COURT FILE AND PARTIES
COURT FILE NO.: CV-09-8373-00CL
DATE: 20140826
SUPERIOR COURT OF JUSTICE - ONTARIO
RE: Dynasty Furniture Manufacturing Ltd., Safiq Hirani, Hanif Asaria, Dinmohamed Sunderji and 2645-1252 Quebec Inc., Plaintiffs
AND:
Toronto-Dominion Bank, Defendant
BEFORE: Penny J.
COUNSEL:
Lincoln Caylor, Nathan Shaheen and Maureen Ward, for the Plaintiffs
Geoff Hall and Junior Sirivar, for the Defendant
HEARD: August 13, 2014
ENDORSEMENT
The Motion
[1] This is a motion for leave to amend the statement of claim. The proposed amendments involve the question of when a bank owes a duty of care to a non-customer and whether, or when, “constructive” knowledge of a fraud can give rise to such a duty.
Background
[2] The procedural background to this motion is quite relevant.
[3] The plaintiffs claim that they lost $17 million by investing in high-yield certificates of deposit that were offered by the Stanford International Bank, a private bank domiciled in Antigua. The certificates were issued as part of a fraudulent scheme. The Toronto-Dominion Bank acted as the correspondent bank for Stanford on a global basis. The plaintiffs did not have accounts with TD and they did not know, when they made the investments, that TD was the correspondent bank.
[4] In 2009, the plaintiffs issued a claim against TD. Regarding one of their negligence claims, the plaintiffs alleged that TD owed a general duty of care to third parties, such as non-customers, to ensure that its customers were not engaged in fraudulent schemes. To discharge this duty of care, TD was required, at the time of opening a new account, to verify the legitimacy of the customer’s business activities and, thereafter, on an ongoing basis to obtain and assess information about the customer’s banking activities, as well as its business activities at large, to ensure that the customer was not engaged in fraudulent activities.
[5] TD brought a motion to strike that portion of the statement of claim under Rule 21 on the basis that the allegations did not disclose a reasonable cause of action. The fundamental issue involved the proximity requirement which determines when a duty is owed. Lord Atkin described that relationship in Donoghue v. Stephenson, 1932 536 (FOREP), [1932] A.C. 562 at page 580-81:
Who then, in the law is my neighbor? The answer seems to be…
Persons who are so closely and directly affected by my act that I ought reasonably to have had them in contemplation as being so affected when I am directing my mind to the acts or omissions which are called into question.
[6] It was not (and is not) disputed that a bank that has actual knowledge (which includes recklessness and willful blindness) of fraudulent activities of a customer may become subject to duty of care in favor of third parties doing business with the customer. Such a duty, for example, might be discharged by terminating the customer’s access to the bank’s facilities, reporting the customer to the appropriate authorities and, in many cases, freezing the customer’s account. The plaintiffs did not, however, allege actual knowledge. Rather, they alleged suspicious circumstances falling short of actual knowledge of fraud, which, they pleaded, gave rise to an obligation to investigate.
[7] Wilton-Siegel J. held, applying the analysis originally developed in Anns v. Merton Borough Council, [1978] A.C. 728, that the “duty to investigate” allegation did not fall within, nor was it analogous to, a category of cases in which a duty of care had previously been recognized. He went on to find that the facts as alleged were not capable of establishing a relationship of sufficient proximity to found a duty of care owed by the bank to the plaintiffs. Finally, Wilton-Siegel J. concluded that, even if a prima facie duty of care could be established under the first branch of the Anns test, it would be negated at the second stage based on overriding policy considerations. Wilton-Siegel J. held, therefore, that it was plain and obvious that the plaintiffs’ claim in negligence did not disclose a reasonable cause of action, except to the extent that the plaintiffs asserted that TD had actual knowledge of Stanford’s fraudulent activities, was willfully blind to the existence of such activities or recklessly disregarded the existence of such activities. The “duty to investigate” allegations were, therefore, struck out. Leave to amend was neither granted nor explicitly denied.
[8] The plaintiffs appealed to the Court of Appeal. The appeal was dismissed, again without mention of possible further amendments. However, the Court of Appeal did not necessarily agree with the implication in the decision of the motions judge that “constructive” knowledge could never found a duty of care owed by a bank to a non-customer. The relevant portions of the Court of Appeal’s brief endorsement are worth quoting in their entirety, as some of the observations of the Court of Appeal are central to the plaintiffs’ position on this motion:
We are of the view that the facts, as pleaded, do not give rise to the duties relied on in the struck portions of the statement of claim. Although in some cases trial courts have, on motion to strike, allowed claims alleging a duty to ensure that a bank’s customers did not use their accounts for fraudulent purposes to proceed to trial, we were not referred to any trial or appellate decision in Canada holding that a bank has those duties to a non-customer. Thus the impugned claims do not fall within a category of cases that has been recognized by the courts.
Moreover, we do not consider this to be a case where this court should recognize a new duty of care under the Anns/Kamloops principles. We generally agree with the motion judge’s analysis of those principles. Based on that analysis, we are of the view that the facts, as pleaded in this case, are not sufficient to warrant recognizing a new duty of care by a bank to a non-customer.
The appellants rely on Semac Industries Ltd. v. 1131426 Ontario Ltd. (2001), 2001 28375 (ON SC), 16 B.L.R. (3d) 88 (Ont. S.C.) to support the proposition that the struck portions of this claim should proceed to trial so that the question as to whether the court should recognize a duty be decided with the benefit of a full evidentiary record. In Semac, the motion judge identified particular circumstances of the claim that, in his view, ought to be dealt with at trial. These included allegations that the bank had already raised concerns internally about suspicious conduct on the part of its customer, and that the non-customer had subsequently alerted the bank to its allegation of fraud.
No such allegations were pleaded in the appellant’s statement of claim and, in our view, there are no circumstances disclosed in the claim that warrant the issue going to trial. We would, therefore, not give effect to this submission.
In the circumstances, we do not find it necessary to decide whether a bank may ever be found to have a duty to a non-customer in circumstances where it does not have actual knowledge (willful blindness or recklessness) of the fraudulent activities being conducted through an account of its customer. We leave the question of whether such a duty exists and, if so, in what circumstances, to another day.
[9] In 2011, Marcus Wide and Hugh Dickson were appointed as the joint liquidators of Stanford. As a result, these liquidators obtained access to all of Stanford’s property, documents and information. The liquidators commenced proceedings against TD in Québec and Ontario. In addition, the plaintiffs assigned any and all proceeds that may arise in this action to the liquidators. The liquidators and the plaintiffs are represented by the same counsel.
[10] In subsequent proceedings, the liquidators’ Québec action was dismissed and a stay of their Ontario action was lifted. As a result of these developments, the plaintiffs now seek to amend their statement of claim to reflect the claims made in the liquidators’ action against TD which, in turn, are based on access to significant quantities of Stanford documentation which was not available to the plaintiffs in 2009/2010.
The New Pleading
[11] In the amended claim (which has blossomed from 15 pages to 95 pages), the plaintiffs plead much more detailed circumstances which, they allege, put TD on notice of suspicious and possibly fraudulent activities on Stanford’s part. As a result of these various circumstances, for example, the claim now alleges that TD knew there was no legitimate business or economic purpose for Stanford to have correspondent banking services in Canada.
[12] The claim also pleads that TD terminated its relationship with another Antiguan correspondent bank, having concluded that the amounts moving through that bank’s account at TD were too large to be associated with a legitimate bank in Antigua. The plaintiffs allege that the amounts running through Stanford’s correspondent bank accounts at TD were comparable to the amounts running through the account which TD closed. It is alleged that by 2008, Stanford had become TD’s single largest corresponding banking customer, not just in the Caribbean but worldwide. It is also alleged that the same TD executive who was responsible for closing the other Antiguan bank’s account was responsible for the Stanford account. As such, the plaintiffs allege, TD was aware of the clear and present need to subject its Antiguan correspondent banks, including Stanford, to particular scrutiny.
[13] The claim now also pleads that TD was aware of the extensive and public condemnation of Antigua’s banking regulation and practices and that TD executives specifically raised concerns with Stanford about questionable banking practices in Antigua and their effect on Stanford. The claim goes on to plead that neither the bank nor its executives took any steps to limit or review the banking services provided to Stanford as a result of these concerns.
[14] The claim alleges that TD personnel visited Stanford’s headquarters in Antigua and Houston, Texas. It goes on to plead that TD executives responsible for the TD/Stanford relationship were cognizant of the fact that they “did not understand” Stanford’s business. As a result, these executives concluded that TD needed to conduct a due diligence investigation of Stanford because “something did not seem right,” but nothing was ever done.
[15] It is also alleged that TD contacted Stanford about certain public criticisms, including the announcement of an SEC investigation of Stanford, and that TD “was beginning to get nervous because of all the rumors circulating” about Stanford but that, again, nothing was done.
[16] The plaintiffs also rely on numerous other allegations of so-called “red flags” which were indicative of the highly suspicious nature of Stanford’s affairs and the fact that other banks and regulators acted on these concerns while TD did not.
[17] In short, the plaintiffs say that the proposed amendments now meet the threshold referred to in the endorsement of the Court of Appeal. The amended pleading does give rise, the plaintiffs say, to alleged facts which warrant going to trial. Whether a bank may ever be found to have a duty to a non-customer in circumstances where it does not have actual knowledge (willful blindness or recklessness) of the fraudulent activities being conducted through an account of its customer was an issue left open by the Court of Appeal. The plaintiffs say they have stepped through that opening with their proposed amended claim. They say, in addition, that at the time of the earlier motion to strike, the plaintiffs simply were unaware of and had no access to the facts supporting the allegations now pleaded dealing with what was known internally at TD about Stanford’s affairs and whether TD had knowledge of suspicious circumstances surrounding Stanford’s banking activities.
[18] In making this argument, the plaintiffs also rely on three authorities decided after the Court of Appeal’s prior decision in this case. In Pardhan v. Bank of Montreal, [2013] O.J. No. 329 (Div. Ct.) T.R. Lederer J. denied leave to appeal the decision of the motions judge granting certification in a class action. Both the decision of the motions judge and at the Divisional Court involved a detailed review of the courts’ prior decisions in Dynasty. Both Horkins J., at first instance and T.R. Lederer J., at the Divisional Court, relying on para. 9 of the Court of Appeal decision in Dynasty, concluded that there were sufficient facts alleged in Pardhan to warrant letting the matter proceed to trial, where the scope of any duty of the bank beyond actual knowledge of fraud could be resolved on a full evidentiary record.
[19] In Javitz v. BMO Nesbitt Burns Inc., 2011 ONSC 1332, [2011] O.J. No. 877 (Comm. List) Pepall J. heard a motion to strike pleadings under Rule 21. Again, there was a detailed consideration of the courts’ prior decisions in Dynasty. The Bank argued as a matter of law that it could never be found liable in negligence in the absence of actual knowledge of fraudulent behavior on the part of a bank customer. Pepall J. disagreed, saying, at para 10:
The Court of Appeal upheld [Wilton-Siegel J.’s] decision… but expressly stated that it did not “find it necessary to decide whether a bank may ever be found to have a duty to a non-customer in circumstances where it does not have actual knowledge (willful blindness or recklessness) of the fraudulent activities being conducted through an account of its customer.” The court left the question of whether such a duty existed to another day. As such, I do not believe that the Dynasty decision may be relied upon as a complete answer to the proposition advanced by the moving parties, namely that a bank cannot be liable in negligence to a non-customer in the absence of actual knowledge.
[20] In Javitz, therefore, Pepall J. went on to conduct a fact specific enquiry into the sufficiency of the pleading. The claim against the bank was based exclusively on its position as the “collecting bank viv-a-vis the cheques invested by the plaintiff.” Its position as banker to plaintiff, as such, was not relied upon at all. Pepall J. concluded, following that enquiry, that the claim did not plead sufficient facts to give rise to a duty of care. Accordingly, the pleading was struck.
[21] The case of Jer v. Samji, [2013] B.C.J. No. 1993 (S.C.) was also relied on by the plaintiffs. In Jer, the plaintiffs alleged that Royal Bank of Canada and TD breached their duty of care to the plaintiffs by failing to investigate transactions involving the deposit of trust instruments into non-trust accounts. In the case of RBC at least, it was pleaded that RBC became concerned about suspicious activity in the relevant accounts but took insufficient action. L.B. Gerow J. agreed with the plaintiffs that “it could not be said is plain and obvious that the cause of action in negligent failure to investigate is bound to fail.” The court distinguished Dynasty on the basis that, in Dynasty, the plaintiff alleged a general duty on the bank in opening accounts (and on an ongoing basis once opened) to ensure that the accounts would not be used for an unlawful purpose. This was in contrast to the specific allegation in Jer:
The alleged duty here is based on the actual knowledge of RBC and TD concerning the repeated deposit by Ms. Samji of substantial funds payable in trust to non-trust accounts, and in the case of RBC, the concerns it had with respect to those transactions that led Ms. Samji to move her accounts.
[22] TD accepts, for the purposes of this motion, that the essential facts pleaded in the proposed amendments would, if they had been pleaded in the first place, have passed muster on a Rule 21 motion. It is therefore not necessary to address the question of whether constructive knowledge could ever give rise to a duty to non-customers or when failing to investigate known suspicions might cross over into recklessness or willful blindness.
[23] TD advances essentially two arguments for why leave to amend should not be granted in this case. First, it says the amendment is an abuse of process – the issue of the plaintiffs’ claim in negligence against the bank is res judicata between these parties. The validity of those claims was argued and lost. The plaintiffs’ claim was struck as disclosing no cause of action. Leave to amend was not granted. The new amendments are merely an attempt to advance a claim which has already been struck out. TD argues that this motion is highly unusual – and that no authority has been, or can be, cited for the proposition that a plaintiff who loses a Rule 21 motion can return with an amended pleading to try to plead their away around the dismissal of their claim.
[24] Second, TD says the quality of the evidence is insufficient. The plaintiffs have not demonstrated, on cogent evidence, that the information now sought to be pleaded is “new” in the relevant legal sense of the word; that is, that it could not with reasonable diligence have been discovered by the plaintiffs in 2009/2010.
Analysis
[25] Rule 26 is mandatory. The court shall grant leave to amend a pleading on such terms as are just unless prejudice would result that could not be compensated for by costs or an adjournment.
[26] It has, nevertheless, long been established that Rule 26 is not to be applied mechanically and contains implied limits in addition to prejudice and costs. An amendment will not be granted for a pleading that is untenable at law, constitutes an abuse of process or one that fails to conform with the rules of pleading, see National Trust Co. v. Furbacher, [1994] O.J. No. 2385 (Gen. Div.); C.L. v. Dominion of Canada General Insurance Co., [1998] O.J. No. 298 (Gen. Div.); and Shannon v. St. Catharines General Hospital, [2009] O.J. No. 4095 (S.C.J.)
[27] In my view, the Court of Appeal’s reasons in the previous Dynasty case, as interpreted in subsequent cases, is governing on this motion. The conclusion of the Court of Appeal was not that a bank could never be sued for breach of duty to a non-customer arising from something less than actual knowledge of a fraud but that the plaintiffs had not pleaded sufficient material facts to establish the basis for such a duty. That was also the basis of Pepall J.’s disposition in the Javitz case.
[28] The amended pleading no longer seeks to rely on an alleged duty to non-customers at large to investigate and monitor the behavior of all of a bank’s customers. The pleading now alleges that this bank:
(i) knew and admitted it did not understand Stanford’s business;
(ii) knew Stanford had no legitimate need for a correspondent bank in Canada;
(iii) knew Stanford was under SEC investigation;
(iv) knew Stanford was transferring funds all out of proportion to its status as an Antiguan bank (and knew this was grounds for termination of the bank’s relationship);
(v) knew about the widespread public condemnation of the Antiguan banking system and questionable practices in Antiguan banks, including Stanford;
(vi) knew something “was not right” at Stanford and was “getting nervous” about it; and
(vii) knew a due diligence investigation was require (but failed to investigate).
[29] None of this information was known or could reasonably have been known by the plaintiffs about TD and Stanford specifically in 2009/2010. The evidence before me is that the information specific to TD’s knowledge only became available to the plaintiffs after the new liquidators were appointed in 2011, as a result of the liquidators’ access to Stanford’s documents. As a result of incorporating this information, the amended pleading has moved from the allegation of a generic duty owed by all banks to all non-customers, to the allegation of a specific duty arising from specific information known to this bank in respect of this customer.
[30] It is certainly true that a good deal of the amended pleading involves allegations of publicly available information that was not acted upon by TD with sufficient alacrity. If that was the end of the matter, I would tend to agree with Mr. Hall that a better explanation would be required for why this information was not pleaded in the first place. More importantly, allegations of publicly available information which “ought” to have been known to the bank, standing alone, would probably not rise above the necessary threshold for establishing a tenable cause of action. However, what was missing then, and is present now, is the specific allegation of TD’s knowledge of this information, specifically in relation to TD’s internal concerns about Stanford. This difference, it seems to me, brings the pleading within the scope of the cases cited above (Semac, Pardhan, and Jer) which allow the claim to proceed beyond the pleading stage and “leave for another day” the question of the scope of such a duty, to be determined on the basis of a full record at trial.
[31] I do not think the motion is an abuse of process. The plaintiffs were not denied leave to amend in the first Dynasty pleadings motion. I certainly agree that a plaintiff cannot keep coming back to the amendment well. However, in the unique circumstances of this case, I find that the plaintiffs have provided an adequate explanation. I see no abuse or unfairness in allowing the plaintiffs to amend their claim to plead, based on new information, new allegations which might conceivably, if proved, result in a finding of a duty of care owed in circumstances where there is something less than actual knowledge of fraud.
[32] It is for this reason that I allow the amendments as set out in the amended pleading at Tab 2 of the plaintiffs’ motion record.
Costs
[33] The parties agreed at the conclusion of argument that costs should follow the event in the amount of $17,500. Costs are therefore payable to the plaintiffs in the amount of $17,500 inclusive of fees, disbursements and all applicable taxes.
Penny J.
Date: August 26, 2014