ONTARIO
SUPERIOR COURT OF JUSTICE
COURT FILE NO.: CV-09-4775-00
DATE: 2013-07-04
B E T W E E N:
Rehman International Ltd., Allied Total Management Inc. and Hafiz Rehman
Tahir Majeed, for the Plaintiffs/Defendants by Counterclaim
Plaintiffs/Defendants by Counterclaim
- and -
Royal Bank of Canada
Benjamin Bathgate and Calie Adamson, for the Defendant/Plaintiff by Counterclaim
Defendant/Plaintiff by Counterclaim
HEARD: March 26, 27, 28, April 3, 2013
REASONS FOR JUDGMENT
M.J. Donohue J.
Contents
The Claims. 3
The Background. 3
Plaintiffs’ Claim for Breach of Contract 4
RBC’s Claim for the Overdraft in the bank accounts. 6
RBC’s Claim under the Personal Guarantees. 6
RBC’s Claim against Mr. Rehman for balance outstanding to RBC. 6
Mr. Rehman’s Background. 8
The Three Fraudulent Transactions. 9
Kaltsakos Cheque Fraud (Bank of Nova Scotia) 9
Foley Cheque Fraud. 11
The Bank of Montreal Counterfeit Cheque Fraud. 14
Personal Use of Corporate Accounts. 15
Analysis. 17
Conclusion. 20
The Claims
[1] The plaintiff companies and Hafiz Rehman, claim against the Royal Bank of Canada (RBC) for breach of contract. The plaintiff companies had three corporate bank accounts with RBC which were frozen after several bad cheques were deposited and the entries subsequently reversed.
[2] The RBC claims against the plaintiff companies for the overdraft on three bank accounts and the same amount against Mr. Rehman on the basis that Mr. Rehman should be personally liable for the shortfall in the three bank accounts.
The Background
[3] The plaintiff companies are owned and controlled by Mr. Rehman. These companies have, since 2001, been in the business of cheque cashing and currency exchange services.
[4] In a four week period the plaintiff companies, in three fraudulent schemes, cashed cheques for almost $800,000 in fraudulent cheques. The circumstances of the fraudulent schemes and cheques are not in dispute and are set out in the Agreed Statement of Facts and the Chronology of Events which were filed on consent of all parties.
[5] The plaintiff companies are parties to written Financial Services Agreements with the RBC. The Financial Services Agreements are valid, binding and enforceable in accordance with their terms.
[6] There is no dispute as to the accuracy of RBC’s banking records.
[7] Mr. Rehman, and his wife Khalida Rehman, executed personal guarantees in favour of the RBC limited to $30,000 for the obligations of Rehman International, one of the plaintiff companies.
[8] There is no dispute the guarantees are valid and binding in accordance with its terms. A demand was made on June 15, 2010. Payment has not been made under the guarantees.
Plaintiffs’ Claim for Breach of Contract
[9] In essence, the plaintiffs submit they were innocent victims of these frauds and relied on RBC and other third party law firms as to the validity of the cheques cashed. This argument is not material to their claim for breach of contract.
[10] The Statement of Claim alleged breach of contract but there was no evidence or law to support a breach. The plaintiff companies submitted that RBC debited their accounts when the fraudulent funds failed to clear and created a substantial overdraft in the bank accounts.
[11] The evidence before me is that the RBC fully complied with the terms of the Financial Service Agreement and had authority to reserve the deposits once the fraudulent cheques were dishonoured.
[12] Mr. Rehman testified that he did not review the terms of the Financial Service Agreement when he executed it on behalf of the plaintiff companies and was not aware of the chargeback terms. I am persuaded that, as this is a commercial relationship and there is no good reason why the agreement should be binding in accordance with its terms, the agreement is binding. (Manor Windsor Realty Ltd. v. Bank of Nova Scotia, 2011 ONSC 4515, 216 A.C.W.S. (3d) 708, at paras. 38-41.)
[13] As there was no breach of contract, RBC cannot be responsible at law for any damages suffered by the plaintiffs arising from the overdraft bank accounts. Further, and in any event, the Financial Services Agreement expressly states that “the Bank will not be liable for any indirect, consequential or exemplary damages (including, but not limited to, loss of profits), regardless of the cause of action.”
[14] Accordingly, the plaintiffs’ claim is dismissed.
RBC’s Claim for the Overdraft in the bank accounts
[15] Having determined that RBC had the contractual right to chargeback the dishonoured cheques, the plaintiff companies’ bank accounts were properly in an overdraft position creating a liability to the RBC from the plaintiff companies.
[16] No reason has been suggested why, in these circumstances, judgment shouldn’t be issued in favour of RBC for the amount of the overdraft in the bank accounts against the plaintiff companies.
[17] Judgment to issue in favour of RBC for these amounts together with pre and post judgment interest.
RBC’s Claim under the Personal Guarantees
[18] There is no evidence or reason why the personal guarantee by Mr. Rehman should not be enforced for the outstanding debt of Rehman Corp.
[19] Judgment to issue in favour of RBC against Mr. Rehman personally on his guarantee of $30,000, together with pre and post judgment interest.
RBC’s Claim against Mr. Rehman for balance outstanding to RBC
[20] Mr. Rehman is the principal and controlling mind of the plaintiff companies. He is the only officer, director and shareholder with his wife.
[21] Mr. Rehman initially testified that Allied Total Management Inc. (Allied) was not a cheque cashing business. Under further cross-examination, he admitted that it does provide cheque cashing services. It was shown that his earlier evidence under cross-examination was that Allied did not deal directly with clients. At trial he changed that answer to say that Allied did deal directly with clients. Then Mr. Rehman testified that business dealings for Allied always went through Rehman International Inc. (Rehman Corp) However, Foley cheque #2 was directly deposited into the Allied account. Allied gave a credit voucher of $1,000 commission on Foley cheque #2 from the imposter Ms. Foley. There was also other evidence of Allied taking commissions directly from clients.
[22] Mr. Rehman confirmed that Allied was not registered with FINTRAC, the Canadian Ministry of Finance department which keeps a registry of businesses in the cheque cashing business. He understood that FINTRAC’s mandate is to protect and prevent money laundering.
[23] Mr. Rehman did not produce any tax statements, financial statements, minutes or other corporate documents to demonstrate that the plaintiff companies’ business and affairs were carried out in accordance with corporate law as separate entities. As will be described below, there is evidence that the separation between Mr. Rehman and the plaintiff companies were not respected and applied in the business dealings.
[24] In addition to his failure to produce highly relevant documents, I find Mr. Rehman’s evidence to be inconsistent on significant points which causes me to have serious doubts as to his credibility and the reliability of his evidence.
Mr. Rehman’s Background
[25] Mr. Rehman, testified that he had worked for ten years as an assistant manager for Allied Bank in Pakistan. In 1992 he opened a foreign exchange business there. When he came to Canada he began his business in financial services, cashing cheques and doing currency exchange. He has been doing this since 2001.
[26] When a client came in with a cheque he would look at the date, the amount and request identification such as a drivers licence or social insurance card. He would copy it and return it to the customer with cash. He charged a commission and wrote out a voucher or receipt for his commission.
[27] He explained that if he received a cheque, to verify it, he would call the phone number of the issuing business and ask if the company issued it.
[28] Clearly, given Mr. Rehman’s experience, he knew how to properly confirm the validity of a cheque prior to cashing it.
The Three Fraudulent Transactions
[29] It is necessary to review the undisputed evidence of the three frauds.
Kaltsakos Cheque Fraud (Bank of Nova Scotia)
[30] When the man identifying himself as Mr. Kaltsakos came in, Mr. Rehman said he asked for his driver’s licence and social insurance number. He took a copy of both. He wrote a letter to the law office to confirm the cheque. He wrote a letter to Scotia Bank to confirm the cheque’s legitimacy and received a confirming call back from an officer named Irina. He received a letter back from the lawyer that the cheque was correct.
[31] It did not concern him that the handwriting and spelling of Mr. Kaltsakos’ name on the drivers licence was different from the man’s signature in his office.
[32] On August 12, 2009 Mr. Rehman deposited what is known as the Kaltsakos cheque via an ATM machine into Rehman Corp’s bank account. The cheque was for $243,064.36. This cheque was a certified cheque from the Bank of Nova Scotia on a lawyer’s trust account made payable to Pericles Kaltsakos.
[33] Rehman Corp charged a fee of $6,076.60 to the person claiming to be Pericles Kaltsakos, whose identification showed that he lived in Scarborough, over 50 kilometres away from Mr. Rehman’s businesses. Mr. Rehman did not find it suspicious that this person would make a three two-hour round trip visits to get his cheque cashed. This did not raise any suspicion or concern to Mr. Rehman.
[34] This person posing as Mr. Kaltsakos told Mr. Rehman that the bank would not give him cash. This did not raise any suspicion or concern to Mr. Rehman.
[35] Mr. Rehman testified that he did not compare the signatures from the identification to the signature on the endorsement of the cheque. At trial Mr. Rehman refused to admit that the signatures were different. I find that the signatures were clearly different. Given the size of the cheque it is extremely surprising that Mr. Rehman did not check the signature.
[36] More importantly, the spelling of the name was different on the cheque and the endorsement. This clearly should have raised serious concerns to Mr. Rehman.
[37] It is agreed that this fraud was discovered, in 2010, to be a mortgage fraud. The Bank of Nova Scotia returned the cheque and the defendant RBC reimbursed The Bank of Nova Scotia the $243,064.36. Pursuant to RBC’s rights under the Financial Services Agreement the RBC debited the Rehman Corp’s bank account.
Foley Cheque Fraud
[38] The Kaltsakos fraud had not been discovered by the RBC when the Foley cheque fraud occurred.
[39] A woman came in to Mr. Rehman’s business, saying she was Kathleen Foley, and asking to cash three cheques. Mr. Rehman got a copy of her driver’s licence and social insurance number. The person posing as Ms. Foley produced a driver’s licence and also an agreement of purchase and sale dated August 14, 2009 to support that the cheques related to the sale of her house. Mr. Rehman testified that he looked at the agreement and satisfied himself that it was evidence that the cheques were good. Under cross-examination Mr. Rehman testified that he did not notice that the agreement was not actually signed on the last page and he did not notice that the agreement was initialled with the letters “FL” throughout instead of “KF” for Kathleen Foley. This raises serious concern whether Mr. Rehman made any real effort to verify the source of the funds or the validity of the cheques.
[40] Mr. Rehman also testified that he did not notice that the person’s drivers licence (which he copied) showed the spelling of her name as “Kathleen” with a “K” but the voucher she signed on September 5, 2009 was written “Catholeen” with a “C”. Again, Mr. Rehman’s actions raise serious questions regarding his bona fides with respect to these very large cheques.
[41] Mr. Rehman wrote the law firm inquiring of the legitimacy of the cheques. He received a letter back from the law firm confirming they were authentic. He charged a commission of $9,613.59 and partially paid the imposter Ms. Foley $100,000 in cash on September 4, 2009. The evidence shows that Ms. Foley signed the voucher confirming receipt of the cash as “Catholeen Foley.”
[42] The following day on September 5, 2009, Mr. Rehman gave her $274,929.43 in cash, for which she signed as “receiving person”. Again she wrote the name as “Catholeen Foley.”
[43] Mr. Rehman deposited three fraudulent Foley cheques, 20 days later, on September 1, 2009. All three cheques were certified and drawn on a bank account with the Bank of Montreal and payable to Kathleen Foley. Foley cheque #1 in the amount of $184,543.01 was deposited at 7:48 p.m. at an ATM in Mississauga in the Rehman Corp’s account. Foley cheque #2 in the amount of $100,000 was deposited also at 7:48 p.m. at the same ATM in Mississauga but in the Allied bank account. Foley cheque #3 in the amount of $100,000 was deposited, more than two hours later, at 9:37 p.m., via an ATM in Woodbridge, in the Rehman Corp bank account. The Woodbridge ATM is over 27 kilometres from the ATM in Mississauga. The manner and locations of these deposits are highly suspicious. Mr. Rehman did not explain as to why he would deposit the cheques as he did, into several different accounts, at several different locations and into separate corporate accounts. This evidence, again, raises suspicion regarding Mr. Rehman’s knowledge but it also demonstrates that Mr. Rehman had no regard for which corporate bank account was used.
[44] Two of the Foley cheques were returned to Mr. Rehman as the backs of the cheques had not been endorsed. Mr. Rehman endorsed the name Kathleen Foley on cheques number #1 and #2 and they were re-deposited into the two corporate accounts on September 8, 2009. Cheque #3 was endorsed with the incorrect name, “Cathleen Foley”.
[45] When RBC returned the cheques on September 4, 2009, as they were not endorsed, Mr. Rehman testified that he called the imposter Ms. Foley and she told him to endorse them on her behalf. Anyone in the financial services business would know this was improper and likely, illegal. Later he testified that the imposter Ms. Foley came in to his office and instructed him to sign them on her behalf. He did not have her sign them in person because the cheques were in his safe and he did not have the key. I find this odd evidence for a man running a financial services business. Mr. Rehman was asked how he gave her the $274,943 in cash that day if he did not have the key to his safe. He explained that he had three safes in his office and the cash was in a different safe. The imposter Ms. Foley had a large purse into which he put all the cash. Mr. Rehman did not produce any documents to show where that amount of cash came from. There was no paper trail provided.
[46] The bank began investigating the Foley cheques around September 23, 2009 and wrote Mr. Rehman’s lawyer on September 23, 2009 requesting an interview. Mr. Rehman did not come in for an interview to discuss or explain the frauds nor did he advise the bank that he endorsed two of the Foley cheques. Instead, within a month, he commenced this lawsuit.
[47] This action by Mr. Rehman implicates his personal involvement in the deposit of these fraudulent cheques.
[48] The Foley cheques were discovered to be part of another mortgage fraud. The RBC had to return funds to the Bank of Montreal and the RBC then debited the plaintiff companies’ bank accounts. This put the bank accounts into an overdraft position.
The Bank of Montreal Counterfeit Cheque Fraud
[49] On September 15, 2009 a counterfeit certified cheque for $782,000 from a Bank of Montreal account of a law firm was deposited into a third party numbered company’s account.
[50] The following day Mr. Rehman deposited a bank draft payable to Allied in the amount of $156,400 into Allied Total Management’s bank account. It is agreed that part of the proceeds from the $782,000 counterfeit cheque were used by the numbered company to purchase the Allied bank draft of $156,400 which Mr. Rehman deposited.
[51] The Bank of Montreal counterfeit cheque fraud was discovered on September 17, 2009. RBC then debited the $156,400 from the Allied bank account, which was already in an overdraft position.
[52] Mr. Dickson, on behalf of RBC, testified that, when Mr. Rehman cashed the bank draft payable to Allied from the numbered company, it did not make commercial sense. The numbered company ordinarily could have simply withdrawn the money from RBC instead of getting a draft from RBC payable to Allied, going to Allied to have it cashed, and to pay a large fee to Allied. There was simply no commercial reason to incur a large fee to cash the cheque which could have been done by the numbered company directly.
Personal Use of Corporate Accounts
[53] Within the same month Mr. Rehman negotiated these fraudulent cheques, Mr. Rehman signed an agreement of purchase sale to acquire a personal residence at 7031 Gaslamp Walk in Mississauga, on September 12, 2009.
[54] As of September 12, 2009, the bank balances of the plaintiff companies’ bank accounts were as follows:
$138.15 Rehman Corp U.S. Business account
$76,232.80 Rehman Corp Canadian Business account (included proceeds from Foley cheques #1 and #3)
($989.28) Allied account (overdraft)
[55] Mr. Rehman stated that Rehman Corp owed him money but Mr. Rehman produced no documentary evidence or specifics regarding this loan. Again, this leads to the inference that Mr. Rehman did not recognize or comply with the distinction of corporate entities.
[56] Mr. Rehman was asked how he could purchase the house and he testified that he had the rest of the cash in his safe. There was no evidence as to how much money was in the safe or where this money had come from.
[57] This evidence raises serious concerns regarding Mr. Rehman’s knowledge regarding these fraudulent cheques and his potential participation. Further, on this evidence I conclude that Mr. Rehman, while having the plaintiff corporations, disregarded their separate entity. The corporate plaintiffs were simply a sham used by Mr. Rehman.
Analysis
[58] RBC relies on the case of Pelliccione v. John F. Hughes Contracting and Development Co., 2005 34822 (ON SC), 47 C.L.R. (3d) 104 to support piercing the corporate veil where the officers fail to treat the corporation as a separate entity, such that the corporation is a sham.
[59] RBC submits that under the guise of collecting on alleged loans to Rehman Corp, Mr. Rehman transferred proceeds of the underlying frauds from the plaintiff companies to himself to fund the acquisition of a residential property for his own use.
[60] RBC also submits that, in the alternative, Mr. Rehman should be held liable for the debts of the corporation he controls when he knew or ought to have known that a fraud was being committed, and chose to ignore the numerous red flags, or became involved in a deal that made no commercial sense, for his own benefit.
[61] RBC argues that Mr. Rehman was wilfully blind in the deception. “Wilful blindness arises where a person has become aware of the need for some inquiry, but declines to make the inquiry because he does not wish to know the truth.” Royal Bank of Canada v. Malfara Importing & Exporting Inc., 2005 7667 (ON SC), 137 A.C.W.S. (3d) 1184, at para. 37, citing R. v. Williams, 2003 SCC 41, [2003] 2 S.C.R. 134.
[62] I am satisfied that the evidence shows Mr. Rehman did not treat the plaintiff corporations as separate entities distinction. They were a sham. I do so for the following reasons:
a) Both plaintiff company bank accounts were used for processing funds with no explanation or any corporate justification. Both companies were used in dealings directly with clients. No corporate records were produced to document transfers between the companies to demonstrate the integrity of their separate accounts;
b) Mr. Rehman suggests he kept large amounts of cash in three safes at his office. He provided no documentation to support such testimony;
c) Mr. Rehman said the two companies owed him corporate loans but produced no records to document the loans; and
d) Mr. Rehman did not provide any documentation tracing the use of the funds by the two companies from the three frauds;
e) Mr. Rehman had been doing this kind of business since 2001. He had been charging commissions to people who were seeking cash. Mr. Rehman failed to carry on the business properly and more unfortunately appears to have done so in a way which caused a loss to RBC;
[63] The following actions of Mr. Rehman are highly suspicious and suggestive that he was aware, or at the very least negligent, in cashing the cheques in circumstances where he knew or ought to have known that the cheques were highly questionable:
a) Mr. Rehman’s action of depositing the one Foley cheque in the Mississauga ATM and then later depositing the other Foley cheque in a Woodbridge ATM is odd and suspicious;
b) Mr. Rehman explained that he has had years of banking experience in Pakistan and has been doing this cheque cashing business since 2001. It is odd and suspicious that he did not refuse to cash the Kalsakos cheque when the signatures were clearly different.
c) Mr. Rehman cashed the Foley cheques when the woman signing the cheques misspelled her name;
d) Mr. Rehman received and cashed a bank draft payable to Allied;
e) Mr. Rehman was involved in three fraudulent schemes in a four week period during which time he signed an agreement for purchase and sale of a private residence while calling in undocumented loans from the two companies;
f) In any one of the frauds, Mr. Rehman was in a position to prevent the fraud from occurring when he noticed or should have noticed the inconsistencies in the information provided by the persons seeking to cash their cheques.
[64] On the evidence I find that Mr. Rehman did not respect the separate corporate entities and keep them distinct from his personal interests. On the evidence I find that Mr. Rehman was wilfully blind to the frauds worked through his business accounts.
[65] I conclude Mr. Rehman should not be shielded from liability for the debts of the two companies which he caused to incur debts to the RBC and for which he used the monies personally to buy a home.
Conclusion
[66] Accordingly, I order as follows:
A) Allied Total Management Inc. and Hafiz Rehman are jointly and severally liable to RBC the sum of $135,215, comprised of:
i) the overdraft on account 02952102-308-4 held by Allied at RBC as of June 15, 2010 in the amount of $106,403.23, such sum being inclusive of interest in the amount of $349.15 from September 18, 2009 to June 15, 2010 calculated at the variable Prime Rate of RBC plus 5 per cent pursuant to the provisions of the Financial Services Agreement signed by Allied on March 15, 2004; and
ii) pre-judgment interest on the Allied Overdraft from the date of demand of June 15, 2010 in the amount of $28,812.09, calculated at RBC Prime plus 5 per cent pursuant to the provisions of the Allied Financial Services Agreement;
B) Rehman International Ltd. and Hafiz Rehman are jointly and severally liable for, and must pay to RBC, the sum of $559,370.44, comprised of:
i) the overdraft of account 02952102-307-6 as of June 15, 2010 in the amount of $440,747.55, such sum being inclusive of interest in the amount of $648.67 from April 26, 2010 to June 15, 2010 calculated at RBC Prime plus 5 per cent pursuant to the provisions of the Financial Services Agreement signed by Rehman International on March 15, 2004, less the balance in Canadian dollars of the Rehman US account 02952400-658-1 in the amount of $496.65, for a total of $440,250.90; and
ii) pre-judgment interest on the Rehman Overdraft from the date of demand of June 15, 2010 in the amount of $119,119, calculated at RBC Prime plus 5 per cent pursuant to the provisions of the Rehman Financial Services Agreement.
C) The judgments set out at paragraphs A and B above bear interest at RBC Prime plus 5 per cent per annum, commencing today, pursuant to the provisions of the Rehman and Allied Financial Services Agreements.
D) Rehman International and Hafiz Rehman are jointly and severally liable to RBC the sum of $11,901.44, comprised of:
i) the principal owing under the Rehman International Credit Agreement dated March 29, 2004 in the amount of $10,000; and
ii) pre-judgment interest on that sum from the date of demand of December 3, 2009 in the amount of $1,901.44, being equal to RBC Prime plus 2 per cent per annum, pursuant to the provisions of the Rehman International Credit Agreement dated March 29, 2004;
E) The judgment set out in paragraph D above bears interest at the variable Primate Rate of RBC plus 2 per cent per annum, commencing today, pursuant to the provisions of the Rehman Credit Agreement.
[67] If the parties cannot agree on costs, I ask for the RBC’s written submissions of three pages or less, plus any applicable offers to settle, within 30 days. The plaintiffs, Mr. Rehman, Rehman Corp, and Allied, are to forward written submissions of three pages or less plus any applicable offers to settle within 14 days thereafter.
M. J. Donohue, J
Released: July 4, 2013
COURT FILE NO.: CV-09-4775-00
DATE: 2013-07-04
ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N:
Rehman International Ltd., Allied Total Management Inc. and Hafiz Rehman
Tahir Majeed, for the Plaintiffs/Defendants by Counterclaim
- and –
Royal Bank of Canada
Benjamin Bathgate and Calie Adamson, for the Defendant/Plaintiff by Counterclaim
REASONS FOR JUDGMENT
M.J. Donohue J.
Released: July 4, 2013