COURT FILE NO.: 15-CL-11159 DATE: 20160511 SUPERIOR COURT OF JUSTICE - ONTARIO
RE: The Midas Investment Corporation, Plaintiff AND: Bank of Montreal, Defendant
BEFORE: Penny J.
COUNSEL: Jeremy Devereux and Nicole Marcus for the moving party, Bank of Montreal Maurice J. Neirinck for the responding party, The Midas Investment Corporation
HEARD: May 2, 2016
Reasons
Overview and Issues
[1] In this action, the plaintiff, Midas, alleges that it was defrauded of over $3 million by two men, Kavanaugh and Commisso. Kavanaugh was an officer and shareholder of Midas.
[2] Midas sues the Bank on the allegation that the Bank was negligent in allowing Kavanaugh and/or Commisso to open, and use, an account in the name of Midas. This account was used to deposit, and then distribute, funds which were derived from an alleged mortgage fraud committed by Kavanaugh and Commisso against Midas. There is a separate action, not involving the Bank, in which Midas is seeking to set aside the fraudulent mortgage on its property. That action is not yet resolved.
[3] The Bank moves for summary judgment dismissing the action against it. The Bank relies on the principle of agency known as the “indoor management rule.”
[4] The indoor management rule originated in the English case of Royal British Bank v. Turquand (1856), 119 E.R. 886 (Eng. Exch.). The principle is that if a corporation holds someone out as a director, officer or agent to third parties, the corporation cannot deny that the person is duly appointed or that he or she has the authority customary or usual for such a director, officer or agent. A person dealing in good faith with a corporation is entitled to assume that the corporation’s internal procedures have been followed. The outsider is not required to conduct an inquiry into compliance with those procedures unless that person has actual knowledge to the contrary or where the person ought to have had knowledge to that effect. The rule is based on the assumption that the company, which has hired and supervises its officers and holds them out as its agents, should bear the burden of their unauthorized activity, as opposed to the outsider dealing with the company in good faith who has no opportunity to investigate compliance with the company’s internal procedures.
[5] This principle has been codified in the Ontario Business Corporations Act, s. 19. Section 19 provides, in relevant part:
A corporation or a guarantor of an obligation of a corporation may not assert against a person dealing with the corporation or with any person who has acquired rights from the corporation that…
(d) a person held out by the corporation as a director, officer or agent of the corporation has not been duly appointed or does not have authority to exercise the powers and perform the duties that are customary in the business of the corporation or usual for such director, officer or agent;
(e) the document issued by any director, officer or agent of a corporation with actual or usual authority to issue the document is not valid or not genuine;
except where the person has or ought to have, by virtue of his position with or relationship to the corporation, knowledge to that effect.
[6] The Bank says, and it is not in dispute, that Kavanaugh was the Secretary Treasurer of Midas. He was also a 50% shareholder. A third party would reasonably assume that the Secretary Treasurer of a corporation has authority to open bank accounts and certify corporate documents such as banking resolutions and changes in the composition of the corporation’s board and officers. The Bank reasonably relied on Kavanaugh’s instructions in this regard and was not required to conduct an inquiry into the nature of Kavanaugh’s actual authority as now claimed by Midas.
[7] Midas responds by arguing that the Bank owes a duty to use reasonable care in the opening and operation of its customers’ accounts. In this case, the Bank was not entitled to rely on the indoor management rule because it knew, or ought to have known, of irregularities in Kavanaugh’s representations to the Bank which put (or ought to have put) the Bank on notice that Kavanaugh’s apparent authority was not safely to be relied upon without further enquiry. Midas says that because no further enquiries were made, the account was opened, the proceeds of the fraud were flowed through the account and Midas has been robbed of over $3 million.
[8] The substantive governing law is not in dispute. Nor is the law of summary judgment as set out by the Supreme Court of Canada in Hyrniak v. Mauldin, 2014 SCC 7.
[9] The sole issue is whether the evidence presented on this motion gives rise to a disputed issue of material fact the resolution of which requires the forensic machinery of a trial. That issue is whether the Bank was put on inquiry by the information it had at the time the account was opened and operated, sufficient to disentitle the Bank from reliance on the indoor management rule. Neither party filed expert evidence on the standard of care of a banker in connection with the opening of a corporate account and whether the account opening procedures, in this case, met that standard.
Summary Judgment
[10] A defendant may after delivering a statement of defence move with supporting evidence for summary judgment dismissing all or part of the claim. The court shall grant summary judgment if the court is satisfied that there is no genuine issue requiring a trial with respect to that claim.
[11] There will be no genuine issue requiring a trial when the judge, on a motion, is able to reach a fair and just determination on the merits. This will be the case when the motions process allows the judge: 1) to make the necessary findings of fact; 2) allows the judge to apply the law to the facts; and, 3) is a proportionate, expeditious and less expensive means to achieve a just result in all the circumstances. In this regard, where a motion will allow the judge to find the necessary facts and resolve the dispute, proceeding to trial would not be proportionate, timely or cost-effective.
[12] Both parties agree that the second step of the two-step process outlined by the Supreme Court of Canada (by which the new fact-finding powers set out in Rule 20.02(2.1) are engaged) is not necessary here. Neither party asks me to weigh the evidence, evaluate credibility or draw inferences on this motion. The Bank says it is not necessary; Midas says that a fair disposition of the central issue requires a trial and that the new fact-finding powers are insufficient to meet the fundamental standard of a “fair and just determination on the merits.”
The Evidence
Background
[13] Midas owned two commercial properties in the City of Toronto, 205 Young St. and 90 Eastern Ave. Thomas Farrell loaned Midas the money necessary to acquire these properties. Kavanaugh advanced no funds to Midas. Farrell is a 50% shareholder and the President and a director of Midas. According to Farrell, only he had the authority to open and operate a bank account for Midas. Farrell resides in Ireland. Alex Papastamos is the other director. He is a Canadian resident.
[14] While Kavanaugh owns the other 50% of the Midas shares, he was never a director of Midas. He did, as noted, hold the position of Secretary Treasurer.
[15] In late 2012, Midas’s bank account in Toronto was with a branch of the Toronto Dominion Bank. Unbeknownst to Farrell and Papastamos, Kavanaugh and Commisso initiated the process of opening a Midas account at a branch of the Bank at 2535 Major Mackenzie Dr. in Maple, Ontario. This process began on October 4, when Kavanaugh and Commisso met with a representative of the Bank at the Major Mackenzie branch. The process was only completed on November 14, 2012. The reasons for this delay are at the heart of the Midas negligence claim against the Bank.
[16] Kavanaugh and Commisso, perhaps assisted by unknown others, caused a fraudulent $5 million mortgage to be registered against the Midas properties. From that mortgage, proceeds in the form of cheques for $3,043,674.92 dated March 4, 2013 and $295,987.80 dated May 8, 2013 were issued to Midas. The cheques were deposited into the Midas account with the Bank on March 5 and May 8 respectively. The funds were then disbursed by various wire transfers authorized by Kavanaugh in March and May 2013, shortly after the funds were deposited.
The Account Opening
[17] The evidence is that on October 4, 2012, Kavanaugh and Commisso attended at the bank. They met with Amanda Coppola, presented certain corporate documents and signed standard bank documents. The account opening was approved by the branch manager, Bernice Ferenac. Ms. Feranac never met Kavanaugh or Commisso.
[18] A Midas corporate profile report from the Ministry of Government Services which was submitted by Kavanaugh as part of the account opening documentation showed Farrell as a Director and the President and Kavanaugh as the Secretary and Treasurer as of that date.
[19] The Bank’s internal audit group sent a notice to the branch on October 12, 2012 requiring changes to the authorized signatory and general banking resolution, also called a Certificate and Authorization. The audit notice insisted that the Bank’s form required from Midas must conform to the information contained in the corporate profile report. The October 4, 2012 version of the Certificate and Authorization which went to the audit branch has never been produced.
[20] Another Certificate and Authorization was signed by Kavanaugh on October 17, 2012, as Secretary Treasurer. This document purported to correct the deficiencies identified by the Bank’s internal audit. It indicated that the authorized signatories for the Midas bank account were Kavanaugh and Commisso. It also indicated that Farrell was a director and the President of Midas as of October 17. By signing this resolution, Kavanaugh certified that he was a duly elected officer of the corporation authorized by Midas to certify the matters set out in the Certificate and that the banking resolution, as represented, had been duly passed by Midas.
[21] On October 23, 2012, the branch received another audit notice indicating that additional changes to the documents were still required. On October 26, 2012, another Certificate and Authorization was signed by Kavanaugh certifying that Kavanaugh and Commisso were authorized signatories for the Midas account. This Certificate also clearly stated that Farrell was a director and the President of Midas as of that date.
[22] For reasons that are not entirely clear, an additional Certificate and Authorization was executed on November 14, 2012. This coincided with Kavanaugh delivering to the Bank an updated corporation profile report. That report, also dated November 14, 2012, showed Kavanaugh as the sole director and officer, including President, Secretary and Treasurer, of Midas. This Report purported to show that Kavanaugh had become a director and the President of Midas on October 11, 2012. The new Certificate and Authorization executed on November 14, 2012 once again provided that Kavanaugh and Commisso were the authorized signatories for the Midas account with the Bank.
[23] In a November 14, 2012 email to Ferenac, Coppola wrote, in connection with the completion of the documentation for the opening of the Midas account:
Okay I put the docs in your office and I left you a vmail about the more confusion added to this friggin file! LOL
So they signed the docs and now have gotten the articles of incorporation amended – deleted all the other officers and directors and just have the main guy as director and officer so I will amend when I get back Saturday to ensure you can complete the audit correction before we go making a mess lolo!
[24] Following the execution of the November 14, 2012 Certificate and Authorization, the account was finally opened and became operational.
Analysis
[25] The Bank says there is no genuine issue requiring a trial. Midas held out Kavanaugh as its Secretary and Treasurer. It is within the purview of a Secretary Treasurer to certify resolutions of the corporation and to open bank accounts. The Bank had no way of knowing that, as deposed by Farrell, Kavanaugh had no actual authority to open bank accounts or that he was, as it is alleged, using his position as Secretary Treasurer to commit acts which were in reality unauthorized. Any irregularities in the documentation provided to the Bank were either des minimus, resolved by Kavanaugh using his apparent authority or would not have caused the alleged loss in any event.
[26] I am not satisfied that the matter is as clear-cut as the Bank would have it. Although Midas argued that the indoor management rule “does not apply,” it is more accurate to say that Midas accepts that Kavanaugh had apparent authority, as Secretary Treasurer, in a general sense but relies on the exception to the application of the indoor management rule. That is, Midas argues, on the facts of this case the Bank knew, or ought to have known (because the Bank ought to have made reasonable inquiries based on inconsistencies in the documents and information provided), that Kavanaugh had no such authority.
[27] The initial affidavit of Ferenac did not tell the whole story about the Bank’s internal processes. I made a procedural order at 9:30 appointment requiring the Bank to deliver an affidavit of documents. I did so because the Bank’s procedures were in issue and the plaintiff could not otherwise be expected to know, or to be able to determine, what went on at the Bank when the account was opened. I also thought that, in the circumstances of this case, Midas ought not to have to rely on the Bank employee’s affidavit on the merits of the motion for all document production purposes.
[28] The Bank employee who actually dealt with Kavanaugh and Commisso, Coppola, filed no affidavit on the motion. Further information was requested by way of undertaking on her cross examination as a witness on a pending motion. Another Bank employee who was involved in the audit, Kristen Kennedy, also swore no affidavit but provided some information by way of undertaking as a result of someone else’s cross examination.
[29] Document production from the Bank is still, on its face, incomplete. For example, the original Certificate and Authorization prepared by the Bank on October 4, 2012 is missing. This is potentially an important document.
[30] These production issues represent one reason for doubting the Bank’s claim that there is no genuine issue requiring a trial.
[31] There are still a number of questions and inconsistencies arising out of the documents that have been produced. The audit department rejected the original file opening documents of October 4, 2012. It is not entirely clear why. File opening documentation was still ruled deficient by the Bank’s audit branch in connection with the October 17 and 26, 2012 documents. Again, it is not entirely clear why.
[32] Midas points to changes to the corporation’s accountants and changes in mailing addresses, such as the fact that the address where the monthly statements were to be mailed did not accord with the corporation’s head office address.
[33] The Bank argues that these are ordinary course changes in the conduct of a corporation’s business but there is no independent opinion evidence to this effect. Ferenac purported to provide evidence of reasonable banking practice but I cannot accept this evidence because Ferenac, being a Bank employee, lacks the requisite detachment and independence to give opinion evidence.
[34] There is really no explanation at all why the Bank, having received certified documents from Kavanaugh on October 17 and 26, 2012 which certified that Farrell was the President and a director of Midas (and that Kavanaugh was not a director), asked no questions when provided with documents in November 2012 purporting to certify that, since October 11, 2012, it was Kavanagh who had been both the President and the sole director of Midas.
[35] There is also evidence that many of the amounts paid out of the Midas account in March and May 2013 did not conform to the requirement that both Kavanaugh and Commisso had to authorize the payment. While this raises possible causation issues, it is evidence that could be considered relevant to the standard of care shown by the Bank in its management of this account.
[36] This is a case where Midas cannot be expected to know anything about the Bank’s internal procedures and what might or might not have caused “red flags” or put the Bank on inquiry. Midas alleges it has been defrauded of over $3 million. There is no contrary evidence on this point. Midas is, in my view, entitled to exercise full rights of discovery before being put to the test of a motion such as this which necessarily requires a detailed examination of the substantive merits of the action, including what was and was not known to the Bank and what the Bank ought reasonably to have done with that information. I am not satisfied that Midas has had that full opportunity to examine all relevant documents and obtain all of the Bank’s knowledge, information and belief on these issues.
[37] Without that information, Midas is in no position to retain an expert on the specific nature of the Bank’s duty of care and whether, on the facts of this case, the Bank met that duty. The Bank, as noted above, chose not to put forward an expert either. The absence of expert evidence makes it doubly difficult for the court to be satisfied that it can dispose of this action “fairly and justly” on a motion. This is particularly the case where there are unexplained changes in addresses and accountants and a glaring inconsistency in the documents submitted over who, as between Farrell and Kavanaugh, was the President and a director of Midas from October 11 to November 14, 2012.
[38] What the Bank employees did or did not do and why in connection with all these events may well engage issues of weight, inference and credibility in respect of which the court will benefit from the viva voce evidence of the employees themselves.
Conclusion
[39] In conclusion, I am not satisfied that I can, by way of a motion, justly and fairly dispose of the central issue in this case. Whether there was sufficient evidence in October and November 2012 to put a reasonable bank on notice that further inquiry was required before approving the opening and operation of this corporate account requires the full exercise of discovery rights and viva voce evidence of those directly involved in the Bank’s communications with Kavanaugh and Commisso and the review and approval of the requisite documentation. For these reasons, the motion for summary judgment is dismissed.
Further Procedural Directions
[40] As a first step, both sides shall deal with any contemplated pleading amendments and then complete the exercise of their discovery rights. They shall have the opportunity to retain experts. The issue on which Midas’s claim turns is a relatively narrow one. It seems to me that this issue can be dealt with by way of a hybrid hearing, in which the evidence in chief of the parties is put forward by affidavit (including expert reports) and that a focused hearing, with limited examination and cross examination focused on the critical points in issue, could be accomplished within a few days.
[41] Following completion of discovery, the parties shall return at 9:30 scheduling appointment to address the completion of any other steps required for the conduct of this hybrid hearing and to map out in detail how the conduct of that hearing will proceed.
Costs
[42] Since this motion, although dealing with the merits, did not result in a final disposition of any issue in the action, this seems to me to be a case where the costs should be fixed and made payable in the cause. In any event, if the parties are unable to agree on costs, written cost submissions (not to exceed two typed double-spaced pages together with a bill of costs) of the plaintiff shall be delivered within seven days. Written submissions subject to the same page limit shall be delivered by the defendant within a further five days.
