CITATION: Service Mold v. Khalaf and TD Bank, 2017 ONSC 6197

COURT FILE NO.: CV-15-22582 DATE: 20171020

ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

Service Mold + Aerospace Inc., SMI Ventilation Products Inc. and Service Mold Associates Plaintiffs

– and –

Nada Khalaf and Toronto-Dominion Bank Defendants

Myron W. Shulgan, Q.C., for the Plaintiffs

Gino Morga Q.C., for the Defendant, Khalaf, who attended and advised Ms. Khalaf takes no position on the Motion Martin Greenglass, for the Defendant, Toronto-Dominion Bank

HEARD: April 25, 2017

RULING ON MOTION

HEBNER J.

[1] The plaintiffs brought this motion requesting partial summary judgment against both defendants. Specifically, the plaintiffs seek relief for amounts paid by the Toronto-Dominion Bank (“TD Bank”) on forged cheques. The plaintiffs are seeking partial summary judgment in the sum of $342,333.68 CAD and $246,094.74 USD. The plaintiffs rely on the Bills of Exchange Act, R.S.C. 1985, c. B-4, the relevant sections of which read as follows:

Forgery

48(1) Subject to this Act, where a signature on a bill is forged, or placed thereon without the authority of the person whose signature it purports to be, the forged or unauthorized signature is wholly inoperative, and no right to retain the bill or to give a discharge therefor or to enforce payment thereof against any party thereto can be acquired through or under that signature, unless the party against whom it is sought to retain or enforce payment of the bill is precluded from setting up the forgery or want of authority.

Recovery of amount paid on forged cheque

48 Where a cheque payable to order is paid by the drawee on a forged endorsement out of the funds of the drawer, or is so paid and charged to his account, the drawer has no right of action against the drawee for the recovery of the amount so paid, nor any defence to any claim made by the drawee for the amount so paid, as the case may be, unless he gives notice in writing of the forgery to the drawee within one year after he has acquired notice of the forgery.

Recovery of amount paid on forged endorsement

49(1) Where a bill bearing a forged or an unauthorized endorsement is paid in good faith and in the ordinary course of business by or on behalf of the drawee or acceptor, the person by whom or on whose behalf the payment is made has the right to recover the amount paid from the person to whom it was paid or from any endorser who has endorsed the bill subsequent to the forged or unauthorized endorsement if notice of the endorsement being a forged or an unauthorized endorsement is given to each such subsequent endorser within the time and in the manner mentioned in this section.

BACKGROUND FACTS

[2] The plaintiffs are a group of related companies that design and manufacture injection molds sold to aerospace, automotive and various commercial customers. The plaintiffs did their banking with the defendant, TD Bank since 1987. The plaintiffs’ accounts were maintained at the main branch of the TD Bank in Windsor, Ontario.

[3] The plaintiffs employed the defendant, Nada Khalaf (“Ms. Khalaf”), as a bookkeeper between 2008 and 2012. She had general responsibility for the plaintiffs’ financial affairs. Her responsibilities included:

1. Posting expenses to accounts payable ledgers, for which the plaintiffs were responsible;
2. Preparing cheques to pay accounts rendered to the plaintiffs by their suppliers and others, and posting the payments to the plaintiffs’ accounts payable ledgers;
3. Preparing invoices to the plaintiffs’ customers and posting to an accounts receivable ledger amounts owing to the plaintiffs by their customers;
4. Recording cheques received by the plaintiffs from their customers and posting said payments to the plaintiffs’ accounts receivable ledgers; and
5. Reviewing the plaintiffs’ bank statements and reconciling their respective bank accounts.

[4] Ms. Khalaf was hired by Martin Schuurman (“Mr. Schuurman”), an officer of the plaintiffs. Mr. Schuurman terminated Ms. Khalaf’s employment in 2012 without cause. Sometime thereafter, he hired the plaintiffs’ current bookkeeper, Ms. Gail Chekansky (“Ms. Chekansky”), who completes tasks similar to those performed by Ms. Khalaf.

[5] According to the evidence filed by the plaintiffs, in early 2015 Ms. Chekansky informed Mr. Schuurman that she had learned that Ms. Khalaf had been fired by her most recent employer. It had been alleged that Ms. Khalaf had forged her employer’s signature on cheques that she had made payable to herself. That information caused Mr. Schuurman to investigate Ms. Khalaf’s work during the years from 2008 to 2012, when she was employed by the plaintiffs. He started his investigation by reviewing the cheque register. He noticed missing cheque numbers and several cheques drawn for even amounts of money. Mr. Schuurman’s evidence is that the plaintiffs rarely issued cheques for even amounts.

[6] Mr. Schuurman’s next step was to request that TD Bank provide copies of the bank statements and cancelled cheques. The TD Bank told Mr. Schuurman that the original bank statements and cancelled cheques had been delivered to a branch of the TD Bank where the plaintiffs do not normally conduct their day-to-day business. Mr. Schuurman was provided with copies of the bank statements and cancelled cheques. On his review of the cheques, he identified cheques on which Ms. Khalaf had forged his signature. In the end, with the help of Ms. Chekansky, Mr. Schuurman determined that Ms. Khalaf had drawn hundreds of thousands of dollars from the plaintiffs’ bank accounts by using cheques made payable to her personally. The affected bank accounts, and the amounts taken from each account by Ms. Khalaf and paid by the bank, are as follows:

1. Service Mold + Aerospace Inc. (formerly Service Mold Inc.) Canadian dollar bank account ($329,120.53 CAD);
2. Service Mold + Aerospace Inc. U.S. dollar bank account ($246,094.74 USD);
3. SMI Ventilation Products Inc. (formerly SMI Sales Inc.) Canadian dollar bank account ($13,213.15 CAD);
4. SMI Ventilation Products Inc. U.S. dollar bank account (NIL);
5. Service Mold Associates Canadian dollar bank account (NIL);

[7] During the period of time in which Ms. Khalaf was the bookkeeper, cheques drawn on the accounts required two signatures by authorized signing officers. Mr. Schuurman was an authorized signing officer for the plaintiffs. Ms. Khalaf was also an authorized signing officer. Ms. Khalaf forged Mr. Schuurman’s signature on the affected cheques.

[8] The plaintiffs had made use of a computer-generated cheque-writing program for intended payments of their accounts payable. The program would require the following information be entered into the computer system:

1. The date;
2. The name of the intended payee;
3. The amount of the cheque; and
4. On some occasions, the invoice number of the account intended to be paid.

[9] The computer would print out a cheque payable to the intended payee. It would then ask if the information it had printed was accurate. If corrections were required, they would be made by altering various fields and a new, corrected cheque would be printed. Ms. Khalaf was apparently able to take advantage of the procedure for printing corrected cheques. She would print the cheque in her own name and then, when the computer asked if the information was accurate, she would correct it and print out a cheque for the intended recipient.

[10] As Ms. Khalaf was the individual posting entries to the plaintiffs’ financial records, she was able to cover up her theft of monies by posting the funds on the cheques to various ledgers so the that ledgers balanced each month.

[11] Ms. Chekansky’s investigation revealed a pattern of conduct on the part of Ms. Khalaf which included the following:

1. Altered name of intended payee: These were cheques on which the named payee on the cheque is identified to be Ms. Khalaf but the payee identified in the plaintiffs’ cheque register is someone other than Ms. Khalaf. There was no payment recorded to the party identified in the computer system as the intended payee of the cheque on that party’s accounts payable ledger.
2. Deleted cheques: These cheques were made payable to Ms. Khalaf and negotiated through the plaintiffs’ bank accounts. They were then deleted from the system.
3. The social club: These cheques were made payable to the Service Mold Social Club c/o Ms. Khalaf. The plaintiffs did not maintain a social club.
4. Cheques incorrectly posted to ledgers: These cheques were incorrectly posted to the accounts payable ledgers. Ms. Khalaf allocated the funds on the cheques to various ledgers so the ledgers balanced each month. Many of these cheques were payable to Petty Cash or Petty Cash c/o Ms. Khalaf.

[12] In addition to the forged cheques, the plaintiffs allege in their statement of claim that Ms. Khalaf directed the TD Bank to make two separate payroll transfers into her account in purported payment of payroll wage expenses. It is alleged that between 2009 and 2012, Ms. Khalaf received payment in the total sum of $299,464.75 in purported payment of employment compensation to which she was entitled. That claim is not the subject matter of the motion.

[13] Ms. Khalaf is apparently facing criminal charges as a result of her actions.

TD Bank Defence

[14] TD Bank has not disputed the plaintiffs’ assertions that Ms. Khalaf forged Mr. Schuurman’s signature on cheques. TD Bank agrees that the provisions of the Bills of Exchange Act quoted above apply and that, absent agreement to the contrary, the bank is subject to strict liability. The TD bank puts forth the following two defences:

1. TD Bank contends that the plaintiffs signed banking agreements that contained account verification obligations which were not fulfilled, and clauses excluding the bank’s liability for forged instruments made by an employee; and
2. The TD Bank contends that the action has been commenced outside the applicable limitation period. The bank asserts that the plaintiffs, but for their negligence, should have discovered the facts on which the action is based more than two years before it was commenced.

[15] TD Bank submitted evidence in the form of an affidavit of Annabelle Nkunzimana (“Ms. Nkunzimana”), a clerk employed by the TD Bank, and an affidavit of Luigi DiPietro (“Mr. DiPietro”), the manager of commercial credit with the commercial banking department of the TD Bank in Windsor.

[16] In her affidavit, Ms. Nkunzimana deposed that TD Bank’s normal practice when a business account is opened is to require that the customer sign a business banking agreement (BBA). Attached to her affidavit is a BBA for Service Mold Associates signed in 1999 by Mr. Schuurman. The BBA contains the following clauses:

1. Clause 9, on page three, is the account verification provision. It requires the bank’s customer to dispute, within 30 days of receipt of a bank statement, any transaction contained in the bank statement, failing which TD Bank would be released from any claim, including claims of negligence, breach of trust, and breach of fiduciary duty;
2. Clause 11, on page three, which is a positive obligation on the part of the bank’s customer to have in place commercially reasonable procedures to prevent and detect losses due to forged or unauthorized signatures, and fraud or theft involving instruments or instructions;
3. Clause 12, on page three, provides that the TD Bank is not liable in reference to forged instruments or cheques unless the bank’s customer proves it was not made by a person who was the customer’s employee or agent, and that the forgery was beyond the control of the bank’s customer.

Business Banking Agreements

[17] Mr. DiPietro, in his affidavit, deposed that the paper files pertaining to the account documentation for the plaintiffs have been misfiled and cannot be produced, with the exception of copies of certain account documentation which had been kept at the branch level. One of the documents is the business banking agreement executed in 1999 by Service Mold Associates. The business banking agreements for the other two party plaintiffs cannot be found or are lost in storage. The crux of Mr. DiPietro’s evidence is that TD Bank cannot find the business banking agreements for the other two plaintiffs, but they must have been signed.

[18] The plaintiffs’ request for summary judgment involves only those accounts in the names of Service Mold + Aerospace Inc. and SMI Ventilation Products Inc. They are not proceeding by way of summary judgment on the account held in the name of Service Mold Associates.

The Issue

[19] The issue before the court is whether it is appropriate to grant partial summary judgment to the plaintiffs against TD Bank in the amount of the forged cheques. The plaintiffs bring this motion under r. 20 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194. Rule 20.01(1) provides as follows:

20.01(1) A plaintiff may, after the defendant has delivered a statement of defence or served a notice of motion, move with supporting affidavit material or other evidence for summary judgment on all or part of the claim in the statement of claim.

[20] Rule 20.04(2)(a) provides:

(2) The court shall grant summary judgment if,

(a) the court is satisfied that there is no genuine issue requiring a trial with respect to a claim or defence;

[21] The powers of a court on a motion for summary judgment are set out in subrules 2.1 and 2.2 as follows:

(2.1) In determining under clause (2)(a) whether there is a genuine issue requiring a trial, the court shall consider the evidence submitted by the parties and, if the determination is being made by a judge, the judge may exercise any of the following powers for the purpose, unless it is in the interest of justice for such powers to be exercised only at a trial:

1. Weighing the evidence.
2. Evaluating the credibility of a deponent.
3. Drawing any reasonable inference from the evidence.

(2.2) A judge may, for the purposes of exercising any of the powers set out in subrule (2.1), order that oral evidence be presented by one or more parties, with or without time limits on its presentation.

[22] In the Supreme Court of Canada case of Hryniak v. Mauldin, 2014 SCC 7, [2014] 1 S.C.R. 87, at para. 66, Karakatsanis J. provided the following guidance for a court hearing a summary judgment motion:

On a motion for summary judgment under Rule 20.04, the judge should first determine if there is a genuine issue requiring trial based only on the evidence before her, without using the new fact-finding powers. There will be no genuine issue requiring a trial if the summary judgment process provides her with the evidence required to fairly and justly adjudicate the dispute and is a timely, affordable and proportionate procedure, under Rule 20.04(2)(a). If there appears to be a genuine issue requiring a trial, she should then determine if the need for a trial can be avoided by using the new powers under Rules 20.04(2.1) and (2.2). She may, at her discretion, use those powers, provided that their use is not against the interest of justice. Their use will not be against the interest of justice if they will lead to a fair and just result and will serve the goals of timeliness, affordability and proportionality in light of the litigation as a whole.

[23] In this case, the parties are agreed that the provisions of the Bills of Exchange Act apply such that TD Bank is strictly liable for the forged cheques. There is no dispute as to the amount. It then becomes necessary to examine each of the two defences put forth by the TD Bank and apply the analysis directed by the Supreme Court of Canada, above.

Agreement Defence

[24] A customer will be precluded from looking to its bank for recovery of amounts paid by the bank on forged cheques if the customer was a party to an agreement that contained account verification obligations. In Arrow Transfer Co. Ltd. v. Royal Bank of Canada, 1972 CanLII 135 (SCC), [1972] S.C.R. 845, the plaintiff had a claim against the Royal Bank similar to the claim in this action. The plaintiff had entered into a verification agreement with the Royal Bank. The trial judge dismissed the plaintiff’s claim, and the plaintiff’s appeal to the British Columbia Court of Appeal was dismissed. The plaintiff’s appeal to the Supreme Court of Canada was also dismissed. At pp. 850-51, Martland J. said:

I agree with the opinions expressed in the Court of Appeal that the verification agreements provided Royal with a complete defence to the action. That agreement is a contract, defining the terms upon which the bank continued the account of the appellant. The appellant agreed to verify each statement of account which it received from the bank, and, within the period specified, to notify the bank of any debits wrongly made in the account. At the end of the stipulated period the account as kept by the bank became conclusive evidence that it contains no debits that should not be contained in it, subject to only two exceptions:

1. Errors of which timely notice had been given to the bank;
2. Payments made on forged or unauthorized endorsements.

[25] TD Bank had an account verification agreement with Service Mold Associates. TD Bank was unable to produce an account verification agreement with the other two plaintiffs and relied on the case of Bunan v. Toronto-Dominion Bank, 2015 ONCA 226, 331 O.A.C. 262. In that case, the plaintiff was defrauded by his cousins. He agreed to lend over $1,000,000 to a partnership owned and controlled by them. They were able to perpetrate their fraud by making withdrawals from a bank account the plaintiff had established with the defendant bank. The plaintiff sued the defendant bank for, among other things, breach of contract and negligence arising from the withdrawals from his account. The bank defended the action on the basis that, when opening the account in issue, the appellant had signed a financial services agreement containing an account verification clause. The bank could not locate the agreement but asserted that such an agreement had been signed by the plaintiff and that the plaintiff had failed to give timely notice. The plaintiff neither admitted nor denied the existence of such an agreement. The trial judge dismissed the plaintiff’s claim against the bank. He found that the plaintiff had signed the agreement. The plaintiff appealed to the Court of Appeal: see Bunan v. Toronto-Dominion Bank, 2015 ONCA 226, 331 O.A.C. 262.

[26] The Court of Appeal found that “the trial judge made an express finding of fact that the respondent’s customer services manager actually recalled the appellant signing the FSA (Financial Service Agreement).” At para. 21, the court said:

There was ample evidence in the record to support the trial judge’s conclusion that the appellant executed the FSA. The evidence included the following:

• the practices and standard procedure of the respondent suggested that a FSA had been signed. A second employee of the respondent vouched for the execution of the FSA consistent with the respondent’s standard procedures and, based on standard procedures, a third check would have occurred before the account could be opened. Additionally, based on standard procedures, an account number would be unavailable in the absence of an executed FSA.

• the signature card for the account stated: “You have received a copy of the information detailing our account and related service charges and your completed copy of the Financial Services Agreement”. … The appellant placed a signature immediately below this acknowledgement. While the appellant did not speak English, one of his cousins translated for him. No defence of non es factum was advanced.

• one of the cousins testified that he had seen the appellant sign the agreements. His evidence on this issue did not appear to be challenged.

• the appellant did not deny signing the FSA; he simply could not remember.

• the appellant had opened bank accounts in Switzerland, Spain and Israel and knew there were terms associated with bank accounts. He opened another account at the respondent bank on the same day as the account in issue and signed a FSA for it.

[27] In the case at hand, Service Mold + Aerospace Inc. first opened accounts with the TD Bank in 1987. Mr. Schuurman’s evidence on cross-examination about documentation signed at the time was as follows:

Question: Do you recall whether there was an agreement concerning your banking fees in 1987? Answer: I’m sure there was. Question: Do you have a copy of that contract? Answer: No. Question: You don’t recall, sir, what you signed in 1987 when the account was opened, do you? Answer: No.

[28] Ms. Nkunzimana provided evidence on behalf of the TD Bank. She is a clerk employed by the TD Bank. She said, “It is normal practice at TD that when a business account is open, numerous documents are executed by the bank’s customer in reference to the bank account in question.” She attached the BBA executed on February 25, 1999 in reference to the plaintiff, Service Mold Associates. She states in her affidavit that, “It is TD’s position on the motion for summary judgment that it should not be penalized because it has misfiled the executed business banking agreement when there is evidence that such business banking agreements are signed and where the form of the business banking agreement is known to everyone.”

[29] On cross-examination, Ms. Nkunzimana gave the following evidence:

Question: With respect to the file opening protocol for a commercial account that existed back in the...let’s say late 1980s or early 1990s, do you have any personal knowledge of what that protocol was? Answer: Not...no. Question: Did you know whether there was a prohibition in force at that time that prohibited an account from being opened unless banking agreements were signed? Answer: I’m not aware. Question: Do you have any knowledge of whether business banking agreements that were in existence in the late ‘80s or early ‘90s contained an account verification obligation? Answer: I’m not aware of if there was (sic) any changes. Question: Or whether that obligation existed in any of the bank’s agreements? Answer: I’m not aware. Question: Do you have any knowledge of any agreements that existed before the one set out in your Affidavit? Answer: No. Question: In paragraph 14 of your Affidavit, you say that documents were misfiled. That presumes that there were documents that existed that weren’t properly filed. Do you have any knowledge of what documents existed that were not properly filed? Answer: I do not, no.

[30] Mr. DiPietro provided evidence on behalf of the TD Bank. Mr. DiPietro is the manager of commercial credit with the commercial banking department of the TD Bank in Windsor, Ontario. He has been employed with TD Bank in commercial banking since 1996 and had been assigned to the Windsor commercial banking department since 2001. He was the account manager assigned by TD Bank to oversee the accounts of the plaintiffs between 2002 and 2006. He gave evidence on the process to follow when a business account is opened.

[31] On Mr. DiPietro’s cross-examination, he gave the following evidence in respect of the agreement signed by Service Mold Associates:

Question: Have you spoken to anyone at the – from the main branch of the bank who dealt with the Service Mold accounts in 1999? Answer: No. Question: Do you know who was responsible for the Service Mold accounts in 1999? Answer: No I do not. Question: Could we please go to your exhibit one? It’s at tab 12 of your motion record. That’s a business banking agreement signed on behalf of Service Mold Associates on February 25th, 1999. Do you see that, sir? Answer: Yes, I do. Question: All right. And I take it by that time Service Mold Associates already had an operating account? Answer: I do not know? Question: Do you have any information on the purpose this document was intended to serve other than what appears on its face? Answer: It’s a standard TD Bank document required for opening an account. Other than that, that’s all I know.

[32] In respect of Service Mold + Aerospace Inc., Mr. DiPietro gave the following evidence:

Question: Do you – and you’ve given me your personal knowledge of banking procedures that have been in force since 1996. Do you know what file opening procedures existed before 1996? Answer: No, I do not. Question: You say the documents have been misfiled. That presumes that the documents at time existed. Answer: Yes. Question: Do you have personal knowledge that those documents ever existed? Answer: No, I don’t.

[33] The facts in this case are completely different than the facts before the Court of Appeal in Bunan v. Toronto-Dominion Bank. There is no evidence that anyone on behalf of Service Mold + Aerospace Inc. signed a BBA with TD Bank containing an account verification clause. Similarly, there is no evidence that SMI Ventilation Products signed such a BBA. There is no evidence that any such agreement ever existed for either of these two plaintiffs.

[34] Service Mold + Aerospace Inc. had banked with TD Bank since its incorporation in 1987. There was no evidence respecting the standard procedures on opening a business account at that time proffered by TD Bank. There was no evidence that an account would/could not be opened without such an agreement. Although TD Bank filed an affidavit saying the account opening documents had been misfiled, there was no evidence as to what those documents actually were.

[35] Given the foregoing, and particularly the lack of evidence of a BBA ever signed on behalf of Service Mold + Aerospace Inc., in my view, there is no genuine issue requiring a trial in respect of this defence.

Limitation Defence

[36] The second defence put forth by the TD Bank is a limitation defence. The Limitations Act, 2002, S.O. 2002, c. 24, Sched. B (“Limitations Act”) provides:

4. Unless this Act provides otherwise, a proceeding shall not be commenced in respect of a claim after the second anniversary of the day on which the claim was discovered.

5(1) A claim is discovered on the earlier of,

(a) the day on which the person with the claim first knew,

(i) that the injury, loss or damage had occurred, (ii) that the injury, loss or damage was caused by or contributed to by an act or omission, (iii) that the act or omission was that of the person against whom the claim is made, and (iv) that, having regard to the nature of the injury, loss or damage, a proceeding would be an appropriate means to seek to remedy it; and

(b) the day on which a reasonable person with the abilities and in the circumstances of the person with the claim first ought to have known of the matters referred to in clause (a).

(2) A person with a claim shall be presumed to have known of the matters referred to in clause (1)(a) on the day the act or omission on which the claim is based it took place, unless the contrary is proved.

[37] Mr. Schuurman’s evidence is that he had no indication of any misdeeds by Ms. Khalaf until early 2015, when he heard that Ms. Khalaf had been fired by her most recent employer for writing forged checks. It was then that Mr. Schuurman conducted his investigation and discovered the forgeries. The statement of claim was issued August 12, 2015. There is no evidence that Mr. Schuurman, or anyone on behalf of any of the plaintiffs, had actual knowledge of the forgeries prior to 2015. The question therefore is when a reasonable person with the abilities and in the circumstances of Mr. Schuurman first ought to have known of the forgeries.

[38] In the Tender Choice Foods Inc. v. Versacold Logistics Canada Inc., 2013 ONSC 80, [2013] O.J. No. 634, at para. 57, Perell J. discussed this issue and said:

The discoverability of a claim for relief involves not only the identification of the tortfeasor but also the discovery of an act or omission that constitutes liability. It is not enough that the plaintiff has suffered a loss and has knowledge that someone might be responsible; the identity and culpable acts of the wrongdoer must be known or knowable with reasonable diligence. [Citations omitted.]

[39] Jurisprudence has set out principles to guide the court in determining discoverability of a claim. They include:

1. The items listed in s. 5 of the Limitations Act are conjunctive. The limitation period does not begin to run until the putative plaintiff is actually aware of all of those matters or until a reasonable person, with the abilities and in the circumstances of the plaintiff, first ought to have known of all of those matters: see Oakley v. Guirguis, 2014 ONSC 5007, at para. 41, [2014] O.J. No. 3970 (“Oakley”).
2. The plaintiff is required to act with due diligence in determining if he has a claim. While some action must be taken, the nature and extent of the required action will depend on all of the circumstances of the case: see Oakley, para. 42.
3. The plaintiff must act reasonably in investigating and determining whether or not he or she has a claim. A consideration of whether the plaintiff has acted reasonably will include an analysis of not only the nature of the potential claim, but also the particular circumstances of the plaintiff: see Oakley, para. 43.
4. The test to be applied in s. 5(1)(b) is an objective test, based on the reasonable person. The circumstances of the putative plaintiff must be considered. The abilities of the putative plaintiff must be considered: see Etaliq Inc. v. Cisco Systems, 2016 ONSC 5109, [2016] O.J. No. 4339 (“Etaliq”).

[40] The plaintiff suggests, correctly, that at common law, a bank’s customer, absent an account verification agreement, owes no duty to the bank to examine bank statements or to maintain a system of accounting controls for the prevention of loss through forgery. In Canadian Pacific Hotels Ltd. v. Bank of Montreal, 1987 CanLII 55 (SCC), [1987] 1 S.C.R. 711, at p. 777, Le Dain J. said:

In conclusion, then, I am of the opinion that a customer of a bank does not, in the absence of a verification agreement, owe a duty to the bank to examine his bank statements and vouchers with reasonable care and to report any discrepancies within a reasonable time, nor does a customer, “sophisticated” or otherwise, owe a duty to its bank to maintain an adequate system of internal accounting controls for the prevention and minimization of loss through forgery.

[41] Here, the plaintiffs did not owe a duty to the bank to examine their bank statements. This principle applies in respect of liability. However, the question here is not one of liability, but of discoverability. In my view, this principle does not necessarily apply in respect of discoverability. The question is what a reasonable person would have done. Would a reasonable person in the plaintiffs’ circumstances and with the plaintiffs’ abilities have reviewed bank statements? If so, would a reasonable person in the plaintiffs’ circumstances and with the plaintiffs’ abilities have discovered the forgeries on a review of the statements?

[42] The plaintiff submits that, absent any evidence that the plaintiffs had cause to be suspicious of the manner in which Ms. Khalaf was performing her duties, there was no reason to question her honesty. The defendant submits that there were sufficient red flags such that a reasonable person would have investigated Ms. Khalaf’s conduct much earlier than 2015. The defendant submits that the number of cheques monetarily ending in .00 raises a red flag. The defendant suggests that the fact of the forgeries was patent, and the plaintiffs needed only to look at their records to discover them.

[43] The evidence is clear that Mr. Schuurman, nor anyone else on behalf of the plaintiffs, was aware of the forgeries until early 2015. The outstanding question is whether there were sufficient red flags such that a reasonable person ought to have been suspicious and conducted an investigation.

[44] I agree with Corthorn J., in Etaliq, when she said at para. 13, “The application of the discoverability principle is fact-based and highly contextual.” In that case, as in this case, the parties had invested heavily in the motion. There was a voluminous record. The record included transcripts from the cross-examinations referred to above. Notwithstanding, having reviewed all of the evidence filed, I find I cannot determine the discoverability issue without viva voce evidence. In my view, a trier of fact will need to hear from Mr. Schuurman (or such other representative of the plaintiffs as is applicable) directly on this issue. Accordingly, I must find that the limitation defence is a genuine issue requiring a trial.

[45] I then turn to the second step in the Hryniak analysis, namely whether the need for a trial can be avoided by using the new powers under r. 20.04(2.1) and (2.2). In my view, it can. A mini-trial, on the issue of discoverability, will result in a determination of the limitation period issue. A determination of the limitation period issue would result in a determination of a large part of the claim. As such, a mini-trial would “serve the goals of timeliness, affordability and proportionality in light of the litigation as a whole” (Hryniak, para. 66). Accordingly, I intend to conduct a mini-trial on the issue of discoverability.

Disposition

[46] The parties shall arrange with the trial co-ordinator for a mini-trial on the issue of discoverability for the purpose of determining the commencement of the limitation period. Mr. Schuurman is a necessary witness. The plaintiffs may call any other witnesses they deem necessary on the discoverability issue, and the TD Bank may summons any additional witnesses it deems necessary on this issue. At this point, I believe that two days ought to be sufficient for the presentation of this evidence, but I am not inclined to enforce a time limit. If either party believes that more than two days will be required, that party may so advise the trial co-ordinator who will bring the matter to my attention for determination.

“original signed and released by Hebner J.”

Pamela L. Hebner Justice

Released: October 20, 2017

CITATION: Service Mold v. Khalaf and TD Bank, 2017 ONSC 6197 COURT FILE NO.: CV-15-22582

ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

Service Mold + Aerospace Inc., SMI Ventilation Products Inc. and Service Mold Associates Plaintiffs

– and –

Nada Khalaf and Toronto-Dominion Bank Defendants

REASONS FOR JUDGMENT

Pamela L. Hebner Justice

Released: October 20, 2017