COURT FILE NO: 07-CV-334218PD3
SUPERIOR COURT OF JUSTICE - ONTARIO
Re: Teva Canada Limited
Plaintiff
- and -
Bank of Montreal, Canadian Imperial Bank of Commerce, TD Canada Trust, and Bank of Nova Scotia
Defendants
AND BETWEEN:
The Bank of Nova Scotia
Plaintiff by Counterclaim
- and -
Teva Canada Limited, Neil Kennedy McConachie, Renzo G. Tittarelli and Florindo Costanzo
Defendants by Counterclaim
AND BETWEEN:
TD Canada Trust
Plaintiff by Counterclaim
- and -
Teva Canada Limited, Neil Kennedy McConachie, Renzo G. Tittarelli, Antonio Rocca and Martino Caputo
Defendants
BEFORE: The Honourable Mr. Justice Kevin Whitaker
COUNSEL:
Colby Linthwaite, for the Plaintiff, Teva Canada Limited
Frank J. McLaughlin & Jeffrey Feiner, for TD Canada Trust
Martin Sclisizzi & Elissa Sinha, for Bank of Nova Scotia
HEARD: October 21-22, 2014
ENDORSEMENT
Introduction
1These are summary judgment motions in an action brought by a pharmaceutical company (“Teva”), against two banks (“TD Trust” and “Scotiabank” or “the banks”). The action is for the conversion of fraudulent cheques. Claims by Teva against three other banks have been resolved.
2The banks each bring cross motions against Teva. Scotiabank seeks leave to amend its defence and summary judgment dismissing the action by Teva. The banks rely on the Limitations Act, estoppel, negligence, equitable set-off and ex turpi causa.
3All parties rely on the Bills of Exchange Act, R.S.C. 1985, c B-4 (the “Act”).
4On the motion and cross motion, the parties seek summary judgment under Rule 20 of the Rules of Civil Procedure. It is agreed that the dispute between the parties can be adjudicated on a motion for summary judgment.
5The plaintiff seeks to strike the counterclaims in negligence and for set-off.
6For reasons which follow, the plaintiff’s motion for summary judgment is granted. The claims brought by the banks are dismissed.
Overview
7The relevant facts are brief and undisputed.
8The plaintiff is a large pharmaceutical company operating in many countries. Between 2003 and 2006, the plaintiff’s Finance Manager, Neil Kennedy McConachie, with others (together “McConachie”) embarked on a scheme to defraud the plaintiff by generating company cheques for services not performed.
9Five banks were initially involved. Two banks remain as defendants.
10The total amount of the fraud is approximately $8 million dollars.
11The plaintiff (as did some other companies in this sector) managed an incentive program which paid customers to buy the plaintiff’s product. Many millions of dollars were dispersed by the plaintiff under this program.
12The method of fraud was as follows - McConachie drafted false purchase orders for which cheques were generated. These cheques were payable to entities with similar or identical names to those of the plaintiff’s real customers.
13McConachie opened a number of bank accounts with the defendants.
14The names used for payees were real customer names or names that were close to identical real customers.
15False cheques were deposited in the accounts and funds were then removed by McConachie.
16The plaintiff believed at the time that each cheque was generated to satisfy a legitimate obligation to a customer.
17The plaintiff did not at any time intend or authorize McConachie or his associates to possess or use the cheques for their own personal use.
18The actual account holders were not intended by Teva to be the payees of the cheques.
The Positions of the Parties
19As indicated earlier, the parties agree this matter may be appropriately disposed of by way of summary judgment. I agree.
20The plaintiff argues the two bank defendants are strictly liable for conversion of the cheques.
21It is agreed that conversion is a strict liability tort. It is further agreed that the scheme of the Act precludes any claim in negligence.
22The banks counterclaim for negligence and claim equitable set-off for any damages recovered under the counterclaim.
23As indicated earlier, the plaintiff seeks to dismiss the counterclaim and the related equitable set-off defence on the theory that both are based in negligence and are inconsistent with the strict liability scheme set up under the Act and at common law.
Discussion
24It is agreed that conversion is a strict liability tort. The banks accept that under the Act they are prima facie liable for the cheque conversion.
25It is not disputed that the legislative scheme under the Act precludes an action in negligence.
26The banks rely on two technical defences available under sections 20(5) and 165(3) of the Act:
a) S. 20(5) Fictitious payee:
(5) Where the payee is a fictitious or non-existing person, the bill may be treated as payable to bearer. R.S., c. B-5, s. 21.
b) S. 165(3) Cheque for deposit to account:
(3) Where a cheque is delivered to a bank for deposit to the credit of a person and the bank credits him with the amount of the cheque, the bank acquires all the rights and powers of a holder in due course of the cheque.
27Section 20(5) provides that where the payee is a fictitious or non-existing person, the bill may be treated as payable to bearer. The issue then is whether the payee is fictitious or non- existent.
28The Supreme Court of Canada in Boma Manufacturing Ltd v. Canadian Imperial Bank of Commerce, 1996 149 (SCC), [1996] 3 S.C.R. 727 provides some guidance in determining whether a payee is non-existing or fictitious. The issue as to whether the drawer is a fictitious person is a question of fact. The Supreme Court’s reasoning in Boma on this point indicates that a real payee is one who might “plausibly” be identified in this capacity. The issue then is whether as a question of fact, is it plausible having regard to all the circumstances, that the payee is a real person for purposes of the transaction.
29The banks argue the claims against them should be dismissed under section 20(5). As the cheques were payable to fictitious and/or non-existent payees, the banks were entitled under section 20(5) to treat them as payable to bearer. The cheques could then be negotiated without endorsement and the claim by the plaintiff should be dismissed.
30I disagree. The facts here are similar to those in Metroland v. CIBC 2001 28367 (ON SC), 2001 14 B.L.R. (3d) 212 where Lederman J. found that section 20(5) did not apply where the names on the cheques and the circumstances of the transaction would permit an honest belief that the cheques satisfied actual obligations - and the payees were not fictitious or non-existing persons.
31In the alternative, under section 165(3), the defendant banks assert that cheques payable to clients were delivered by McConachie and deposited to accounts in their names - the account holders being the named payees. On the bank’s theory no endorsements were required and the banks became holders in due course. On this theory, the banks held the cheques free of defect in title and the claim against them for conversion should be dismissed.
32If applicable, this section would relieve the banks of liability if they delivered the cheques to the banks and for the credit of a “person” entitled to the cheque.
33There is a rational basis for concluding that cheques were apparently made payable to existing clients.
34I find that the payees could plausibly be understood to be real entities and customers of the plaintiff.
35There are no fictitious or non-existing persons for purposes of section 20(5) of the Act.
36There are no authorised persons to whom a cheque was delivered for purposes of section 165(3) of the Act.
37I am satisfied that two statutory defences provided for in the Act do not apply.
38The cross claim and the Limitations Act defence are based in negligence. These claims are not permitted under the strict liability scheme of the Act.
Outcome
39Summary judgment is granted to the plaintiff. The cross claims are dismissed.
40Submissions as to costs may be made in writing on less than three pages within three weeks.
41Order accordingly.
Whitaker J.
Released: February 19, 2014