Service Mold + Aerospace Inc. et al. v. Khalaf et al.

[Indexed as: Service Mold + Aerospace Inc. v. Khalaf]

Ontario Reports Court of Appeal for Ontario Doherty, Paciocco and Zarnett JJ.A. May 7, 2019

146 O.R. (3d) 135 | 2019 ONCA 369

Case Summary

Civil procedure — Summary judgment — Partial summary judgment

Plaintiffs defrauded by employee who used forged cheques and made unauthorized payroll payments into her bank account. Plaintiffs suing bank on basis that it was strictly liable and liable in negligence for cheque fraud and liable in negligence for payroll fraud. Bank raising limitations defence and also relying on business banking agreement that contained verification clause and limited liability clause. Motion judge erring in granting plaintiffs partial summary judgment based on strict liability claim relating to cheque fraud. Motion judge failing to give sufficient weight to risk of overlap in evidence when she bifurcated cheque fraud and payroll fraud claims.

Limitations — Discoverability

Motion judge erring by conducting purely subjective inquiry rather than modified objective inquiry when determining when claim ought to have been discovered.

Facts

The plaintiffs were defrauded by their bookkeeper, K, who used forged cheques (the "cheque fraud") and also made unauthorized payroll payments into her bank account (the "payroll fraud"). K was terminated in 2012 for unrelated reasons. In 2015, the plaintiffs received information that K had been fired by her subsequent employer for forging cheques. The plaintiffs commenced an action against the defendant bank, claiming that it was strictly liable under s. 48 of the Bills of Exchange Act and liable in negligence for the cheque fraud and liable in negligence for the payroll fraud. The defendant raised a limitations defence and relied on a business banking agreement ("BBA") that contained a verification clause and a limited liability clause. The plaintiffs brought a successful motion for partial summary judgment based on its strict liability claim relating to the cheque fraud. The motion judge found that there was no genuine issue to be tried on the BBA defence or the limitation defence to the cheque fraud. The defendant appealed.

Held: The appeal should be allowed.

Decision

Overview

[1] The respondent corporations, Service Mold + Aerospace Inc. and SMI Ventilation Products Inc., were defrauded by their bookkeeper, Ms. Nada Khalaf. She committed the fraud in two distinct ways. She used forged cheques (the "cheque fraud") and made additional unauthorized payroll payments into her bank account (the "payroll fraud"). The respondent corporations sued the appellant, the Toronto-Dominion Bank, claiming the appellant bank was strictly liable and liable in negligence for the cheque fraud, and liable in negligence for the payroll fraud.

[2] The appellant bank defended both claims based on (1) a business banking agreement (the "BBA") containing a verification clause and a limited liability clause that it claimed the respondent corporations had signed (the "BBA defence"); and (2) the Limitations Act, 2002, S.O. 2002, c. 24, Sch. B (the "limitations defence"). These were the sole defences to the strict liability claim relating to the cheque fraud; it denied negligence on the payroll fraud claim.

[3] The respondent corporations brought a successful motion for partial summary judgment based on its strict liability claim relating to the cheque fraud. The motion judge found that there was no genuine issue to be tried on the appellant bank's BBA defence or its limitation defence to the cheque fraud.

[4] The appellant bank appeals, claiming (1) the motion judge erred in proceeding with a motion for partial summary judgment in the circumstances of the case, (2) misapplied the test for discoverability relating to the limitations defence and (3) erred in finding that there was no evidence to support the BBA defence.

[5] For the reasons that follow, the appeal is allowed.

The Material Facts

[6] The respondent corporations are related manufacturing companies operated by Mr. Martin Schuurman. Between 2009 and 2012, they were defrauded, along with a third company not involved in these proceedings, by Ms. Khalaf for close to $1 million.

[7] In 2012, Ms. Khalaf was terminated for unrelated reasons. In 2015, the respondent corporations received information that Ms. Khalaf had been fired from her subsequent employer for forging cheques. This led the respondent corporations to conduct an examination that uncovered both the cheque fraud and the payroll fraud that she had committed against them.

[8] The respondent corporations sued Ms. Khalaf. They also sued the appellant bank. With respect to the cheque fraud, the respondent corporations claimed that the appellant bank was strictly liable under the Bills of Exchange Act, R.S.C. 1985, c. B-4, s. 48, and liable for negligently failing to review the cheques. The payroll fraud claim was based exclusively in negligence. The respondent corporations claimed, among other particulars, that the appellant bank breached its duty of care in negligently transferring the purported payroll funds into Ms. Khalaf's account.

[9] The appellant bank sought to defend both claims based on the BBA defence and the limitations defence. With respect to the negligence claims, it also denied it breached a duty of care.

[10] On November 2, 2016, the respondent corporations moved for partial summary judgment on their strict liability claim relating to the cheque fraud. The appellant bank agreed that the provisions of the Bills of Exchange Act applied and that unless its BBA defence or its limitations defence succeeded in relation to the cheque fraud claim, it would be strictly liable for the cheque fraud in the amount the respondent corporations were claiming.

[11] The partial summary judgment motion was heard on April 25, 2017. On October 20, 2017, the motion judge ruled that there was no genuine issue to be tried relating to the appellant bank's BBA defence to the cheque fraud claim, because there was no evidence that the respondent corporations had signed a BBA containing an account verification or limited liability clause. She also held that she could not determine the crucial discoverability issue relating to the limitations defence to the cheque fraud claim without viva voce evidence, and so she ordered a mini-trial on the issue of discoverability.

[12] That mini-trial was held on February 20 and 21, 2018. On September 12, 2018, she granted partial summary judgment to the respondent corporations in the amount of CDN$342,333.68 and US$246,094.74. She found that the limitation period did not begin to run until early 2015, and had not passed when the statement of claim was issued.

Analysis

A. The Motion Judge Should Not Have Granted Partial Summary Judgment

[13] The standard of review in an appeal from a summary judgment ruling, including partial summary judgment rulings, was described concisely in Baywood Homes Partnership v. Haditaghi (2014), 120 O.R. (3d) 438, 2014 ONCA 450, at para. 30:

In Hryniak v. Mauldin, 2014 SCC 7, [2014] 1 S.C.R. 87, at para. 81, Karakatsanis J. ruled that the exercise of powers under the new summary judgment rule attracts appellate deference. The question as to whether there is a genuine issue for trial is a question of mixed fact and law; in the absence of an extricable error in principle, or palpable and overriding error, this determination should not be disturbed on appeal.

[14] The principles that guide whether partial summary judgment is appropriate are, however, more complex than those that apply to summary judgment motions generally. In Hryniak v. Mauldin, 2014 SCC 7, [2014] 1 S.C.R. 87, at para. 60, Karakatsanis J. recognized that partial summary judgment may "run the risk of duplicative proceedings or inconsistent findings of fact" at trial. There is also the risk that partial summary judgment can frustrate the Hryniak objective of using summary judgment to achieve proportionate, timely and affordable justice. If used imprudently, partial summary judgment can cause delay, increase expense and increase the danger of inconsistent findings at trial made on a more complete record: Butera v. Chown, Cairns LLP (2017), 137 O.R. (3d) 561, 2017 ONCA 783, at paras. 29-33. These risks, which require careful consideration by motion judges, were known before Hryniak and Butera, as illustrated by this court's decision in Corchis v. KPMG Peat Marwick Thorne, at para. 3. For this reason, while partial summary judgment has its place, it "should be considered to be a rare procedure that is reserved for an issue or issues that may be readily bifurcated from those in the main action and that may be dealt with expeditiously and in a cost effective manner": Butera, at para. 34.

[15] In this view, the motion judge erred in ordering partial summary judgment in the circumstances of this case. In so doing, the motion judge committed an extricable error in principle, as well as palpable and overriding error.

[16] In her initial decision of October 20, 2017, the motion judge asked whether it was appropriate to grant partial summary judgment, but referenced only the standards for summary judgment, without overtly addressing partial summary judgment considerations.

[17] In her September 12, 2018 decision, the motion judge explained why, in her view, partial summary judgment was appropriate. After citing the relevant principles from Butera, including the cautions about partial summary judgment, she found the cheque fraud and payroll fraud claims to be distinct, representing different causes of action. She noted that she did not hear evidence during the motion of the payroll fraud, and said that there was "no indication that any additional evidence on the cheque fraud would be available at trial". She concluded that partial summary judgment could eliminate a single claim enabling the subsequent trial to be shorter and more focused, and that this could encourage settlement. She then said with respect to the risk of inconsistent findings:

In my view, the commencement of the limitation period in respect of the payroll fraud claim may or may not be a different date than the commencement of the limitation period in the cheque fraud claim. As I said, I heard extensive evidence on the cheque fraud. I did not hear similar evidence on the payroll fraud. Although there may be some overlap in the evidence, there were possibly different office procedures respecting the payroll fraud and possibly different considerations as to when the plaintiffs ought to have been aware of the loss.

[18] In this view, the motion judge erred in principle when evaluating the risk of overlap in the evidence. She proceeded to partial summary judgment because she had not heard evidence about the payroll fraud during the summary judgment motion, there was "no indication that any additional evidence on the cheque fraud would be available at trial", there "may or may not be a different date" for commencement of the relevant limitation periods, and there would only "possibly [be] different office procedures respecting the payroll fraud and possibly different considerations as to when the plaintiffs ought to have been aware of the loss". Her orientation was wrong. In effect, she looked to see whether overlap had been demonstrated. To the contrary, she should not have proceeded to partial summary judgment unless she was satisfied affirmatively that the issues before her could readily be bifurcated without causing overlap that could lead to inefficient duplication or a material risk of inconsistent findings or outcomes.

[19] She also made palpable errors in her reasoning. The fact that she heard no evidence of the payroll fraud during the partial summary judgment motion is, without more, uninstructive on whether she would be apt to hear evidence that would be relevant to the limitation period for the cheque fraud claim during the payroll fraud trial.

[20] More importantly, she gave insufficient weight to the risk of overlap in the evidence relating to the respective limitations defences. For example, the limitations defences to each claim engaged the office procedures in place, and required expert evidence that could be furnished by the same expert. Deciding the issue in respect of one claim while leaving it open on the other creates the very risk of inconsistency that is to be avoided.

[21] Finally, and most critically, the motion judge appears to have failed to recognize that the BBA defence was pleaded in response to both claims, not just the cheque fraud. As the BBA defence was left open on the payroll claim, the risk of a different result went without consideration by the motion judge.

[22] Together, these palpable errors are overriding given their impact.

[23] This case is also illustrative of the delay that partial summary judgment entails. Through no fault of anyone, the summary judgment motion has delayed the trial by close to two years, leaving aside the seven months it has taken to hear the appeal. The motion judge spent over 12 months deliberating in order to write two decisions, a significant expenditure of judicial resources. The delay was predictable and, in this view, not given adequate consideration, particularly when the motion judge came to appreciate after the April 25, 2017 hearing that the summary judgment motion would require the scheduling, conduct and determination of a mini-trial before the trial itself would move forward.

B. The Motion Judge Misapplied the Test for Discoverability

[24] Although the foregoing is sufficient to determine the appeal, it is important to say something about the motion judge's treatment of the test for discoverability.

[25] The two-year limitation period that applies in this case begins to run when the claim is discovered within the meaning of the Limitations Act. A claim is discovered when the plaintiff has the knowledge described in s. 5(1)(a), or when a reasonable person as described in s. 5(1)(b) ought to have had that knowledge. The material section in this case is s. 5(1)(b). It says:

5(1) A claim is discovered on the earlier of,

(b) the day on which a reasonable person with the abilities and in the circumstances of the person with the claim first ought to have known of the matters referred to in clause (a).

[26] Section 5(1)(b) establishes a "modified objective test". It seeks to make an objective determination by inquiring what a reasonable person ought to have known, but it imbues the hypothetical reasonable person with the subjective "abilities and . . . circumstances of the person with the claim".

[27] Here, the motion judge held that a reasonable person with the abilities and in the circumstances of Mr. Schuurman "first ought to have known of the loss suffered by the plaintiffs when . . . alerted to the allegations of fraud brought against Ms. Khalaf by a subsequent employer. That was early 2015", meaning that the limitation period had not passed when the statement of claim was issued.

[28] In appealing this finding, the appellant bank focused primarily on its claim that the motion judge erred in principle by using Mr. Schuurman's abilities and circumstances, instead of those of the corporations. It argues that since the claim belongs to the corporate plaintiffs, the s. 5(1)(b) test should have focused on their abilities and circumstances, not Mr. Schuurman's.

[29] The court need not resolve this issue because, in this view, the motion judge clearly erred in applying the modified objective test by conducting a purely subjective inquiry. Rather than imbuing the hypothetical reasonable person with the abilities and circumstances of Mr. Schuurman, she imparted on that person the attitudes and practices of Mr. Schuurman, thereby defeating the objective reasonableness inquiry.

[30] She said:

The reasonable person standard is to be applied taking into account the "abilities" and the "circumstances of the person with the claim". It seems to me that when the "reasonable person" standard in the context of s. 5(1)(b) is applied in this case, the circumstances of Mr. Schuurman include the organization of his business at the time of the fraud. The organization of the business, and particularly the bookkeeping part of that business, lacked a segregation of duties. Without a segregation of duties as described by Ms. Grogan, the plaintiffs were vulnerable to bookkeeper fraud. To put the analysis another way, the "abilities and circumstances'" of Mr. Schuurman included his overly trusting, perhaps gullible nature and his resultant vulnerability.

[31] First, an issue in the case was whether the respondent corporations failed to know what they ought to have known, because the bookkeeping part of their business was not monitored as it reasonably should have been. The motion judge begged that question by assuming that a reasonable person would have the same bookkeeping practices as the respondent corporations had. Simply put, in identifying the "circumstances of the person" that the reasonable person will share with the plaintiff, it is an error in principle to infer that the reasonable person would conduct itself in the same way that the plaintiff did. To do so is to eviscerate the objective component of the test. That is what the motion judge did here.

[32] Second, s. 5(1)(b) is about knowing what one ought to know. In context, the reasonable person component of s. 5(1)(b) serves to ensure that the plaintiff acted with reasonable levels of prudence and attention in attending to the risk of injury, loss or damage. Because the objective component of the test is modified, the degree of prudence and attention that can reasonably be expected will vary among persons with claims, according to their abilities and circumstances -- things such as level of intelligence, education, experience, resources, health, power imbalances, dependence and situational pressures or distractions that might bear on the ability to appreciate what is happening. It is imperative to remember, however, notwithstanding that the term "abilities" may be wide when viewed in isolation, s. 5(1)(b) requires that once material characteristics are attributed to the reasonable person, that hypothetical person will remain reasonable. If the hypothetical person is imbued with unreasonable imprudence or inattention the objective component of the test is defeated, and only one result can obtain.

[33] In this view, that is the effect of positing a reasonable person who has an "overly trusting, perhaps gullible nature". Where a person has the ability to be less trusting and less gullible, being overly trusting and gullible are not "abilities or circumstances". They are attitudes or tendencies that, when manifest, could properly be considered to be indicia of unreasonableness.

[34] In this view, the motion judge erred in applying the modified objective test in s. 5(1)(b).

C. The Court Need Not Decide Whether the BBA Finding Was Made in Error

[35] The determinations already made are sufficient to dispose of the appeal and provide sufficient guidance going forward. Since the question of whether the companies signed a BBA containing a verification clause and/or limited liability clause may be litigated again on what could be a different record, the court chooses not to consider this ground of appeal.

Conclusions

[36] The appeal is allowed and the partial summary judgment is set aside. As agreed between the parties, the costs order of the motion judge is set aside. The court orders costs to the appellant bank in the summary judgment motion of $50,000, inclusive of applicable taxes and disbursements, and $25,000 costs on this appeal.

Appeal allowed.

End of Document