drawer of the instrument discovered the existence of the proper payee only after the fraud had been disclosed.
[47] For these reasons, I conclude that the trial judge erred in finding that this case fits within Falconbridge’s fourth proposition. The payee is not the name of any real person known to the respondents at the time they drew the instruments. The payee is, therefore, non-existing. Accordingly, this case fits within Falconbridge’s first proposition and the defence in s. 20(5) of the Act is available to the Bank.
[48] Given my finding that Nithiyakalyaani Jewellers is a non-existing entity, it is unnecessary to consider the other arguments raised by the Bank regarding the trial judge’s reasons on the main action. It is also unnecessary to consider the Bank’s counterclaim, as it is only relevant in the event the main appeal was dismissed.
Disposition
[49] I would allow the appeal on the main action, set aside the judgment and dismiss the actions against the Bank.
[50] The parties agreed that, if the appeal is allowed, the Bank is entitled to $18,749.31 for the costs of the appeal and to costs of the trial in the same amount fixed by the trial judge in favour of the respondents: $47,500 for each action. I would fix costs in accordance with this agreement.
Released: December 3, 2014 “AH”
“C. William Hourigan J.A.”
“I agree Alexandra Hoy A.C.J.O.”
“I agree Gloria Epstein J.A.”