373409 Alberta Ltd. (Receiver of) v. Bank of Montreal, [2002] 4 S.C.R. 312, 2002 SCC 81

Bank of Montreal Appellant

v.

Ernst & Young Inc., in its capacity as Receiver and Manager

of 373409 Alberta Ltd. and Province of Alberta Treasury Branches Respondents

Indexed as: 373409 Alberta Ltd. (Receiver of) v. Bank of Montreal

Neutral citation: 2002 SCC 81.

File No.: 28607.

2002: October 1; 2002: December 12.

Present: Gonthier, Iacobucci, Major, Bastarache, Binnie, Arbour and LeBel JJ.

on appeal from the court of appeal for Alberta

Banks and banking operations — Bills of exchange — Conversion — Sole shareholder and directing mind of A and B corporations altering cheque payable to A by adding B as a payee — Bank accepting unendorsed cheque for deposit in B’s account — Bank crediting B’s account and shareholder later withdrawing funds — Whether Bank liable in conversion.

L was the sole shareholder, director and officer of two corporations, A and B. L received a cheque payable to A, but altered the cheque by adding B as a payee. L did not endorse the cheque and deposited the altered cheque into B’s account at the appellant Bank. The Bank credited B’s account with the proceeds of the cheque and the funds were later withdrawn by L. A subsequently went into liquidation, and its Receiver and Manager brought an action in conversion against the Bank for having accepted an unendorsed cheque for deposit into B’s account. The trial judge held that the Bank was liable in conversion and could not avail itself of the defence provided by s. 165(3) of the Bills of Exchange Act. A majority of the Court of Appeal upheld the decision.

Held: The appeal should be allowed.

The issue in this case is not whether A transferred its title in the cheque to B, but rather whether the Bank dealt with the cheque on the authority of A. A lending institution’s liability in conversion is predicated upon finding both that payment upon the cheque was made to someone other than the rightful holder of the cheque, and that such payment was not authorized by the rightful holder. If either of these criteria is not satisfied, there is no tort. Here, A, through L, authorized the Bank, as it was entitled to do, to deposit the cheque’s proceeds into B’s account. As a result, the Bank did not wrongfully interfere with A’s cheque, as it did not deal with that cheque in a manner inconsistent with A’s instructions. Consequently, the Bank is not liable in conversion to A’s Receiver and Manager for the proceeds of the cheque. The impropriety of A’s diversion of funds from its creditors did not undermine L’s authority to deal with those funds on behalf of A.

Cases Cited

Referred to: Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce, 1996 149 (SCC), [1996] 3 S.C.R. 727; Toronto-Dominion Bank v. Dauphin Plains Credit Union Ltd. (1992), 1992 8544 (MB CA), 98 D.L.R. (4th) 736; Lennard’s Carrying Co. v. Asiatic Petroleum Co., [1915] A.C. 705; Canadian Dredge & Dock Co. v. The Queen, 1985 32 (SCC), [1985] 1 S.C.R. 662.

Statutes and Regulations Cited

Bills of Exchange Act, R.S.C. 1985, c. B-4, ss. 59(3), 165(3).

Authors Cited

Bowers, Renzo D. A Treatise on the Law of Conversion. Boston: Little, Brown, 1917.

Crawford and Falconbridge: Banking and Bills of Exchange: A Treatise on the Law of Banks, Banking, Bills of Exchange and the Payment System in Canada, vol. 2, 8th ed. by Bradley Crawford. Toronto : Canada Law Book, 1986.

Grubb, Andrew, ed. The Law of Tort. London: Butterworths LexisNexis, 2002.

APPEAL from a judgment of the Alberta Court of Appeal (2001), 198 D.L.R. (4th) 40, 92 Alta. L.R. (3d) 280, 277 A.R. 211, 13 B.L.R. (3d) 165, [2001] 7 W.W.R. 638, [2001] A.J. No. 341 (QL), 2001 ABCA 76, affirming a decision of the Court of Queen’s Bench. Appeal allowed.

James K. McFadyen, for the appellant.

Douglas N. Tkachuk and Kelsey Becker, for the respondents.

The judgment of the Court was delivered by

1 Major J. — The outcome of this appeal depends on whether the appellant Bank of Montreal (the “Bank”) by itself or with others acted in any way to cause financial loss to the respondents. As the appellant Bank acted with proper authority, the answer is no. The appeal is allowed with costs.

I. Facts

2 The facts are not in dispute. Douglas Lakusta was the sole shareholder and directing mind of both 373409 Alberta Ltd. (“373409”) and Legacy Holdings Ltd. (“Legacy”). The events that give rise to this action occurred after 373409 entered into a General Security Agreement with the respondent Province of Alberta Treasury Branches, but before the respondent Ernst & Young Inc. was appointed as 373409’s Receiver and Manager.

3 Lakusta received a cheque payable to 373409 for the sale of an automobile to a bona fide customer, Lea Sanderson. Lakusta altered the cheque by adding “/Legacy” so that the payee read “373409 Alberta Ltd./Legacy”. He deposited the altered cheque into Legacy’s account at the appellant Bank. The cheque was not endorsed. The Bank credited Legacy’s account with the proceeds of the cheque, and the funds were later withdrawn by Lakusta.

4 373409 subsequently went into liquidation, and its Receiver and Manager brought the present action in conversion against the Bank for having accepted for deposit 373409’s unendorsed cheque into Legacy’s account.

II. Judicial History

5 The Alberta Court of Queen’s Bench held that the Bank was liable in conversion to the Receiver and Manager of 373409 for having credited Legacy’s account with the proceeds of the cheque without the endorsement and negotiation of the cheque by 373409 in accordance with the provisions of the Bills of Exchange Act, R.S.C. 1985, c. B-4 (the “Act”). The trial judge also held that the Bank could not avail itself of the defence provided by s. 165(3) of the Act since the cheque was not deposited into the account of a “person” within the meaning of that section.

6 A majority of the Alberta Court of Appeal dismissed the appeal ((2001), 2001 ABCA 76, 198 D.L.R. (4th) 40). Girgulis J. (ad hoc) (McClung J.A. concurring) agreed with the reasons of the trial judge, and held that the Bank was liable in conversion and could not avail itself of the defence provided by s. 165(3) of the Act. In dissent, Conrad J.A. held that the Bank was not liable in conversion because the deposit was made by a person entitled to possession and having authority to deal with the cheque, notwithstanding the lack of formal endorsement.

III. Issues

7 1. Is the Bank liable in conversion to the Receiver and Manager of 373409 for having deposited the proceeds of the cheque into Legacy’s account, as authorized by Lakusta, the sole shareholder and directing mind of 373409?

2. If so, can the Bank avail itself of the defence provided by s. 165(3) of the Act?

IV. Analysis

A. The Tort of Conversion

8 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 149 (SCC), [1996] 3 S.C.R. 727, per Iacobucci J., at para. 31. It has long been recognized that an action in conversion may be brought by the rightful holder of a cheque against a wrongful dispossessor: Crawford and Falconbridge: Banking and Bills of Exchange (8th ed. 1986), vol. 2, at p. 1386 (“Crawford and Falconbridge”). The tort is one of strict liability, and although the dispossession must arise as a result of the defendant’s intentional act, “it is no defence that the wrongful act was committed in all innocence”: Boma, supra, at para. 31.

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 a manner authorized by the rightful owner is consistent with the owner’s right of possession, and does not qualify as wrongful interference. The principle is aptly stated in R. D. Bowers, A Treatise on the Law of Conversion (1917), at § 10:

It will be noted that the deprivation must be wrongful, for without the element of wrong no tort can be committed and conversion cannot occur; and to be wrongful, it must be wholly without the owner’s sanction or assent, either express or implied. So, where the owner has given to another, or permitted him to have control of the property, no one can be held responsible in tort for its conversion who merely makes such use of the property or exercises such dominion over it as is warranted by the authority thus given. Otherwise expressed, it has been said that a rightful interference with the chattels of another cannot constitute a conversion. [Footnotes omitted.]

The principle is reiterated in A. Grubb, ed., The Law of Tort (2002), at para. 11.170:

No action lies in conversion or trespass to chattels for consensual interferences with goods: the nature of these torts involves wrongful interference with goods and an interference that is consented to cannot be wrongful. Consent may be express, as in a contract or agreement for bailment or lease, or it may be implied from the circumstances. [Emphasis in original.]

10 Boma, supra, presented an entirely different factual basis than the case at bar. There, a bookkeeper committed fraud against the companies she worked for by issuing a series of fraudulent cheques made payable to various individuals. The collecting bank deposited the proceeds of the fraudulent cheques into the bookkeeper’s account. Iacobucci J. cited (at para. 36) with approval the following passage from Crawford and Falconbridge, at p. 1386:

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 has 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. [Footnotes omitted.]

That means a lending institution’s liability in conversion is predicated upon finding both that payment upon the cheque was made to someone other than the rightful holder of the cheque, and that such payment was not authorized by the rightful holder. If either of these criteria is not satisfied, there is no tort. On the facts of Boma, supra, Iacobucci J. held, at para. 40, that the bookkeeper’s actions were beyond the ambit of authority granted to her by the companies she worked for. As a result, the bank’s actions were undertaken without the authority of the companies which were rightfully entitled to the cheques’ proceeds, and resulted in the dispossession of those companies’ entitlements. Consequently, the bank was held to be prima facie liable in conversion for having deposited the cheques’ proceeds into the bookkeeper’s account.

11 The respondents rely upon Toronto-Dominion Bank v. Dauphin Plains Credit Union Ltd. (1992), 1992 8544 (MB CA), 98 D.L.R. (4th) 736, a decision of the Manitoba Court of Appeal. The facts in that case were similar to the case at bar: the sole shareholder of a company staving off creditors deposited two unendorsed cheques payable to that company into his own account. The Court of Appeal found the credit union which collected the cheques’ proceeds to be liable to the receiver and manager of the cheques’ payee. The case is of little help in this appeal as it was not an action for conversion, and the Court of Appeal did not appear to have been asked or to have considered whether the credit union’s actions had been authorized by the rightful payee, notwithstanding the payee’s lack of endorsement.

12 In this appeal, it is acknowledged that the Bank dealt with 373409’s cheque in a manner which, if unauthorized, would have created liability in conversion. Before the cheque was brought to the Bank by Lakusta, 373409 was the rightful holder of the cheque and entitled to its proceeds. Lakusta’s alteration of the cheque had no effect upon 373409’s sole entitlement to it. The deposit of the cheque’s proceeds into Legacy’s account led to the dispossession of 373409’s entitlement. The issue is whether the Bank was authorized by 373409 to deal with the cheque as it did, the result being to deprive 373409 of the cheque’s proceeds. If 373409 authorized the Bank to deposit the proceeds of the cheque into Legacy’s account, then the Bank’s actions cannot be wrongful interference and cannot give rise to liability in conversion because it acted with the authority of the true owner of the cheque.

13 The respondents’ argument turns on their submission that only a proper endorsement of the cheque would have provided the Bank with the authority needed to deal with it. In their submission, Lakusta had to endorse the cheque in accordance with the provisions of the Act. Absent that endorsement, the respondents argue, Lakusta’s explicit instructions to the Bank did not constitute authorization to deal with the cheque. The trial judge and the majority of the Alberta Court of Appeal agreed with this analysis. The Court of Appeal stated, at para. 6, that “the Bank cannot argue that Lakusta had authority on behalf of the numbered company without actually obtaining an endorsement to that effect”. With respect, that conclusion is wrong as it would remove the possessory rights attached to the ownership of the cheque.

14 Iacobucci J. stated in Boma, supra, at para. 30, that “[a]n individual obtains title to a bill through negotiation”. Negotiation, then, refers to the transfer of a bill’s title between two parties. As per s. 59(3) of the Act, “[a] bill payable to order is negotiated by the endorsement of the holder”. An endorsement, therefore, is the formal mechanism by which the holder of a bill payable to order transfers title in that bill to another party.

15 The issue in this case, however, is not whether 373409 transferred its title in the cheque to Legacy, but whether the Bank dealt with the cheque on the authority of 373409. As long as the Bank’s actions were authorized by 373409, then the criterion of wrongful interference does not arise. An owner’s capacity to authorize others to deal with his or her chattel is fundamental to that owner’s right of possession. The provisions of the Act do not in any way limit the capacity of a cheque owner to delegate such authority. The rightful owner of any chattel, including a bill of exchange, is capable of authorizing another party to deal with that chattel, notwithstanding the absence of a formal transfer of title.

16 Consequently, whether 373409 negotiated the cheque and effected a transfer of title to Legacy is not dispositive of whether 373409 authorized the Bank to deal with its cheque as it did. The owner of a cheque is capable of authorizing another party to collect the proceeds of the cheque and transfer those proceeds to a third party. The granting of such authority is not dependent upon a transfer of legal title pursuant to the requirements of the Act.

17 As Conrad J.A. noted in her dissent, at para. 37, a bank assumes significant risk in accepting an unendorsed third party cheque into a customer’s account. An endorsement is the formal mechanism by which a bank is able to verify that it has the authority to deposit a cheque’s proceeds into a customer’s account. However, where the rightful owner has in fact authorized the bank to deal with the cheque, the lack of endorsement will not negate that authority. In other words, as Conrad J.A. concludes, at para. 49, a bank’s “assumption of that risk . . . does not by itself constitute conversion”.

18 In this case, Lakusta instructed the Bank to deposit the proceeds of the cheque payable to 373409 into Legacy’s account. As Lakusta was the sole owner of 373409, he could, as he did, authorize the Bank to deal with 373409’s cheque, and the Bank played no role in conversion. To state the obvious, if Lakusta was not acting on behalf of 373409, then the Bank would not have had authorization to deal with the cheque and would be liable in conversion for having dispossessed 373409 of the cheque’s proceeds.

19 There can be no doubt that Lakusta’s act of directing the Bank to deposit the proceeds of the cheque into Legacy’s account can be attributed to and considered authorized by 373409. See Lennard’s Carrying Co. v. Asiatic Petroleum Co., [1915] A.C. 705 (H.L.), per Viscount Haldane L.C., at p. 713:

. . . a corporation is an abstraction. It has no mind of its own any more than it has a body of its own; its active and directing will must consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation. That person may be under the direction of the shareholders in general meeting; that person may be the board of directors itself. . . .

20 Here, Lakusta was the sole shareholder, director, and officer of 373409. He was the only person capable of acting as the corporation’s directing mind, and he formed the entire “ego” and “personality” of the corporation. In his capacity as sole shareholder and director of the corporation, he had the full capacity to delegate authority to the corporation’s agents. He was the sole officer of the corporation, and its only agent. Consequently, any act which he undertook as 373409’s agent must be deemed authorized by the corporation. The only conclusion available on the evidence was that Lakusta, qua shareholder and director, authorized Lakusta, qua officer, to deposit 373409’s funds into Legacy’s account.

21 Conrad J.A. in her dissent agreed with this conclusion. The majority of the Court of Appeal decided the appeal on the invalidity of the endorsement, and at para. 14 held that it was unnecessary to consider whether Lakusta’s authority to transfer funds on behalf of 373409 was undermined by the fact that he was “taking money from the rightful payee, the numbered company, and using it improperly for the benefit of the other company or for himself”.

22 In Canadian Dredge & Dock Co. v. The Queen, 1985 32 (SCC), [1985] 1 S.C.R. 662, it was held at p. 713, that where a criminal act “is totally in fraud of the corporate employer and where the act is intended to and does result in benefit exclusively to the employee-manager”, that act cannot be attributed to the corporation. In this appeal, Lakusta’s diversion of money from 373409 to Legacy may very well have been wrongful vis-à-vis the corporation’s creditors. However, Lakusta’s action was not in fraud of the corporation itself. Since Lakusta directed the funds into Legacy’s account with the full authorization of 373409’s sole shareholder and director, being himself, that action was not fraud in respect of 373409.

23 The impropriety of the corporation’s diversion of funds from its creditors does not undermine Lakusta’s authority to deal with those funds on behalf of the corporation. The wrongfulness of an officer’s act in relation to a third party does not negate that act’s attribution to the corporate body. For instance, a corporation may be responsible for the criminal acts of its agents, as it was in Dredge & Dock, supra. The key question in determining attribution is whether that agent’s action was within the scope of authority delegated to him or her by the corporation. Since Lakusta was acting within the scope of authority granted to him by 373409, his act of instructing the Bank to deposit the cheque’s proceeds into Legacy’s account must be attributed to the corporation.

24 373409, through Lakusta, authorized the Bank, as it was entitled to do, to deposit the cheque’s proceeds into Legacy’s account. As a result, the Bank did not wrongfully interfere with 373409’s cheque, as it did not deal with that cheque in a manner inconsistent with 373409’s instructions. Consequently, the Bank is not liable in conversion to 373409’s Receiver and Manager for the proceeds of the cheque.

B. Section 165(3) of the Act

25 As a result of the conclusion reached, it is unnecessary to consider whether the Bank can avail itself of the defence to conversion provided by s. 165(3) of the Act.

V. Conclusion

26 For the foregoing reasons, I would allow the appeal with costs, and set aside the judgments of the Alberta Court of Appeal and the Alberta Court of Queen’s Bench.

Appeal allowed with costs.

Solicitors for the appellant: Parlee McLaws, Edmonton.

Solicitors for the respondents: Reynolds Mirth Richards & Farmer, Edmonton.