ONTARIO SUPERIOR COURT OF JUSTICE

COURT FILE NO.: CV-13-10349

DATE: 20180309

BETWEEN:

1169822 Ontario Limited 2213729 ONTARIO LIMITED, CAHMAC MACHINERY, CARTINA CONCRETE FORMING INC., CREDIT HILLS DEVELOPMENT CORPORATION, DAN COOPER, ECKARD CAHSENS, GRAND COMMUNITIES (PARKERHILL) CORP., GVBS INC., MAPLE VIEW BUILDING CORPORATION, MARIA BALATONI, ZOLTAN BALATONI, MICHAEL PALETTA, PLASTINA DRAIN & CONCRETE CORP., TRI-TINA FORMING INC., LUCINDA KIESSLING AND DAVID KIESSLING, BRIAN JOSEPH TUCKER, SANDRA TUCKER AND THE BRIAN JOSEPH TUCKER FAMILY TRUST (TRUSTEE OF)

Plaintiffs

– and –

The Toronto-Dominion Bank

Defendant

Jonathan Bell, Ashley Patterson, for the Plaintiffs

Geoff R. Hall, Richard Lizius and Trevor Courtis, for the Defendant

HEARD at Toronto: January 15– January 19, 2018, January 22-23, 2018 and January 25, 2018.

Reasons for judgment

S.F. Dunphy J.

[1] When does a bank owe a duty to protect third-party victims of a Ponzi scheme fraud perpetrated by one of its own customers?

[2] Our courts have long insisted that only proof of actual knowledge of the fraud (or proof of its moral equivalence in wilful blindness or recklessness) will suffice to require a bank to take steps to protect third parties from a fraud being perpetrated by its customer using accounts at the bank. The plaintiffs allege the defendant Toronto-Dominion Bank had such knowledge here or, if it did not, they submit that the common law has not yet closed the door to extending the bank’s duty of care to instances where it was put on inquiry that should have led the bank to knowledge of the fraud. This case, they say, presents facts that cry out for such an advance in the common law to be made.

[3] The plaintiffs are all victims of an admitted Ponzi scheme fraud orchestrated by Seaquest Corporation. With immaterial exceptions, none of the plaintiffs had any direct dealings with TD in relation to the fraud – certainly no dealings sufficient for any plaintiff to advance a direct misrepresentation claim. None relied on the bank in making their decisions to become involved with Seaquest. As is usually the case with Ponzi schemes, there was little to nothing left for creditors when the music stopped and the trustee in bankruptcy stepped in. There was not enough money even to fund the trustee to conduct a detailed examination of how the Ponzi scheme operated although its broad lines are clear enough (and not disputed).

[4] The plaintiffs collectively “invested” over $30 million in the scheme over a period of about five years ending in late 2011. They represent some but not all of the victims of the Seaquest fraud (i.e. not all victims joined in this law suit). Some began with small investments and gradually increased their investment while others invested large amounts all at once. Some brought friends and family into the “opportunity”. They were attracted and retained by returns that were consistent enough and high enough to persuade even the most cautious among them to turn a blind eye to signs that hindsight at least has revealed as red flags.

[5] As frauds go, this one was fairly sophisticated. While the trail of documents created may have conjured into existence investments with the appearance of solidity, these were actually mere Potemkin villages devoid of substance. The perpetrators of this scheme adorned it with sufficient verisimilitude to survive at least some scrutiny from the few investors who took the trouble to conduct any due diligence. Every missed or late payment and every bounced cheque was smoothly and soothingly explained away or the victim was persuaded to “roll over” the missing payment for still more of the same “too good to be true” returns. Behind the veneer of smooth talk, soothing excuses and corporate complexity however, there lurked an ugly con that relentlessly worked to drain its victim of a substantial part of their savings and left them with nothing but hot air.

[6] TD provided Seaquest with ordinary small business banking services and only a small amount of credit. The plaintiffs claim TD ought to have detected and brought to a halt a Ponzi scheme that they themselves continued to invest in without apparent concern. Had TD taken steps to close the accounts, they submit, the scheme could not have continued and at least some of the investor losses could have been avoided.

[7] The plaintiffs’ claim against TD Bank is premised on two closely-related legal theories. Firstly, it is alleged that TD was negligent when it failed to take steps to close Seaquest’s accounts at the point where TD was allegedly fixed with actual or alternatively constructive knowledge of the fraud being perpetrated. Secondly, it is alleged that TD is liable on the theory of knowing assistance in a breach of trust based upon its alleged actual knowledge of the fraud being perpetrated by Seaquest (or based on its alleged knowledge of Seaquest holding investor funds under an express trust that TD had notice that Seaquest was regularly breaching). In either case, the plaintiffs seek to recover the losses they suffered on investments made into the scheme after TD acquired the knowledge they say should have led to a shut-down of the scheme.

[8] While the parties are in sharp disagreement about whether liability can attach to TD based upon constructive knowledge of the fraud alone, the main issue to be resolved here boils down to the age-old question: what did they know and when did they know it?

[9] With one notable exception, the plaintiff’s case for actual knowledge of TD depends upon the knowledge of a single individual, Mr. Robinson, who was the “small business advisor” assigned to facilitate TD’s relationship with Seaquest. Mr. Robinson having emphatically denied all knowledge the plaintiffs sought to attribute to him, the case hangs quite significantly upon my assessment of the credibility of that single witness.

[10] For the reasons that follow, I am dismissing this claim.

[11] Firstly, none of the plaintiffs have made a case for the existence of an express trust existing at the time of their individual investments.

[12] Such documentation as the plaintiffs have produced governing their purported investments with Seaquest is either entirely silent on the subject or on its face is inconsistent with the existence of an express trust. I can attach little weight to the ex post facto characterizations of these investments offered by some of the plaintiffs in testimony at trial.

[13] Secondly, TD never had actual knowledge of a fraud being committed by Seaquest prior to the latter’s bankruptcy nor can TD be charged with wilful blindness or recklessness of in relation to that fraud.

[14] The perpetrators of the fraud may have enjoyed a modest level of success in cultivating a close relationship with Mr. Robinson. It appears likely that they at least attempted to do so in part using dishonest methods. However, I cannot find that their efforts accomplished anything more than securing a relatively friendly approach by TD to resolving the occasional liquidity issues experienced by Seaquest – episodes that never resulted in actual losses to TD. I cannot find in this any suggestion that Mr. Robinson knew of or even suspected the existence of the Seaquest fraud. Mr. Robinson was not “in on the secret” – he too was duped.

[15] Finally, I am not persuaded that a bank owes third parties such as the plaintiffs a stand-alone duty of care to avoid economic loss arising from mere constructive knowledge of a potential fraud. At all events, I am satisfied that none of the facts known to or learned by TD were sufficient to have put TD on notice to make an inquiry the outcome of which would have had a reasonable likelihood of detecting the fraud or reducing or avoiding any of the plaintiffs’ losses.

[16] The plaintiffs’ claim must accordingly be dismissed. My more detailed reasons follow.

Facts

[17] The parties presented this case with commendable collaboration focussing solely upon the facts and issues that were truly in dispute. All documents were agreed upon and bound in advance. Financial experts collaborated and arrived at a common approach to damages. Even the legal briefs – delivered at the opening – were co-ordinated and highlighted both the legal principles in which there was broad agreement (almost all of them) and the small number of issues where there was disagreement. What was initially headed to be a three-week (optimistically estimated) trial was reduced to under two weeks. Scarce court time was used efficiently and client legal costs were minimized. The streamlining and collaborative approach did not impede the ability of the parties to disagree quite sharply on the key elements of their case and they did so with great energy. That energy, however, was focussed on the handful of areas where both sides recognized that their case would stand or fall rather than on peripheral matters.

[18] I expressed my gratitude to the exemplary professionalism shown by both sides during the trial and I do so again now.

(a) Timeline and overview of main events

[19] Mr. David Holden had bank accounts with TD and/or its predecessor Canada Trust from about 1993 and had a relationship with its Bay & Front Street Branch in downtown Toronto. There is no evidence TD ever had any particular issues with Mr. Holden’s personal bank accounts.

[20] Mr. Holden was convicted of various breaches of the Securities Act in 1995 and sentenced to 90 days in jail. He was also sentenced to 6 years in prison arising from a mortgage fraud scheme to which he pled guilty in 2000. There is no evidence that TD was ever actually aware of Mr. Holden’s previous criminal record prior to June 2011. I shall review what knowledge if any TD gained at that time below.

[21] Without delving into the question of TD’s duties at this stage, I find that there is insufficient evidence before me to conclude that TD would have been able to discover Mr. Holden’s criminal past had it performed an “open source” internet search on platforms such as Google during the relevant time frame (2006-2011). Some of the plaintiffs performed such searches without discovering any trace of Mr. Holden’s record when they first became involved with the fraud. Better luck might have been had using certain subscription-based services that TD did not make generally available to its staff. Even there, however, the success of a search would depend upon the level of detail used in crafting search terms. There is no evidence before me, for example, as to how many returns would have been generated even from subscription services searching for news of “David Holden” alone without qualifying that search with narrower search terms supplied by hindsight.

[22] Canada Trust merged with TD in 2001 and TD continued the Bay & Front branch under the “TD Canada Trust” name thereafter. By 2006, this branch, located in the heart of downtown Toronto’s financial district, was focused on retail and small business banking. In 2006, TD had approximately 1,500 small business accounts at the Bay & Front branch out of about 500,000 such accounts spread among approximately 1,250 branches nationwide.

[23] Commercial banking in the area was handled out of TD’s main branch a block away from the Bay & Front branch.

[24] The main point of differentiation between “small business” banking and “commercial” banking at TD was not the size of the business itself but the size of the credit if any extended to it. At the time, a credit line beyond $500,000 would normally result in an account being handled by the commercial banking group rather than the small business banking group.

[25] At the relevant time, TD employed about 300 “small business advisors” spread among its 1,250 retail branches. Not every retail branch had one. Mr. Patrick Robinson was the sole “small business advisor” operating out of the Bay & Front branch between 2006 and 2011 (the relevant years for this litigation).

[26] The small business advisor’s role was primarily one of facilitating and improving the relationship between the small business customer and the bank. The SBA would help iron out service issues with the customer and look for opportunities to promote additional services to the customer. Within the branch, Mr. Robinson was supervised by and reported directly to the branch manager. He also reported on a “dotted line” basis to the small business regional area manager.

[27] Mr. Robinson did not have exclusive or even primary responsibility for overseeing or managing any accounts. After a small business account was opened, his role was primarily reactive – either dealing with requests for assistance by the customer or dealing with issues for the bank arising during the operation of the account (especially overdraft issues).

[28] There was no person at the branch tasked with responsibility for reviewing activity generally in a particular customer’s account and assessing whether, for example, the activity appeared to conform to the disclosed business of that customer. As small business account advisor, Mr. Robinson did not have a “teller window” and could not conduct teller business at his desk. He could however call up the account on his computer terminal if an issue arose requiring him to look at it.

[29] TD small business customers had wide latitude in choosing how they wished to conduct their banking. Customers might deal directly with a teller and might also have questions or issues they wish to take up with the small business advisor. They might prefer dealing with their retail financial advisor. They might prefer to conduct some or all of their business at other branches using inter-branch banking.

[30] Of the approximately 1,500 small business accounts at the branch, the Seaquest accounts were neither the most nor the least active in terms of the amount of attention devoted to them by Mr. Robinson over the relevant time frame.

[31] In this branch at least, Mr. Robinson and the branch manager (there were three of them over the relevant time frame) reviewed the overnight overdraft reports generated from the clearing of cheques and other transactions each day. Usually, Mr. Robinson was responsible for following up with the small business clients that showed up on this report as having fallen into overdraft. This was not an uncommon occurrence among the 1,500 or so small business clients whose accounts resided at the branch and there is no basis to conclude that Seaquest was more frequently in overdraft trouble than other clients even if some overdraft episodes were relatively large.

[32] Clients in an overdraft position would be contacted and inquiries made to rectify the situation as soon as possible. This responsibility usually fell upon Mr. Robinson’s shoulders.

[33] Another common occurrence in the daily business of the branch was dealing with “holds” on deposited cheques. Cheques and other instruments drawn on another financial institution are normally credited to the depositor’s account on a provisional basis only since these might subsequently be rejected or returned by the institution upon which the cheque was drawn once the cheque is submitted through the clearing. A “hold” is placed upon the deposit until the bank can be confident the cheque or instrument will be honoured.

[34] The decision to modify or waive a hold period do so is fundamentally a credit decision based upon experience with the client, the level of deposits in other accounts or credit available to the client in related accounts, knowledge of or experience with the drawer of the cheque, etc. There is no hard and fast rule as to when a hold will be placed or for what period of time. The teller receiving the deposit might be asked to modify or waive the hold period. A small business advisor or the branch manager might also be asked to modify or waive the hold period. Mr. Robinson frequently dealt with requests by Seaquest to waive holds on cheques it was depositing.

[35] Seaquest was incorporated in March 2005. Mr. Joshua Pelly was the incorporating (and only) director and officer initially.

[36] On June 1, 2006, Seaquest opened its accounts with TD at its Bay & Front branch. It was transferring its account from Scotiabank, a not infrequent occurrence particularly in the early stages of a banking relationship. The account opening forms were processed by Mr. Robinson and approved by the branch manager. Mr. Robinson had no clear memory of who attended at the branch when the account was opened. Mr. Holden may have done, but he was not sure. Nothing turns on the answer to that question.

[37] Mr. Holden, as an existing client of the bank, was listed as one of three persons who referred Seaquest to TD. He was not a signatory of any of the account opening documents nor was he then a director or officer of Seaquest.

[38] The account opening forms variously described Seaquest’s business as “business management & assistance re financing & restructuring” and “provides assistance to business looking to re-structure or apply for financing”. The businesses so described did not mark Seaquest as being involved in a line of business for which enhanced due diligence was required under TD’s anti-money laundering (or “AML”) policies.

[39] In November 2007, there was a change at Seaquest. Mr. Holden was named President of Seaquest and Mr. Pelly appears to have left the company altogether. As this time, Mr. Edward So became Secretary of Seaquest and it is with him that Mr. Robinson had the bulk of his Seaquest-related dealings until Mr. So’s departure from Seaquest in early 2011.

[40] The plaintiffs initially claimed that TD breached duties owed to them in connection with the Seaquest account opening process in June 2006. Those claims were withdrawn at trial after it became clear that Mr. Holden was not a signing officer of Seaquest until more than a year later.

[41] In late September 2010 Mr. Ali Hemani was added as a signing authority to the account and eventually replaced Mr. So early the following year. Mr. So left Seaquest and went on to work at another company (Redstone) with no apparent connection to any of the claims of the plaintiffs at least. Mr. So was also removed as a signing officer of Seaquest in early 2011.

[42] Seaquest’s banking operations were, from TD’s perspective at least, quite plain and ordinary. Seaquest had a relatively small overdraft credit line of $35,000. That modest credit placed Seaquest squarely within the parameters for a small business account. Seaquest and certain affiliated companies (to be discussed below) also had investment accounts with TD’s self-directed brokerage affiliate TD Waterhouse. It had some credit card products.

[43] While Seaquest’s account was generally trouble-free, there were what might best be described as clusters of liquidity issues that arose during the five year history of Seaquest’s banking arrangements with TD. To use a metaphor, Seaquest occasionally got itself out over thin ice, but it was always able to skate away from trouble. It did so until October 2011. Prior to then, the problems that arose were dealt with swiftly.

[44] The account statements for Seaquest over this entire time period were produced as an exhibit at trial. These show a relatively steady but moderate level of activity most months. There were occasionally high balances, but these usually only persisted for relatively brief periods of time. The account was sometimes in debit balance, but again, not generally for more than a brief period of time and – with one exception – seldom for a significant amount of money relative to the volume passing through the account.

[45] It was suggested that an examination of the account activity demonstrates that Seaquest was “obviously” a Ponzi scheme. I cannot accept that suggestion. Apart entirely from the fact that TD was not required to perform – and did not in fact perform – any sort of periodic analysis of the activity in the account, there was no expert opinion evidence to support that conclusion. Having reviewed the statements in some detail, I found nothing approaching the level of plain and obvious fraud that could be identified without employing hindsight. Whether or not TD had a duty to perform such an examination at some point, it had no practice of doing so and did not in fact conduct such an analysis of the Seaquest account prior to Seaquest’s bankruptcy.

[46] I find that absent such a forensic analysis (going behind the account statements to review and analyse the identities of transferors and transferees), the account statements themselves did not contain any “red flags” indicative of the likely or probable presence of fraud.

[47] In 2010, “Seaquest Capital Corporation” was added to the Seaquest family of companies. Mr. Robinson was involved in the account opening process and in ironing out account issues that arose with this company from time to time.

[48] There was a further change of signing authorities at Seaquest in late August 2011 when Mr. Hemani was removed as signing authority and Mr. Phipps and Mr. Holden appear to have been the remaining signing authorities until the music stopped in October 2011.

[49] Between August 2006 and October 2011, each of the plaintiffs made a number of “investments” with Seaquest and other apparently related companies. TD does not dispute that Seaquest was operating a Ponzi scheme at least from June 1, 2006 when the account was opened nor does it dispute that the plaintiffs were victims of that fraud.

[50] A common feature of all of the investments by the plaintiffs is that Mr. David Holden was instrumental in persuading them to make the investment and the investments offered a very high rate of return – generally somewhere between 15% and 30%. While usually relatively short-term in nature, the plaintiffs were generally persuaded to “roll over” their investments into new, equally-attractive investments. Some of these “roll over” discussions happened after Seaquest had failed to repay an investment at term. From time to time, various of the plaintiffs agreed to make additional investments or new investors were found, thereby adding further funds to the scheme.

[51] Another common feature is that the investments were fraudulent. Either the alleged borrower did not exist or it was a non-arm’s length company related to the principals of Seaquest. Sometimes the plaintiffs themselves had equity in one or more of the borrowers but the companies in question were managed by Mr. Holden. Where the borrowers existed, they in fact had few if any of the secure attributes represented or none of the assets alleged at the time the victim was persuaded to part with his or her savings. Investments were usually guaranteed by Seaquest and at least some of the time were evidenced by formal loan documentation forwarded to the plaintiffs.

[52] The plaintiffs in this case exercised degrees of diligence varying from a completely insouciant disregard of risk at one end of the spectrum to “some” due diligence into the principals in the middle of the spectrum to a moderate degree of care taken in examining documents (in one case). The documentation underlying the investments retained and produced by the plaintiffs was often spotty.

[53] Whatever can be said about the plaintiffs’ level of collective care in avoiding this fraud, there is no suggestion that any of them were actually aware either of Mr. Holden’s fraudulent past or of the fraudulent nature of the investments they were being persuaded to make.

[54] On Thursday June 30, 2011 at least one of the wheels on this scheme began to come off.

[55] One group of investors (Mr. Tucker, his wife and his family trust) served a Notice of Motion seeking a Mareva injunction. A copy of the Notice of Motion was sent to TD’s corporate security office minutes before 5 p.m. on the eve of the July long weekend. I shall refer to this Notice of Motion in further detail below.

[56] The Mareva injunction was scheduled to proceed the following business day (Monday July 4, 2011). It did not proceed and was ultimately withdrawn and settled later in July. Under the settlement, the Tucker plaintiffs agreed to maintain confidentiality and were to see their “investment” repaid to them gradually. They received about half of their money back before Seaquest was shut down in October.

[57] The Notice of Motion was not sent to the branch and was simply filed away by TD’s corporate security office given the lack of any further action on it by the plaintiffs.

[58] Whether it was due to the withdrawal of funds by the Tucker family or due to some other reason, the scheme began to unravel by September, 2011. Seaquest filed a Notice of Intention to make a bankruptcy proposal on October 24, 2011 and was later placed into bankruptcy liquidation. The extent of the fraud only emerged after the bankruptcy filing.

[59] The report of the defendant’s damages expert (PriceWaterhouseCoopers) has been accepted by the plaintiffs as providing the methodology for calculating the plaintiffs’ damages at various points in time depending upon whether and when TD is found to have become liable to some or all of the plaintiffs. The parties agreed that, should I find in favour of the plaintiffs, they expect to be able to agree on the damages from whatever date I might specify as being the date on which TD had notice of the fraud and ought to have denied Seaquest further access to its accounts. Accordingly, I have not made specific findings in relation to damages apart from addressing questions of timing when things became known.

[60] All of the plaintiffs’ claims relate to their “investments” made in or through Seaquest. At least some of the plaintiffs (the Plastina family interests) had other business dealings with Mr. Holden and were co-owners of at least some of the companies used by Mr. Holden and Seaquest to raise money from the other plaintiffs. None of the claims made by the Plastina family (or those related to them) concerns those other entities.

(b) Particular circumstances of the plaintiffs

[61] I shall review briefly the particular circumstances of each plaintiff below. In doing so, I have not attempted to quantify the damages claims of any of them. The parties have gone a long way towards reconciling the claims of each and I have only been asked to determine (a) whether any of the plaintiffs has proved any claim at all; and (b) if so, to specify as of which date a claim has been made out. The parties have undertaken to finalize any damages claims as needed between them and this court would only become involved if and to the extent necessary to resolve any issues arising from their failure to do so should that occur. Accordingly, the numbers used below are intentionally approximate only.

(i) Peter Plastina: Credit Hills Development Corporation, Grand Communities (Parkerhill) Corp., GVBS Inc., Maple View Building Corporation, Plastina Drain & Concrete Corp. and Tri-Tina Forming Inc.

[62] Peter Plastina is a director or officer of each of the following plaintiffs and was the person with knowledge and responsibility for the investments made by each in or through Seaquest: Credit Hills Development Corporation, Grand Communities (Parkerhill) Corp., GVBS Inc., Maple View Building Corporation, Plastina Drain & Concrete Corp. and Tri-Tina Forming Inc. Peter Plastina’s brother Carlo was involved with some of these companies as well.

[63] Peter Plastina and his brother Carlo worked with their father in a number of construction-related businesses that they have taken over and expanded since their father’s retirement. Peter was introduced to Seaquest through his brother Carlo (whose story is discussed below). Mr. Holden came by the family business offices from time to time to discuss business matters with Carlo. Peter came to know Mr. Holden and learned of the investments Mr. Holden was arranging through Seaquest. He was interested. The investments Mr. Holden was arranging seemed to be liquid (relative to the time horizon of real estate investments at least) and offered a high rate of return.

[64] His initial investment was a relatively small one of $100,000 or perhaps $150,000. This was supposed to be for a pending acquisition that never closed. He got his principal back plus a piece of the break fee for the deal that did not close – perhaps $25,000. The hook was set. Thereafter, Peter Plastina made a series of investments. Mr. Holden was his only contact and the source of all the information he received.

[65] Peter Plastina performed no due diligence at all and relied upon what he understood to be his family’s favourable experience with Mr. Holden. If he received any documentation in respect of the various investments he made, he recalls reading none of it.

[66] Over time, the investment of the various family businesses arranged by Mr. Holden were in the range of $25 to $26 million. Not all of this was through Seaquest and is not the object of this claim however. The total amount claimed for this group of plaintiffs arranged by Peter Plastina is approximately $18.7 million.

[67] He had no particular difficulties with any of the investments. Usually he received post-dated cheques from Seaquest for all of the scheduled payments (interest plus a “balloon” for principal at the end). There was one cheque he admitted was bounced by the bank (this was at CIBC). However, when he brought it to Mr. Holden’s attention, Mr. Holden took care of the problem promptly. There may have been other instances like this. Peter Plastina did not consider these issues to be other than isolated incidents.

[68] The first sign of serious trouble was in August 2011. There were some investments coming due and Peter Plastina needed the funds for some pending land deals that he had. He declined to agree to roll over the investment and Mr. Holden did not press the point. However, the money was not forthcoming when due. Mr. Holden told him that the bank would not permit him to pay any principal but he would be able to pay interest. Interest was paid for the first month and nothing further was received after September 24, 2011. His next information was when the bankruptcy proceedings were commenced.

(ii) Carlo Plastina, Cartina Concrete Forming,

[69] Carlo Plastina was also a social acquaintance of Mr. Holden. Mr. Holden was married to the sister of a good friend. He had been on trips with Mr. Holden.

[70] In June of 2008, Mr. Holden and Carlo Plastina discussed going into business together. The business would be involved in importing and distributing a building material from Egypt that they thought had great potential in road building. Mr. Holden needed access to Mr. Plastina’s contacts in the construction business. They formed a company known as “Icon Global” as 50:50 shareholders in early 2009. They also founded Ready-Mix Concrete and “MonoCrete”, in both cases as a 50:50 corporate venture. At least one of these companies figures among the list of names used by Mr. Holden in proposing investments to various of the other plaintiffs. According to Carlo Plastina, Mr. Holden was a director of each of these companies and, following the collapse of Seaquest “everything just disappeared”. His investments in those companies are not part of this action.

[71] Carlo Plastina learned of the “opportunity” to invest in Mr. Holden’s other ventures during some of the meetings he had with Mr. Holden to discuss the importing and distributing business the two were in the process of establishing.

[72] I was not at all satisfied with Mr. Carlo Plastina’s credibility. I found that he underplayed the nature of his relationship with Mr. Holden. His rather specific allegations about the investment structure he allegedly thought governed his investments seemed to be the product of subsequent wishes and suggestions rather than contemporary fact and is not at all consistent with the casual, due diligence-free nature of the significant investments he made though Mr. Holden into Seaquest. I also reject any of his evidence tending to suggest that TD had anything at all to do with his decisions to invest in or with Mr. Holden. His report of fairly casual conversations with TD employees, even if they were accurately reported by him (which I don’t accept) were a long way from establishing anything like detrimental reliance.

[73] Carlo Plastina learned of the inability of Mr. Holden or Seaquest to return principal on August 24, 2011 at the same time as his brother Peter. Before this, he had no inkling of trouble. Cartina’s investment, arranged by Carlo Plastina, stood at about $1.45 million, the bulk of which arose from the last dated investment of US$ 1 million in March 2011 that was to have matured in September 2011.

[74] The two Plastina brothers appear to have been strangely mute after being told of a suspension of payments in late August 2011 given the extensive investments they had with Mr. Holden, including the Seaquest-related ones. I found the entire question of the relationship between Carlo Plastina, Peter Plastina and Mr. Holden to be a very, very suspicious circumstance having regard to the extensive web of interconnections between them. I have no hesitation in concluding that the Plastina’s were not dealing at arm’s length with Mr. Holden. Some of the companies in which Carlo Plastina invested along with Mr. Holder were used by Seaquest to solicit investments from other plaintiffs, even if Carlo Plastina has denied any knowledge of these circumstances. This is a troubling circumstance given that the plaintiffs represented by these two brothers represent more than two-thirds of the total claims of all of the plaintiffs.

[75] I considered and rejected the question of treating the claims of Plastina plaintiffs differently from the rest of the plaintiffs. They may have had a greater chance to detect the fraud than some of the other plaintiffs, but invest they did and their investments were lost. There is no basis to conclude that they knew about the Ponzi scheme, their huge losses stand as mute witnesses to their ignorance of the fraud. They too were victims of the fraud. In this, Mr. Holden appears as an equal-opportunity perpetrator of fraud – taking in friends, business associates and strangers with equanimity.

(iii) Brian Joseph Tucker, Sandra Tucker and Brian Joseph Tucker Family Trust

[76] Brian Tucker is a Chartered Accountant by training. In addition to his accounting experience, Mr. Tucker has been a successful entrepreneur lending his expertise profitably to certain early-stage businesses. In addition to managing his own savings, Mr. Tucker has invested money on behalf of a family trust he established and he also advised his wife. It was his advice that brought the three Tucker plaintiffs into the Seaquest orbit.

[77] Mr. Tucker first heard of Seaquest via advertisements he heard on the radio and then saw in the newspaper for an entity known as Harris Brown Partners Limited. He understood Harris Brown to be a Seaquest-controlled entity. That fact has not been established before me, but it is clear that Seaquest and Harris Brown shared a number of key personnel. The inference that the two entities were at least related to each other is one that I do not hesitate to draw. However, there is no admission that Harris Brown operated a Ponzi scheme or was party to any fraud.

[78] Mr. Tucker attended a Harris Brown presentation about a particular investment given by Mr. Harris in January or February of 2010. In the course of that presentation, Mr. Harris spoke highly of Mr. Holden and introduced him. Mr. Holden then mentioned the “opportunity” of investing in Seaquest.

[79] Mr. Holden proceeded to set the hook. Mr. Tucker was invited to a variety of “men’s” dinners featuring cigars, drinks and the opportunity to rub elbows with other investors like himself. He became attracted to the idea of investing with Mr. Holden.

[80] Mr. Tucker did very little research on Mr. Holden, Harris Brown or Seaquest, but he did do some. He verified that Harris Brown were registered with the Ontario Securities Commission, although Seaquest was not. He Googled Mr. Holden’s name as well as Harris Brown and possibly Seaquest. However, he did not recall finding anything of interest arising from those searches. He did not Google any of names of the companies he was supposed to be investing in and had little memory of any of their names.

[81] Mr. Tucker’s initial investment was $150,000 and was originally intended to be with Harris Brown in March 2010. However, Mr. Harris called him back and asked him to make the cheque payable to Seaquest Capital Corporation instead. Mr. Tucker asked few questions, saw even less documentation and simply complied with the request. He understood the “investment” was to be for a one year, 12% “bridge loan” intended for a company that he believes was called “MMI”. Interest was regularly paid and the investment was “rolled over” when it came due a year later with an additional $350,000 being added to it (bringing the total of this investment to $500,000).

[82] The documentation Mr. Tucker recalls seeing at the time he made his investments was a “receipt of funds”. About ten days later he would receive a promissory note from the company and other documents, the nature of which he was not able to recall. He did not learn the name of the companies he believed he was investing in until after the fact. Mr. Holden explained to him that revealing these names might be insider trading, an explanation Mr. Tucker accepted without question.

[83] Further investments following the same general pattern soon followed in ever-larger increments. There was $400,000 made on September 27, 2010, itself rolled over in March 2011 until September 2011. There was $300,000 invested on December 3, 2010 that was rolled over on June 3, 2011 until December 2011. There was $500,000 invested on February 24, 2011, maturing August 24, 2011.

[84] The pace and volume picked up in May/June 2011. Mr. Tucker invested $1 million on May 12, and a further $3.5 million on June 2, 2011. All of the above dates being the dates shown for such investments in Seaquest’s own records – the dates the relevant cheques were cleared (and where they were deposited) may be different. With the exception of the first investment (at 12.25%), the remaining investments all attracted a 15% rate of return.

[85] In late May, 2011, Mr. Tucker received a call from “someone” at TD. He recalls that it came on the Saturday of the May long weekend. The call asked him to verify that he was “still going ahead” with an investment represented by a $1 million cheque Mr. Tucker had given to Seaquest. This cheque was one of a number of instances where TD waived “holds” that the plaintiffs refer to as “red flags” and will be gone into further below.

[86] Mr. Tucker said that he was somewhat disturbed by this call. He clearly was not disturbed enough at the time to say anything negative to the caller or to halt payment on his cheques however.

[87] The connection between this call and Mr. Tucker discovering details of Mr. Holden’s criminal past in June 2011 is unclear. What is clear is that at some point in mid-June, Mr. Tucker learned of Mr. Holden’s criminal past and leapt into action. Mr. Tucker testified that even after learning of Mr. Holden’s record, he did not yet suspect fraud but decided to have nothing to do with him. I rather doubt that Mr. Tucker was quite that cautious in his conclusions. Actions speak louder than words. Mr. Tucker hired a private investigator and lawyers and worked to get his money back as soon as possible. At this point, the Tucker interests had invested approximately $6.2 million with Seaquest and related entities.

[88] On June 30, 2011, Mr. Tucker brought a Mareva injunction that will be discussed in some detail below. His lawyers and Seaquest’s lawyers worked feverishly over the long weekend to resolve matters and the injunction application did not in fact proceed. A settlement was finalized soon afterwards. Under the settlement, certain allegations made in the proceedings were struck, Mr. Tucker’s action was dismissed, his family’s investments were agreed to be returned via monthly payments and Mr. Tucker agreed to keep the terms of the settlement confidential. Mr. Tucker received back some of the agreed funds before Seaquest’s bankruptcy in October 2011 and has joined this claim seeking the remainder (approximately $3 million).

(iv) David Kiessling and Lucinda Kiessling

[89] Mr. David Kiessling found his way into Mr. Holden and Seaquest’s circle through an advertisement he noticed in the newspaper from Harris Brown. He contacted Harris Brown. In early 2008 he had a lunch meeting with Mr. Holden and learned of the opportunities that he could find at Seaquest.

[90] Mr. Kiessling was a fairly sophisticated investor and had many years of managing his family’s investments. He actually performed some due diligence on Mr. Holden but learned nothing of Mr. Holden’s criminal past from his internet searches. He even searched “David Holden Fraud” and came back with no relevant hits. While he did perform some corporate-level due diligence, this was into Harris Brown. He reviewed their deal documents – documents with which he is quite familiar by reason of his years of business and investment experience – and all seemed to be in order. He did not repeat that due diligence when he made his investments with Seaquest though.

[91] Mr. Kiessling’s first three investments in 2008 were relatively small and short-term (4 or 5 months). Each was repaid. He recalls that one or two interest payments on these may have been late, but the problem was fixed swiftly and raised no alarms with him. There followed three larger investments in 2009, 2010 and 2011. This time, he rolled the investments over when they matured. There were some problems with clearing cheques deposited by him at his home branch in Kitchener but this was soon resolved when Seaquest arranged to pay him with electronic funds transfers. The last of these three investments was made in May 2011 at a rate of 24% for a four-month term. It was rolled over in September 2011 at a slightly lower (18%) rate. It was never repaid.

[92] His net losses amount to approximately $450,000.

(v) Eckard Cahsens and Cahmac Machinery

[93] Mr. Cahsens was introduced to Mr. Holden and Seaquest by Mr. Kiessling and his path to investing was similar. He attended a Harris Brown presentation and was wooed by Mr. Holden. He made small initial investments in 2008 and had a good experience with them, especially with the 18-24% rates of return he was getting. He suspected nothing was amiss until things blew up following the bankruptcy. His losses amount to approximately $889,000.

(vi) Paul Paletta – 1169822 Ontario Limited

[94] Mr. Paletta is the principal behind the plaintiff 1169822. Since obtaining his Bachelor of Commerce degree, Mr. Paletta has spent his career running a family meat processing business and, more recently, a family-owned real estate development company. He was introduced to Mr. Holden by his financial advisor. His advisor, Mr. Scott Studley, introduced him to Mr. Holden at a lunch in 2009 and, shortly afterwards, Mr. Paletta made his first investment.

[95] He described his first investment this way: “I gave the money to Seaquest and Seaquest was loaning it out to another third party.” In short, Mr. Paletta neither asked for nor received much in the way of details about what he was investing in or what legal structures were being used. He did no due diligence on his own. He alleges no contact with TD related to his investments.

[96] Unusually enough, 1169822’s initial $150,000 investment was fully repaid, with interest, on February 5, 2010. However, the hook had been set and further investments were made. Under Mr. Paletta’s direction, 1169822 invested $200,000 on December 16, 2009, $150,000 on February 22, 2010, $200,000 on April 14, 2010, $500,000 on October 1, 2010, $300,000 on February 24, 2011. These investments were rolled over from time to time and Mr. Paletta suspected nothing was amiss until the bankruptcy intervened. The rates paid on these investments varied from 12% to 18% with an “equity upside split” element to each.

[97] Mr. Paletta made two additional investments in July, 2011 of $250,000 that paid 2.5 % per month in interest, a rate that he described as “extremely higher” than the others and one that “definitely set off some red flags” and “caused some suspicions”. Nevertheless, he made the investment and continued to roll over prior investments coming due in August and September without apparent hesitation.

[98] When the dust settled, 1169822 had lost about $1.65 million. Seaquest never missed any payments to him and Mr. Paletta never suspected anything was amiss until the end despite the “red flags” he described seeing in July.

(vii) Michael Paletta

[99] Michael Paletta was introduced to Seaquest and Mr. Holden by his brother Paul. He attended a presentation about the “Santa Fund” (one of the structures used by Seaquest to solicit investments). He performed no due diligence and understood relatively little of the structure behind his investments. At least one investment was made after the loan in question had already closed according the proposal he received. Between July 201 and August 2011 he made a total of six investments with Seaquest (not including roll-overs). His net loss was just over $1 million.

(viii) Kal Johnson and 2213729 Ontario Limited

[100] Mr. Johnson was another investor introduced to Mr. Holden by Mr. Scott Studley. He invested a month or two after the initial introduction made at a golf course. Mr. Johnson testified that he understood that Seaquest would hold his money until the company that it was ultimately intended for needed it. I attach no weight to Mr. Johnson’s very vague description of what he understood the structure of this investment to be. This risk of these after-the-fact descriptions representing the product of suggestion is simply too high and the oral descriptions offered by witnesses such as Mr. Johnson are not confirmed by any documents shown to me. I cannot find that Mr. Johnson knew or cared whether his actual investment was with Seaquest or with some client of Seaquest whose name he did not know. I cannot, in particular, infer any kind of representation was made to him amounting to an actual undertaking by Seaquest to hold his investment funds under some kind of express trust (a conclusion that in no way excludes the presence of fraud and constructive trust arising).

[101] Mr. Johnson did effectively no due diligence either on Seaquest or the names of any of the companies that he was supposed to be investing in. He made his investments without concern up until he learned of the bankruptcy. He invested $100,000 on September 15, 2009, $150,000 on March 9, 2010, USD $200,000 on February 24, 2011 and a further $200,000 on August 22, 2011. These were rolled over as they came due. The last investment had a lump-sum interest component payable after nine months that Mr. Johnson admitted was equivalent to about 26% per year. The other investments paid 15% interest. His total investment loss was approximately $650,000.

(ix) Zoltan Balatoni and Maria Balatoni)

[102] Mr. Zoltan Balatoni and his wife Maria were social acquaintances of Mr. Holden before they had the misfortune of becoming his victims as well.

[103] Mr. Balatoni first met Mr. Holden in 2000 or 2001 at a party at Mr. Holden’s cottage. He knew Mr. Holden as an “investment banker”. Given the evidence that Mr. Holden became a guest of Her Majesty for a six year prison term following a guilty plea in 2000, I will infer the introduction took place before that guilty plea and sentence. Mr. Balatoni was quite unaware of this particular side of Mr. Holden’s life.

[104] Mr. Balatoni’s evidence about his first investment was quite vague. He had received some proceeds from the sale of his cottage that he was looking to invest and he asked his accountant to look into Harris Brown. After getting a favourable report back from his accountant, he invested $200,000. However, he didn’t know where the money was going and just knew that “they” were going to invest it for him.

[105] In fact, his first investment was made via a cheque from his wife directly to Mr. Pelley rather than to Seaquest. He did well on this investment and decided to put in more money. He had only the most general of ideas where his money was going. He heard of bridge loans but really didn’t know where his money was going. He stopped investing when he had no more to invest and then rolled over investments until the bankruptcy. Seaquest’s records show a variety of investments of both debt and equity.

[106] Mr. Balatoni invested $200,000 in March and April 2005 which investment was increased to $300,000 (i.e. an additional $100,000) in July 2005. Another investment of $100,000 was made on October 26, 2009 and a further $100,000 on October 26, 2010. Each of these investments were rolled over until the bankruptcy. His total investment appears to be about $500,000. There were other equity investments that appear to be have been made in 2005 and 2006 before the time frame for which any allegations against TD have been maintained.

[107] Mr. Balatoni never did any due diligence into Seaquest. He explained: “I get the return so I wasn’t interested”. His investments were made after oral discussions with Mr. Holden, documents arriving after the fact (that he does not appear to have read with any interest). He received interest rates of 15-18% and up to 24%.

[108] He had some difficulty getting his year-end tax statements from Seaquest. As well, interest payments were sometimes late by one to three months. None of these caused him any particular concern and he continued to invest. He had no contact with TD at all.

(x) Dan Cooper

[109] Mr. Cooper too was introduced to Mr. Holden and Seaquest through Mr. Studley. Mr. Cooper met Mr. Studley on vacation and the two gradually formed a friendship. Over the course of that developing relationship, he learned that Mr. Studley was friends with Mr. Holden and Mr. Studley arranged to introduce him to Mr. Holden over coffee one day. Mr. Holden kept in touch with him and, after about a year, Mr. Cooper eventually agreed to invest with Mr. Holden. He invested a total of $1 million with Seaquest in September 2010.

[110] Mr. Cooper did no due diligence for this investment. He did not know the name of the company Seaquest was investing in, only finding out that his investment had been divided among two companies after the fact.

[111] This investment was originally supposed to be for six months at 15%, due on March 25, 2011. The first few interest payments arrived on time via electronic transfer. Subsequent interest payments were missed and Mr. Cooper received a number of excuses instead of his money. After some pressing, Mr. Cooper got about half of his money back. It is unclear when this occurred. He never received anything else.

[112] Mr. Cooper’s losses amount to just under $400,000.

Issues to be decided

[113] Have the plaintiffs established the existence of an express trust for the purposes of the claim of knowing assistance in a breach of trust?

[114] Did TD have actual notice of the fraud of Seaquest at any time before the bankruptcy of Seaquest?

[115] Is constructive notice of the fraud sufficient to establish a duty of care?

Analysis and discussion

(a) Have the plaintiffs established the existence of an express trust for the purposes of the claim of knowing assistance in a breach of trust?

[116] The oral evidence of some (but not all) of the plaintiffs contained descriptions of the “expectation” they each had that all of their several “investments” in or arranged by Seaquest were intended to be held separately by Seaquest and used only for the particular purpose of the investment.

[117] The plaintiffs sought to rely upon this evidence to claim that all of the funds invested by each of them with Seaquest were always intended to be subject to an express trust for their benefit. This allegation, if proved, would permit them to attempt to demonstrate that TD had knowledge of those express trusts and of Seaquest’s breaches of such a trust even if they cannot prove that TD actually knew that Seaquest was operating a fraud. Knowingly assisting another to breach a trust renders the person assisting liable for the breach of trust as a constructive trustee: Air Canada v. M & L Travel Ltd., [1993] 3 SCR 787, 1993 CanLII 33 (SCC) at para. 38.

[118] I have not been able to accept any of the plaintiffs’ oral evidence on this subject. This aspect of the witnesses’ evidence, such as it was, often only emerged after leading questions. This circumstance did not dispel the impression of a memory owing more to wishful thinking than hard fact.

[119] The plaintiffs’ status as intended “investors” in loan transactions[^1] arranged by Seaquest does not, in and of itself, lead to an inference that Seaquest thereby always received investor funds under an express trust. Seaquest did not have a trust or escrow account (at least not with TD) and there is no evidence that it ever suggested to investors that it did. Such receipts for investments as the plaintiffs have produced contain declarations such as “I/We understand that funds to SeaQuest Corporation are deposited directly into SeaQuest’s current account” or “I/We acknowledge that the funds will be utilized by SeqQuuest Corporation in its investment and financing activities”. Some receipts were vaguer still. None of this is the language of express trust and is generally inconsistent with the existence of an express trust.

[120] “Investments” can be made under any number of forms. Such documentation as has been produced is generally consistent with Seaquest selling a participation in loans that it had already committed to and arranged as principal. Most of the emailed solicitations sent to investors by Seaquest requested the funds be payable to Seaquest and not the borrower directly. None of this excludes express trust necessarily, but it does not confirm it either and is generally more consistent with other, non-trust arrangements.

[121] Nothing in the paper record produced by the plaintiffs indicates an express trust or leads to that conclusion as a necessary or even probable inference. I cannot infer from this evidence that any of the investments made by the plaintiffs were intended to be subject to an express trust. The plaintiffs have failed to discharge their burden of establishing an express trust governing their investments with Seaquest.

[122] The claim of knowing assistance in a breach of an express trust requires proof of actual knowledge by the defendant of the existence of a trust obligation and of the dishonest performance of the trust by the trustee: Air Canada v. M & L Travel Ltd., [1993] 3 SCR 787, 1993 CanLII 33 (SCC). Actual knowledge in this context includes wilful blindness or recklessness.

[123] The plaintiffs have failed to adduce any evidence that TD knew either of the existence of an express trust or of a breach of such a trust.

[124] While TD certainly knew that some of the deposits being made into the Seaquest account were from “investors”, that occasional description offered by Seaquest for some deposits cannot be generalized to all of them. In fact, TD never had detailed information about the nature of those investments or the legal relationship intended to be created thereby. TD did not receive copies of the solicitation documents or receipts sent to investors. An express trust is only one of several possible structures that might have been employed to reflect an investment.

[125] I find that the plaintiffs have failed to establish that TD has knowingly assisted Seaquest in the breach of an express trust.

(b) Did TD have actual knowledge of the fraud of Seaquest at any time before the bankruptcy of Seaquest?

[126] My finding rejecting the plaintiffs’ claim arising from an express trust does not exclude the possibility of such a claim being made out based on breach of a constructive trust.

[127] By admitting that Seaquest was a Ponzi scheme, TD has effectively also admitted that Seaquest was a constructive trustee of the plaintiffs’ funds when it received them. Under the principles described in Air Canada, anyone who knowingly assisted Seaquest in breaching that constructive trust by turning the funds to another purpose (i.e. other than returning the fraudulently obtained funds to the victims) would also run the risk of being found to be a constructive trustee.

[128] The parameters of the equitable claim for knowing assistance in a breach of trust are quite clear and the required level of knowledge is a high one. Only actual knowledge of the existence and breach of the trust – or its moral equivalents wilful blindness or recklessness – will suffice to bind the stranger’s conscience in favour of the victim of the breach of trust and give rise to a remedy where the required action was not taken. The bank’s liability does not arise where only constructive knowledge of the breach can be shown: Air Canada at paras. 39-41.

[129] Actual knowledge of those same facts (i.e. the existence of the fraud and the use of the bank’s services to facilitate it) are also the predicates of the duty of care underlying the negligence claim advanced here[^2]. There is an acknowledged duty of care owing by banks to third parties not to permit their account facilities to be used by the bank’s customer to operate a fraud upon such third parties: Dynasty Furniture Manufacturing Ltd. v. Toronto Dominion Bank, 2010 ONSC 436, [2010] O.J. No. 2703; affirmed on this point 2010 ONCA 514, 321 D.L.R. (4th) 334 (Ont. C.A.).

[130] In other words, if TD had actual knowledge that Seaquest was defrauding the plaintiffs, it had a duty not to enable Seaquest to further that fraud through the use of its accounts at TD. The parameters of this claim are the same, be the claim expressed in negligence or as an equitable claim for knowing assistance in a breach of trust. Of course the plaintiffs also claim that the negligence duty of care extends beyond actual knowledge to cases of constructive knowledge as well. This claim shall be examined in the next section.

[131] I shall examine the question of whether TD had actual knowledge by reviewing the parameters of actual knowledge (as distinct from constructive knowledge). I shall then review the question of the credibility of Mr. Robinson. Finally, I shall consider whether delivery of the Notice of Motion for the Mareva injunction imparted sufficient information to satisfy the actual knowledge component as of that date.

(i) Wilful blindness and recklessness

[132] It has long been held that actual knowledge of fraud also extends to parties who are wilfully blind of the fraud or who are reckless as to its existence. They are each equivalent to each other in terms of the consequences that flow from having such knowledge and failing to act upon it.

[133] Both wilful blindness and recklessness are comparatively high standards of knowledge because they involve a level of knowledge that is considered to be morally equivalent to actual knowledge. They require a consideration of both the degree of actual knowledge and of the culpable attitude or mental state of the person whose knowledge is in question.

[134] They are concepts that are defined in part by contrast to what they are not. While a failure to inquire after being put on notice can be a component of wilful blindness or of recklessness, it can also be a component of constructive knowledge, the latter concept entailing a significantly lower level of knowledge and culpability.

[135] Wilful blindness or recklessness requires proof of culpable conduct that goes beyond “mere” negligence or laziness underlying a failure to inquire. It requires a combination of knowledge and conduct of a level that that can fairly be equated to actual knowledge. The additional element I have described as “culpability” was described by Iacobucci J. in Air Canada as being “want of probity”. He described this as the element that differentiates wilful blindness or recklessness (either of which will bind the stranger’s conscience) from constructive knowledge (which normally will not): Air Canada at para. 41.

[136] Wilful blindness arises where a party is aware of the need for inquiry but declines to undertake it “because he does not wish to know the truth”; where “it can almost be said that the defendant actually knew”; where it can be said that the person suspected the fact and realized its probability but refrained from obtaining confirmation deliberately: R. v. Sansregret, 1985 CanLII 79 (SCC), [1985] 1 S.C.R. 570 at para. 22. It is to be distinguished from mere negligence in failing to obtain information. The required level of knowledge extends beyond knowledge of some risk of fraud to knowledge of the “clear probability” of it: Big X Holdings Inc. v. Royal Bank of Canada, 2015 NSCS 184 at para. 89. In Bullock v. Key Property Management Inc., 1997 CanLII 3440 (ON CA) the Court of Appeal found that wilful blindness is premised on the existence of an actual suspicion that certain facts exist and not on the failure to take steps to inform oneself of those facts.

[137] Each of these definitions of wilful blindness intentionally sets this standard apart from mere negligence and thus attaches to a much narrower, more exceptional and thus more culpable range of conduct. In Bullock, it was not sufficient that the bank should have been on inquiry regarding its customer. The court found that “a stranger to a trust will be wilfully blind and hence liable as a constructive trustee where that stranger suspects that a trust exists and that the trustee is acting dishonestly towards that trust” and, armed with that suspicion “declines to make the inquiries necessary to confirm that suspicion” (Bullock at para. 9).

[138] Recklessness also requires more than mere negligence or inadvertence but entails (i) acting in such a way to create obvious or serious risk; and (ii) doing so either without thought to the risk or recognizing the risk but deciding to take it: Machias v. Mr. Submarine Ltd. 2002 CanLII 49643 (ON SC) at para. 146.

(ii) Credibility and knowledge of Mr. Robinson

[139] I have carefully considered the plaintiffs’ central argument that Mr. Robinson was untrustworthy and a liar and that he had actual knowledge or was wilfully blind or reckless to the Ponzi scheme being operated by Seaquest I have reviewed his testimony again in its entirety as well as my notes of it. I have reviewed each and every email sent or received by him that was in evidence in detail as well.

[140] With some very minor caveats, I found myself unable to agree with the conclusions the plaintiffs urged upon me so strongly. I did find that Mr. Robinson was a bit combative and defensive at times. While this was not very helpful, this occasional behaviour did not suggest an intention on his part to deceive me while he was testifying.

[141] Mr. Robinson had little to no specific memory of almost all of the events about which he was questioned. There were two incidents (discussed below) that were both embarrassing to him and unusual enough that his claim to no memory of them seemed rather strained. However, I also found it quite unfair to expect any witness in his position to be able to engage in a minute examination so many years after the fact of such a large number of what were – to him at least – quite routine and ordinary financial transactions involving one customer out of many. In short, his memory gaps were, with two exceptions unexceptional.

[142] Overall, I was satisfied with Mr. Robinson’s sincerity and credibility. Few witnesses come with neither caveats nor warts. None of the plaintiffs did. Mr. Robinson was no exception. Sincerity and reliability are not invariably companions. Memories fade; uncertain impressions can eventually gel into firm belief over time. A judge’s conclusions regarding credibility of a witness emerge when impressions formed from observing the witness on the stand are checked and cross-checked against the totality of the evidence.

[143] All such allowances being made, my central finding was that Mr. Robinson was not a deliberate liar and was generally worthy of being believed to the limited (and quite general) extent he had memory to offer. In particular, I have no hesitation in accepting his vehement assertions that he did not know or suspect the existence of a fraud at Seaquest until after Seaquest became bankrupt and litigation followed.

[144] The entire tenor of all of the communications passing between Mr. Robinson and the various officers of Seaquest with whom he dealt over the years is quite inconsistent with Mr. Robinson being “in the know” about a large-scale fraud operation.

[145] The suggestion that Mr. Robinson was a knowing accomplice or wilfully blind simply holds no water. Every impression I received – both from Mr. Robinson in his testimony and from my review of all of the documents – was to the effect that Mr. Robinson was duped and suspected nothing.

[146] Some of the main reasons for my conclusions regarding Mr. Robinson follow.

Nature of Seaquest’s dealings with Mr. Robinson

[147] There was nothing particularly out of the ordinary in relation to the administration of Seaquest’s banking business by Mr. Robinson. He did not have any kind of overall responsibility to “watch” Seaquest’s accounts. He was not a front-line teller and would not see Seaquest’s deposits to his own branch, let alone those made at other branches, unless there was a particular reason for him to become involved (as for example with a request to lift a hold). He was not required to look over their monthly statements and there is no evidence that he did so. He would not see outgoing debits unless they happened to cross his desk in the event of a problem (such as with overdraft issues) and in each case these were handled without creating any credit loss to his employer. From this very limited vantage point, Mr. Robinson’s actions and communications in relation to the Seaquest were quite consistent with his role and were in no way suggestive of knowledge of an on-going fraud or wilful blindness to it.

[148] The plaintiffs attached great weight to the Mr. Robinson’s continued refusal during cross-examination to acknowledge that he was aware that Seaquest solicited investment funds from private investors to advance loans to clients. He maintained throughout that he understood Seaquest to be in the restructuring business although he seemed quite unable to describe in any detail what he understood that description to entail.

[149] In assessing the relative importance of this aspect of his testimony in this regard, I must consider a few things. Firstly, there is nothing particularly inconsistent with being in the “restructuring” business and sourcing investor funds to assist clients in need of financial restructuring. Mr. Robinson’s unwillingness to see that may be attributed to nothing more than nervousness and clinging to what he knows (or thinks he knows). Secondly, I consider Mr. Robinson’s level of sophistication. He was a fairly low-level employee without, for example, significant credit experience. His background was as a teller and the small business credit limits were at a relatively low level, higher value credits being transferred to the commercial banking division. This too may contribute to an unusual level of sensitivity on his part. Finally, the actual record (as opposed to Mr. Robinson’s occasionally defensive and always imperfect memory of it) is quite clear that Seaquest did in fact disclose the alleged “true” nature of its business (i.e. bridge lending and equity raising) to him in writing and on several occasions. Nothing at all turns on Mr. Robinson’s ability – years after the fact – to recall with precision what that description was. Mr. Robinson’s actual handling of Seaquest was entirely consistent with the description of that business given by Seaquest at the time whether or not Mr. Robinson is able today to recall that description.

Holds and overdrafts

[150] Holds and overdrafts both involve the bank possibly accepting credit risk. Seaquest most definitely found itself on thin ice in this department several times over the years between account opening in 2006 and bankruptcy in 2011. Mr. Robinson was at the centre of most decisions taken to grant holds or indulgences in the manner of dealing with overdrafts. In each case, he dealt with the issue swiftly. Where the bank took some credit risk, it was usually small and not out of keeping with the account history of this client.

[151] None of the incidents examined – large or small - actually came back to bite the bank. Overdrafts were covered before recourse was lost. Cheques deposited without a hold period cleared. The credit risk never actually evolved into a credit loss. The volume of these incidents was not at all out of the ordinary for similar-sized clients and these sort of decisions were precisely the sort of administrative assistance that small business advisors like Mr. Robinson were expected to get involved in to assist clients and help deepen their connections to the bank. None of this history had any potential to alert any reasonable banker not armed with hindsight to the existence of a systematic fraud scheme being operated by Seaquest.

[152] The plaintiffs sought to attach great importance to incidents where overdrafts arose from cheques drawn on parties allegedly related to Mr. Holden or Seaquest were returned NSF causing credit problems in Seaquest’s account. While there is some evidence before me to confirm that some of these parties were controlled by Mr. Holden or affiliated in some way to Seaquest, it cannot be said that those facts would necessarily have been known or present in the consciousness of Mr. Robinson, particularly where the entities in question banked at another institution.

[153] The plaintiffs attached great importance to the manner in which Mr. Robinson dealt with an overdraft situation that arose over the New Year’s holiday (2010-2011). In that episode, an unauthorized $2.9 million overdraft situation had arisen. TD had the option of returning the cheques that had caused the overdraft back through the clearing and avoiding any credit risk. In an exchange of emails, Seaquest (Mr. So) explained that a client had deposited cheques that it was meant to return by accident because the investment was being rolled over. After initially agreeing that TD should return the cheques NSF, Mr. So asked TD to allow him to cover the overdraft with a deposit instead. This was done although the cheques deposited were not certified. There is no evidence as to whether TD undertook a telephone certification[^3] or on what basis no hold was placed on the deposit made. At the end of the day, the cheques were not returned NSF and the freshly-deposited cheques cleared without incident.

[154] Mr. Robinson had little to no memory of the incident beyond what was recorded in the email exchange. The dollar amount was indeed far beyond the very limited credit line of Seaquest but was not particularly out of line for the volume of transactions in that account.

[155] I cannot see in this the actions of a bank officer pregnant with actual knowledge of a fraud or even suspecting it. The customer was at first perfectly happy to have the cheques returned NSF and then proposed an alternative that ended up being acceptable. The idea of a miscommunication causing such a mix-up over the holidays is hardly a novel one. There is nothing in the tone of any of the communications to suggest actual knowledge or wilful blindness.

Volume and nature of emails exchanged

[156] The plaintiffs urged me to examine the volume of emails exchanged between Seaquest and Mr. Robinson and suggested that this suggests that he was somehow “in the know” and co-ordinating with Seaquest to provide cover for the fraudulent operation.

[157] The volume of emails exchanged between Seaquest employees and Mr. Robinson should not be exaggerated. Over a multi-year period, there were a series of strings of emails. Many of these were of a purely administrative nature, arranging appointments to change signing authorities, arranging introductions with other parts of the bank, opening new accounts and similar matters. In-coming requests for assistance on hold periods or out-going requests to attend to overdraft tended to generate strings of emails (three, four or five at a time) but came in clusters a relatively small number of times over a period of several years. Sometimes a few incidents in a single month, other times nothing for a couple of months. The number of these requests was not unusual in Mr. Robinson’s view – a view I accept. Seaquest was neither the most nor least active small business client at the branch.

[158] The ordinary course nature of these exchanges was confirmed by the evidence of TD’s two experts both of whom I found to be equipped with much more direct and applicable experience than the narrow compliance-related experience of Ms. Smith, an expert whose experience base outside the world of credit-card issuers was quite limited.

[159] The type of language employed by Mr. Robinson in his email communications with Seaquest may have appeared unusual to an expert such as Ms. Smith with her limited experience. TD’s experts had a different view. Idiosyncratic perhaps, Mr. Robinson’s communications were generally quite in keeping with the nature of the messages he was trying to convey (usually ensuring he had the client’s full attention about the necessity of dealing with overdraft issues forthwith). Neither the language employed by Mr. Robinson nor the frequency of the exchanges betrays any concrete indication of a relationship between Mr. Robinson and his clients than was other than an ordinary professional one.

Emails suggesting dishonest or unethical behaviour of Mr. Robinson

[160] There were two email exchanges with Mr. Robinson that must be considered to be outliers to this picture. They are frankly troubling and doubtless embarrassing to Mr. Robinson. They do not, however, point towards knowledge or complicity on his part.

[161] On November 27, 2009, Mr. Robinson was sent a “test” email to his home address by Mr. So. He responded the following day (Saturday) at 4:18 p.m. writing “sorry for the delay in responding. I sometimes take some time to look at my email at home. You have the right email address”.

[162] To this point, there is nothing at all unusual about the email exchange. Mr. Robinson had no memory of being asked for his home email by Mr. So. He surmised that he might have sent Mr. So an email from his home computer on one occasion. That explanation appears to me to be a perfectly reasonable one.

[163] On December 1, 2009 at 11:11 a.m. Mr. So sent a further email that was copied to Mr. Holden. The text (corrected by me to remove evident corruption from file recovery) reads as follows:

Hi Pat,

Dave, has been asking me for the dates that you would like to book for the trip that we have for you. As far as I understand, its 7 days including accommodations.

Am I correct Dave?

Ed

[164] There was no response to this email – whether from Mr. Holden to confirm the offer or from Mr. Robinson to accept it. Mr. Robinson had only a “vague” recollection of some discussion of a trip which he thought was about Mr. Holden having a place, not booking a trip. Mr. Robinson was quite adamant that he did not accept the offer and recalled no follow up on it either. There was no evidence to the contrary.

[165] I accept his explanation about this exchange. As he put it, “what am I supposed to do, say to the client I'm sorry, I have to close your account because you offered me this?” In the end, Mr. Robinson did nothing. In hindsight – or indeed in foresight – he ought to have made some mention of this to his branch manager. I cannot find his failure to do so to be the product of a guilty mind with knowledge or suspicion of fraud a fraud, still less of a fraud affecting the plaintiffs.

[166] The second troubling exchange was in relation to deposit “churning”. Seaquest occasionally had significant credit balances on hand for a few days in a row. There was an exchange of emails between Mr. So and Mr. Robinson in September 2010 that suggests that Mr. So was encouraged by Mr. Robinson to move surplus funds to a Seaquest account at TD Waterhouse and then back to TD on alternate days because each new “deposit” would count towards quarterly volume targets for Mr. Robinson at the branch.

[167] The volume targets in question were branch-level volume targets, not personal ones. Even the seven figure deposits being discussed in the exchange would have had only a tiny impact on targets and a very contingent and insignificant impact if any upon Mr. Robinson’s personal bonus performance.

[168] While I found that Mr. Robinson was quite defensive about this whole area on cross-examination, my review of the correspondence in question leads me to conclude that Mr. Robinson made the suggestion in jest.

[169] While embarrassing, there is a lot less to this exchange than meets the eye. It was not argued that this was a frequent occurrence. The correspondence chain suggests the exchange was in the nature of an inside joke because Mr. Robinson had been attempting to alert his client for some time to the possibility of earning higher interests elsewhere in the bank when it had high credit balances on hand. Certainly no hints of Mr. Robinson being “in” on the fraud that hindsight tells us was actually going in can be discerned. The plaintiff did not lead evidence to show me an actual pattern of churning between accounts.

[170] My review of the account history from that time frame does not show anything like a pattern of transfers in and out of the account following a large deposit. It certainly was not a practice in that time frame. In other words, the actual account history seems to confirm that the email exchange was, as it appeared, essentially in jest.

[171] The benefit, if any, to Mr. Robison from this exchange would have been next to nil if there was any benefit at all. Mr. Robinson was rightly a bit red-faced about the exchange but it I cannot take this as an indicator of anything approaching the standard of actual knowledge, wilful blindness or recklessness to the existence of a fraud, still less of a fraud targeting the plaintiffs or others like them.

[172] The closing argument of the plaintiffs suggested that “there is good reason to think that Mr. Robinson had his reasons for turning a blind eye”. I do not find that Mr. Robinson was in fact bribed or influenced. However, even if I were to take the evidence of the offer of a trip and the “churning” emails at their darkest - as evidence of an attempt to bribe or influence Mr. Robinson to turn a blind eye - the evidence would not be of any assistance in answering the question of what it is that Mr. Robinson was supposed to be bribed to turn a blind eye to.

[173] At most, these two clumsy attempts to influence Mr. Robinson might potentially have induced him to be less vigilant in defending his employer’s interests when credit decisions relating to hold periods or overdraft were being made. I cannot infer and there is no evidence to suggest that Mr. Robinson was actually “in” on the multi-million dollar, multi-year fraud scheme that Seaquest was operating or that he had been given enough of a sense of it to reach the state of wilfully blind or reckless to the possibility. The whole pith and substance of all of his communications belies this.

Cash Withdrawals

[174] The plaintiffs suggest that Mr. Robinson should have tumbled to the existence of fraud by reason of the number of large cash withdrawals made by Seaquest. I cannot accept that assertion.

[175] Firstly, Mr. Robinson saw only those cash withdrawals that were brought to his attention, a subset of the total. This happened when the client gave an advance warning and asked for his assistance in ensuring the cash was available.

[176] Secondly, AML reporting rules apply to cash deposits and not cash withdrawals. There was and is no particular reason to flag cash withdrawals for investigation. The source of the funds is fully identified in the case of a withdrawal. There was no report to file.

[177] Thirdly, the bank is not in the business of policing what customers do with their own money. While cash may be less common than cheques, it is legal tender and a client is entitled to withdraw funds in its account. Mr. Robinson testified that he saw nothing to warrant his attention in requests for cash withdrawals and in this his opinion was solidly backed by TD’s two experts whose direct banking experience made them far better qualified to comment on this than the plaintiffs’ expert whose executive-level banking experience was limited to “mono-line” banks issuing credit cards without a branch network.

[178] Finally, cash withdrawals themselves do not point to the existence of fraud or a Ponzi scheme. Even if Mr. Robinson were to have investigated cash withdrawals, what could he have learned? The only likely outcome of Mr. Robinson asking questions would be either (i) the receipt of a convincing answer from a polished fraudster; or (ii) a cessation of cash withdrawals.

“Pyramid” warning?

[179] On October 18, 2010, Mr. Robinson and Mr. So exchanged email messages. Mr. So was looking for help in updating account signing authorities on the account (to add Mr. Hemani). Mr. Robinson asked a follow-up question and indicated he would be out for a while visiting his mother in hospital. Mr. So responded to Mr. Robinson’s information request and asked after Mr. Robinson’s mother. As expected, Mr. Robinson was somewhat delayed in getting back to Mr. So. The following email exchange then occurred::

Mr. Robinson:

Okay. [in apparent answer to the question “Hope your mom is ok” from Mr. So]

Just got back to the office. By the way I got a call from Anna at Cash management wanting to talk to me about the nature of business for Seaquest. Apparently, she talked with Christine and was unsure what the nature of the business ways [sic] and didn’t really get a straight answer so now she is concerned. Do you know what Christine told her?

Mr. So (in reply):

Christine came franticly [sic] in my office worried she said something wrong about the operations of seaquest as the way she said it was “Seaquest is an investment company that takes money from investors and pays them interest.” Anna asked “Is it a pyramid?” and I laughed.

So I think Christine forgot to mention that the big part of the business is the short term lending and equity positions that are taken into companies.

I just tried to call Anna, but got her voicemail.

[180] The plaintiffs ask me to infer from this exchange that Mr. Robinson was put on notice of the possibility of Seaquest being a pyramid scheme and turned a blind eye. I cannot agree.

[181] Ms. Seto, the person to whom the “pyramid” comment was attributed by the email exchange testified. She had next to no memory of dealing with the Seaquest account, a state that is perfectly understandable given her very limited dealings with them. She was adamant that if she had ever had a suspicion of something as grave as a pyramid scheme being operated by a client, she would remember it and would certainly have done something about it. Whether or not the word “pyramid” ever crossed her lips[^4], it was not a serious suggestion on her part and she did not pass anything as serious as that on to Mr. Robinson when she contacted him before he initiated the above email exchange.

[182] In the context, there was no reason for Mr. Robinson to have been alarmed by the “pyramid” comment in the email.

[183] Firstly, Mr. Robinson had already been contacted by Ms. Seto prior to the email exchange. The evidence establishes that she did not raise any “pyramid” concern alarms with Mr. Robinson. If fellow bank employee Ms. Seto was not concerned enough to raise alarms with Mr. Robinson when she spoke to him – and she was not – it is hard to see how Mr. So’s second-hand account of the same conversation would raise any alarms with him when fellow-employee Ms. Seto did not do so directly.

[184] Secondly, the exchange was in a fairly routine context. Mr. So was arranging for a clerical employee to be instructed by Ms. Seto in use of a cash management product TD makes available to its customers and Ms. Seto needed to have a sufficient understanding of the nature of the client’s business to ensure the product was suitable. Ms. So provided Mr. Robinson with a more suitable description of the business than the low-level clerical employee had been able to provide Ms. Seto . Ms. Seto ultimately was satisfied and the account was set up with the cash management tool in question.

[185] Thirdly, the tenor of the communication from Mr. So was not the response of one confederate “in the know” about a fraud to another. It was clearly designed to put Mr. Robinson at ease. The explanation, humorously given, was plausible and reasonable.

Social and other contacts as “incentive” to turn blind eye

[186] The plaintiffs suggest that Mr. Robinson had an unusual number of social and similar contacts with Seaquest or its principals that incented him to “turn a blind eye”. While the suggested trip described above is one such example, they also point to evidence suggesting that Mr. Robinson went on lunches and was invited to a wedding or a party. None of this evidence is indicative of any impropriety on Mr. Robinson’s behalf nor does it approach the standard of establishing actual knowledge or wilful blindness.

[187] On one occasion, Mr. Robinson was invited to a wedding. His evidence was that he did not go and that such invitations would occasionally be extended to him by small business clients. There was a single social gathering arranged by Seaquest that Mr. Robinson and another TD employee attended. His evidence, that I accept, is that this too was not unusual. Such occasions provide networking and marketing opportunities. They both made an appearance and left after a short while. Finally, there is reference in an email exchange to having what appeared to be an annual holiday lunch – once again, that is hardly an unusual or suspicious activity in the commercial context.

Conclusion re: Mr. Robinson

[188] I simply cannot find that Mr. Robinson had anything like the level of information that would satisfy the standard of actual knowledge, wilful blindness or recklessness that I have discussed above. There is nothing in the evidence to establish that he ever actually suspected that there was anything amiss at any material time. He denied this consistently and credibly. I am fully satisfied that Mr. Robinson was fooled just as fully and completely as the plaintiffs were by a smooth and suave fraudulent undertaking.

(iii) Mareva Injunction – failure to investigate allegations

[189] On June 30, 2011, counsel for three of the plaintiffs in this action (Mr. Brian Tucker, Ms. Sandra Tucker and the Brian Tucker Family Trust) emailed a letter to Mr. Thomas Hancock, Director of the corporate security department of TD Canada Trust enclosing a copy of a Notice of Motion for a Mareva Injunction returnable in Toronto on July 4, 2011.

[190] The letter gave notice of “our clients’ motion for an injunction to freeze the assets of the above noted defendants, including the bank accounts”. It referenced three account numbers and the names of David Holden, Rosa Holden, Seaquest Capital Corporation, Seaquest Corporation “and related entities” (without listing them).

[191] The attached Notice of Motion made no specific mention of a “fraud” or of a “Ponzi scheme”. This failure to mention fraud in the context of a domestic Mareva application is at least somewhat unusual. The Notice of Motion did mention that some of the companies the plaintiff invested in “do not appear to exist”, for example, but did not actually plead fraud. It also pleaded that certain investee companies and promised security did not “appear” to exist. The allegation was thus a qualified one (did not appear to exist) and no particulars of the names involved were provided to enable an independent verification of the question.

[192] Mr. Hancock is not a current employee of the bank and did not testify at the trial. TD’s answer to an undertaking was read into evidence by the plaintiff as an admission. It is, TD stated that “based on an earlier interview, Mr. Hancock recalled that he was contacted by a law firm or a private investigation firm and was told that lawyers were in court seeking a Mareva injunction…Mr. Hancock did not recall receiving motion materials. He recalled assembling certain documents, but did not turn them over because no court order was issued and he believed the matter was settled”.

[193] Mr. Tucker did testify at trial and admitted that the injunction was withdrawn before it was heard and the action ultimately settled later in July, 2011. One of the terms of the negotiated settlement was confidentiality.

[194] The cover email to Mr. Hancock was sent at 4:52 p.m. on Thursday June 30, 2011. Of course this was at a few minutes to five on the last working day before the first long weekend of the summer announcing a possible injunction the first working day after the weekend. There can be no doubt that Mr. Hancock saw at least the email and the cover letter at some point (whether the same day or Tuesday morning) because he admitted learning of an intended Mareva injunction and assembling some documents in response.

[195] The cover letter informed Mr. Hancock of the entities and accounts at TD that were potentially affected by the intended Mareva injunction, information that would be useful to a bank preparing to respond to an order if it were issued. If his uncontradicted evidence is that he did not recall receiving the motion materials, I cannot infer from this answer that he went beyond the cover letter and actually read the Notice of Motion as well. Given the timing and the unchallenged admission on discovery read into evidence, the only inference I can reasonably draw is that Mr. Hancock did not read the Notice of Motion at all or, if he did, he glanced at it no further than the prayer for relief to confirm what might be required of TD were the motion to be granted.

[196] Whatever Mr. Hancock read or did not read, the evidence is that he took no further action and believed at some point – correctly as it turns out – that the matter had been settled. I accept without hesitation Mr. Robinson’s testimony that the news of the legal proceeding did not reach him at the branch and he never saw the Notice of Motion before this litigation.

[197] While I cannot find that TD had actual notice of the particular allegations contained in the Notice of Motion, the issue is largely a moot one given the limited information it conveyed and given the very limited duties that receipt of a mere Notice of Motion affecting a customer imposes upon a bank.

[198] The Notice of Motion itself conveyed little in the way of actual information that TD could have investigated even if it had a duty to do so. The allegations contained in the Notice of Motion were so vague and general as to be incapable of independent investigation by a third party such as TD without access to more detailed information. The one party with a vested interest in conducting that investigation – Mr. Tucker – elected not to proceed with the injunction application and soon afterwards settled the proceeding. That is not a circumstance that lends credence to the allegations nor can it be construed as actual notice of fraud or wilful blindness to its existence.

[199] The one concrete allegation advanced in the Notice of Motion – if its details had actually come to TD’s attention – was the matter of Mr. Holden’s criminal record. Leaving aside the possibility of error (“Holden” not being a particularly uncommon name), there is little that TD could have done with that information five years after opening the accounts. At the limit, having verified the truth of the matter, TD might have decided to ask Seaquest to move its accounts with reasonable notice, it might have decided to decline further accommodations in future in relation to holds or overdrafts. It also just as likely that TD would have been duped with some story or another advanced by a very smooth and accomplished fraud artist. The one thing TD could not have done armed with that information was simply shut down Seaquest’s accounts without warning on the basis of a ten year old criminal conviction that it discovered in 2011.

[200] Ms. Joyce’s evidence (and common sense) both concur that a prudent banker in TD’s position would have had no obligation to go further than to adopt the “wait and see” attitude it adopted. The application was for a Mareva injunction – an ex parte procedure whose very purpose it to freeze accounts before the defendant has an opportunity to spirit the funds out of sight or out of the jurisdiction. Giving notice to the branch would have created a grave risk of a leak to the target of the proposed injunction. I accept that the Bank would have prepared itself as necessary by identifying the branch and accounts affected (and Mr. Hancock appears to have done this) but otherwise awaited developments. As it transpired, there were none.

[201] Of course hindsight enables one to draw a line from allegations contained in the Notice of Motion to the broader fraud that has been laid out before me in this trial. Hindsight is not the lens to be applied here however. There were certainly no grounds to enable the Bank to take unilateral action and close the accounts and potentially put a client out of business overnight.

[202] Ms Joyce (TD’s expert) was of the view that the Bank acted prudently in its treatment of this Notice of Motion and I agree with her assessment. Ms. Joyce’s experience and expertise are both far more relevant to this question than the plaiintiffs’ expert Ms. Smith.

(iv) Conclusion re: actual knowledge

[203] Upon a careful review of the evidence, I have concluded that TD did not in fact have actual notice of the fraud of Seaquest at any relevant time prior to Seaquest’s bankruptcy filing. For the avoidance of doubt, my finding in that regard includes a finding that TD was neither reckless nor wilfully blind to the prospect of its accounts being utilized by Seaquest to commit fraud upon the plaintiffs.

[204] None of the information that came before TD gave or could reasonably be supposed to have given an honest person reason to suspect that Seaquest was operating a Ponzi scheme or other fraudulent enterprise directed at the plaintiffs.

(c) Is constructive notice of the fraud sufficient to establish a duty of care?

[205] The plaintiffs submit that constructive knowledge by TD of the fraud is sufficient to create the duty of care required for the negligence claim even if that lower level of awareness will not sustain the claim for knowing assistance in a breach of trust. The Court of Appeal in Dynasty explicitly left that question unanswered on the facts of that case.

(i) Livent proximity analysis

[206] The Supreme Court of Canada recently reviewed and refined the Anns/Cooper common law approach to recognizing the existence of a duty of care in Deloitte & Touche v. Livent Inc. (Receiver of), 2017 SCC 63 at paras. 26-28.

[207] Applying the Anns/Cooper analysis as updated by Livent, my first task is to inquire whether the proposed duty of care is one that has either already been recognized or is analogous to one that has already been recognized. This is done after considering the identity of the parties and examining the true nature of their relationship. If the result of this review is a finding that an established proximate relationship has been demonstrated, there will not normally be any need to pursue the legal analysis further in order to recognize that duty of care.

[208] If the conclusion is that the proposed category has not yet been sufficiently recognized and applied as part of the common law, the second step is to undertake a more complete proximity analysis. This must assess whether the harm was reasonably foreseeable and whether the relationship between the parties is sufficiently close and direct to warrant the imposition of such a duty. At this point, consideration of expectations, representations, reliance, property or other interests involved as well as the impact of any statutory obligations would enter the mix.

[209] If the potential duty of care is found to be prima facie valid after the proximity analysis is undertaken, the third step is to undertake an analysis of applicable public policy considerations. At this last stage of the analysis, the question of whether the proposed duty of care can creates unlimited liability to an unlimited class of persons or violates other public policy concerns is examined to determine whether these concerns negative the prima facie findings of foreseeability and proximity.

(ii) Is there an established duty of care based on constructive knowledge?

[210] The Supreme Court of Canada deliberately chose not to extend the equitable remedy for knowing assistance in breach of trust to cases of constructive knowledge in Air Canada and gave reasons for that decision. It would thus appear to me to be an unlikely conclusion that a lower standard of care should apply to a legal remedy applicable to the same conduct and in the same relationship.

[211] While common law rules do not always display perfect consistency with equitable rules, it seems to me that we ought to be in a position to announce that we are nearing completion of the merger of the separate streams of law and equity after 140 years. If the common law has not already recognized a duty of care owed to strangers based on the lower standard of constructive knowledge of fraud, Air Canada supplies very persuasive grounds not to do so now.

[212] The plaintiffs urged upon me the authority of Semac Industries Ltd. v. 1131426 Ontario Ltd., 2001 CanLII 28375 (ON SC) where Cameron J. found (at para. 64) that a bank might be liable to third party victims of its customer “if the Bank knew or ought to have known of the fraudulent use of its facilities” (emphasis added).

[213] I do not consider Semac to be convincing authority for concluding that there is an already recognized duty applying in the case of constructive knowledge alone. The motion before Cameron J. was a summary judgment motion and his conclusions were expressed in the context of explaining why further evidence was needed and summary judgment was inappropriate. The required level of knowledge issue does not appear to have arisen in that case and the concepts of actual and constructive knowledge appear to have been used somewhat interchangeably. Indeed, C. Horkins J. took a similar view of Semac when the case was cited to her in Pardhan v. Bank of Montreal, 2012 ONSC 2229.

[214] By contrast, Wilton-Siegel J. considered this very question at great length in Dynasty Furniture Manufacturing Ltd. v. Toronto Dominion Bank, 2010 ONSC 436, [2010] O.J. No. 2703.

[215] Dynasty is a case with a great deal of similarity to the present one as it also considered the liability of a bank to victims of a Ponzi scheme perpetrated by its customer. In Dynasty, Wilton-Siegel J. concluded that the existence of a duty of care owed by a bank fixed with actual knowledge of the fraud was well established. However, he found that there was not yet a recognized duty of care owed by a bank with only constructive knowledge of its customer’s fraudulent activities. In this finding, his decision was upheld by the Court of Appeal at 2010 ONCA 514, 321 D.L.R. (4th) 334, although the Court of Appeal left the question of whether such a duty ought to be recognized for another day.

[216] The question came up again before C. Horkins J. in Pardhan and she concluded, as do I, that the expanded duty alleged by the plaintiffs has not yet emerged as an “accepted” duty of care. By the same token, given the reservation expressed by the Court of Appeal in Dynasty (at para. 9), the question of expanding the negligence duty of care to cases where constructive knowledge is alleged cannot be considered to be a closed one either.

[217] I find that our common law has not yet embraced the idea of imposing upon a bank a duty of care to prevent harm to a stranger by a dishonest customer of the bank where the bank has no more than constructive knowledge of the fraud in question.

(iii) Should the duty of care extend to constructive knowledge?

[218] It is on this second step in the Anns/Cooper proximity analysis that the legal positions of the parties diverged most sharply.

[219] For the plaintiffs, Livent changed nothing in the Anns/Cooper proximity analysis. They submit that Livent was concerned primarily with the scope of the undertaking accepted by the auditor and the duties that flowed from this and did not purport to alter the long-established principle that proximity is determined by reference to whether the plaintiffs were within the class of persons that the bank ought to have had within its reasonable contemplation when conducting its banking business. However, they offered little in the way of a principled approach for answering that question without the application of hindsight in cases where, as here, the duty is not one that has already been recognized.

[220] For the defendant, Livent’s framing of the question in terms of the defendant’s undertaking and the plaintiff’s reliance is a crucial part of the proximity analysis. These two factors were held to be “determinative” of the analysis by the majority: Livent at para. 30.

[221] I agree with the defendant’s approach to Livent. Proximity cannot be answered by a circular “I’ll know it when I see it” reasoning process. A principled approach to the question is required where the duty would be a novel one and Livent provides just such an approach. Apart from representing good common sense, it is also a precedent from the highest court in the land.

[222] The only connection that TD has to the facts of this case is through the banking services that it undertook to provide to Seaquest. It had no material direct contact with any of the plaintiffs in connection with their losses beyond the fact that their cheques or wire transfers happen to have been deposited into a Seaquest account at TD on their way to being purloined by Seaquest or its principals.

[223] TD’s negligence if any can only be determined by examining (i) the nature of the services it undertook to perform when agreeing to open and operate an account for its customer and (ii) the reasonable expectations that its undertaking could give rise to in the plaintiffs who were not themselves dealing with TD directly.

[224] The class of persons that are in the reasonable contemplation of the defendant can only be determined by reference to the nature of the thing the defendant has undertaken to do expressly or impliedly because the plaintiffs, as strangers, cannot reasonably rely upon the defendant to do more.

[225] The connection made by Livent between proximity and foreseeable reliance of the plaintiff is a crucial one. There must be a logical and foreseeable connection between the information possessed by TD and the services undertaken by it that put TD in proximity to the plaintiff and to the loss of the plaintiff.

[226] It is simply not relevant to observe that TD might have put Seaquest out of business and incidentally limited the plaintiff’s loss if it had applied its own internal credit policies more strictly to an occasionally off-side Seaquest. In applying credit policies devised by the bank to protect itself, TD would not reasonably have had the interests of the plaintiffs in prospect. The purpose of such policies is not to detect fraud on third parties but to protect the bank. The plaintiffs cannot have reasonably relied on TD to apply overdraft or deposit hold policies more strictly to avoid a loss from an unsuspected Ponzi scheme. The foreseeable risk for failing to limit credit exposure is credit loss to TD and not third party loss.

[227] I shall therefore proceed to consider the nature of the undertaking of TD in the context of the banking relationship in evidence before me and in light of the reasonable expectations the plaintiffs might have arising from that relationship.

[228] TD provided what can only be described as conventional banking services to Seaquest. It provided what was, for the size of the account, a quite basic level of overdraft protection ($35,000). The customer was given the ability to conduct inter-branch banking and access to electronic banking facilities. The customer’s line of business was not such as to require enhanced due diligence.

[229] The plaintiffs have raised a number of “red flags” that they submit are evidence that TD had constructive knowledge of the on-going fraud sufficient to put it on notice of the need to conduct an inquiry. Such an inquiry, they submit, would have led TD to conclude that the account should be closed, thereby mitigating the harm being caused to the plaintiffs. For the purposes of this proximity analysis, I would summarize the “red flag” allegations as follows[^5]:

a. Failure to conduct on-going due diligence of the principals of Seaquest that would have led to discovery of Mr. Holden’s criminal past;

b. Failure to follow up on the information in the Mareva Injunction Notice of Motion about Mr. Holden’s criminal past;

c. Failure to act on suspicions that ought to have been engendered by the large cash withdrawals;

d. Failure to act on suspicions that ought to have been raised by the frequent overdraft problems and requests to modify hold policies by Seaquest; and

e. Failure to monitor the conformity of the actual operation of the account to Seaquest’s declared business.

[230] A logical objection to each of these “red flags” is that none of them has a direct relationship to the plaintiffs’ loss in the sense that they do not lead logically to a suspicion of an active, on-going fraud in general, still less to a suspicion of any particular fraud involving a class of victims that includes the plaintiffs.

[231] Mr. Holden’s criminal past is the closest that any of these come to an allegation of a circumstance that, if investigated, might have brought the plaintiffs into view as possible victims. However, that is at best an equivocal piece of evidence. The convictions were a decade in the past at the time the first missed opportunity for TD to have learned of the fact arose (with the Mareva injunction in June 2011 – a Notice of Motion I have found TD did not actually read and was not required to have read in detail or acted upon in any event). They also involved a business that Seaquest was not in (mortgages).

[232] At their highest, these “red flags” might be supposed to have potentially led to a level of disquiet about the wisdom of continuing to do business with Mr. Holden and Seaquest or to requesting a further and better description of the nature of Seaquest’s business or other explanation of the circumstances.

[233] In argument, I asked the plaintiffs’ counsel to follow the logic of this argument a few steps. What type of investigation could the bank undertake with the tools at its disposal? It did not have any contractual right to inspect the books and records of Seaquest, for example. If it started to contact Seaquest clients directly seeking more information about vague and uncertain suspicions, it would risk incurring liability for damaging Seaquest’s business. Were TD to ask direct questions about these matters of Seaquest it might (a) receive a stern request to mind its own business or (b) receive a smooth and convincing story from an accomplished fraud artist whose internal documents appear to have been sufficiently convincing to survive inspection by at least one of his victims.

[234] None of these likely investigation outcomes offers a reasonable basis to expect the actual fraud being operated by Seaquest upon the plaintiffs would have been detected or halted. It is hard to find something if you don’t know what you are looking for.

[235] It was suggested to me that an examination of the operation of Seaquest’s account would have led to such a conclusion. I have had produced to me the entire history of that account. I have examined it carefully. There is nothing from that examination that leads me to the conclusion (unaided by hindsight) that there was an on-going Ponzi scheme in operation nor was any expert evidence placed before me to suggest otherwise. Such a conclusion may have been possible after a detailed forensic examination of the records underlying every deposit and every withdrawal. However, none of the red flags alleged were so specific as to point strongly to the need for such an expensive and detailed examination.

[236] It is easy enough to allege that TD ought to be “put on inquiry”. That is only part of the question. To put a stranger on inquiry, the information must be of a nature to be acted upon in a particular way and one that is relevant to the injury the defendant had a duty to help prevent. Inquiry about what? What evidence would be reasonably accessible to such an inquiry? What conclusions could such an inquiry reach?

[237] If TD received a convincing explanation from its client following a narrow inquiry (the most likely outcome of a non-specific investigation), there is no reason to expect things would not have continued as before. If TD were not satisfied with the explanations received but did not uncover specific, actionable evidence of a fraud either, it could not simply shut down Seaquest’s accounts without notice. Such an action would expose it to very significant liability. Even asking the Seaquest for more information about a particular transaction is not without difficulty since suspicious transaction reports are normally required to be filed with OSFI without disclosing that fact to the customer in order to avoid interfering with investigations that regulators may wish to undertake.

[238] The parties provided me with expert evidence to describe the nature of the duties undertaken by TD in the context of this banking relationship. That evidence has led me to conclude that the nature of the undertaking by TD in agreeing to supply bank account services to its customer Seaquest was not such as to equip TD to detect a fraud in Seaquest’s underlying business.

[239] The plaintiffs produced Ms. Glenna Smith as an admitted expert in regulatory compliance and the prevention of financial crime in the Canadian financial services industry to provide an opinion on the sort of on-going account monitoring TD ought to have performed.

[240] Ms. Smith is currently a resident of Barbados where she have been operating a consulting practice for regulatory compliance in financial services, specializing in anti-money laundering (or “AML”) since 2011.

[241] Ms. Smith worked for CIBC for ten years from 1988 until 1998. She worked as a teller until completing her degree at Concordia University in 1992 and thereafter as a Risk & Profitability Analyst at a branch and as an Accounting Advisor at CIBC’s offices in Montreal. She did not hold an executive role at CIBC.

[242] She worked outside the banking industry form 1998 until 2001. Thereafter, Ms. Smith worked for five years at Bank of America/MBNA Canada Bank (2001-2006) and a further five years at Capital One Bank (Canada branch) (2006-2011). In both of these two later roles, Ms. Smith had responsibility for AML and compliance. She is presently a consultant specializing in AML issues based in Barbados.

[243] While Ms. Smith’s expertise in relation to AML regulations is undoubted, her experience in compliance as this relates to retail banking, deposit taking, small business account administration and similar matters is distinctly lacking. Neither of the two banks for which Ms. Smith worked in 2001-2011 had a retail banking presence remotely comparable to the branch network of any of the “Big Five” Canadian banks. The principal line of business of both MBNA and Capital One was the issuance and operation of consumer credit cards. Her experience at CIBC was in a non-executive role and was prior to the sea change in the regulatory environment that followed the extensive re-designing of AML regulations and privacy regulations in 2001 and later years.

[244] In her expert report, Ms. Smith opined that she would expect that “measurable and reasonable due diligence would take place” after account opening and that “best practice is to include screening to ascertain that there is no negative or criminal history of all clients … on an ongoing basis”. That opinion did not long survive contact with cross-examination.

[245] Ms. Smith was able to describe her experience from working on various AML-related committees that Canadian banks perform nightly screening of names in their client database against databases they maintain of politically-exposed persons or persons on various UN or other watch lists. However, Ms. Smith had no information about what databases were consulted by the banks in conducting such screening. She was not able to conclude than any of the subscription-based services such as Lexis-Nexis (where news articles concerning Mr. Holden’s criminal past were found) would have been consulted by any bank on an on-going basis during the relevant time frame. She had no understanding of the mechanism for conducting a criminal record search (including the requirement for the subject’s consent, the time or the fees involved). The idea that a bank could practically conduct such searches nightly or even periodically for each name associated with millions upon millions of accounts is absurd.

[246] Ms. Smith’s suggestion that Mr. Holden’s criminal past was something TD should have discovered as part of its on-going due diligence was utterly shattered on cross-examination. It was also flatly contradicted by TD’s two experts whose evidence I preferred in every way to Ms. Smith’s.

[247] Ms. Smith’s opinion also suggested that there were a number of instances where TD’s representative ought to have noticed that Seaquest’s business was different from what he believed it to be. She concluded from this that “this type of unusual activity ought to have been escalated” as per AML procedures.

[248] It is not at all likely that “elevation” of a question about the adequacy of the description of Seaquest’s business that TD had on file under AML procedures would have led to anything more than a more detailed description of the business being placed in the file. However, however Mr. Robinson may have balked on the witness stand in describing today what he then understood Seaquest’s business to be, the actual written descriptions of that business on file were quite adequate to describe the type of business Seaquest purported to be in.

[249] Further, there is no reason to expect that “escalation” of any misunderstanding of the nature of Seaquest’s business would have resulted in anything more meaningful than a more detailed explanation of that business being placed in the file.

[250] Ms. Smith’s AML experience base was of limited to no utility in the areas examined by me in this case. AML regulations and practices are fundamentally designed to identify the sources of deposits into the financial system and the identity of account holders. These are not focussed on the destination of funds properly brought into an account. AML compliance procedures are not designed to detect fraudulent activity of the sort undertaken by Seaquest and Ms. Smith was unable to point to any actual breaches of AML procedures in this case leaving aside the question of whether such breaches could give rise to a civil duty of care.

[251] TD’s two expert witnesses were of much greater utility in considering the question of what duties it would be reasonable to consider a bank has undertaken in agreeing to operate an account for a customer. Ms. Smith simply had no relevant experience on this subject.

[252] Mr. Curran and Ms. Joyce are both career bankers who have recently retired after lengthy service in executive roles in other main-line Canadian banks. I found both to be highly qualified and credible.

[253] Mr. Curran has come through a variety of branch, regional and national-level positions without Royal Bank of Canada. Starting at the London, England branch of Royal Bank, Mr. Curran’s career advancement eventually brought him to Canada. Among other things, his experience included two years in the Royal Bank Special Loans group in the early 1990’s, experience that would have exposed him to all facets of things going wrong in a banking relationship.

[254] Mr. Curran’s opinion on the claimed duty to monitor Seaquest’s account was simple, direct and in my view entirely valid:

It is not standard banking practice to monitor or question a client’s day to day use of monies in their bank accounts. The sheer volume of day-to-day credits and debits in a bank’s substantial customer base renders such an in depth and intrusive activity as impractical and very costly. It is not standard banking practice to challenge or question how a client conducts its day to day business. It is not standard practice to compare daily account activity to the purported nature of business of any particular Company.

[255] Ms. Joyce acquired extensive and direct AML compliance experience in her long career at Bank of Montreal. She was unable to identify any transactions that ought to have led to a suspicious transaction report being filed with FINTRAC. Reviewing the written record of Seaquest’s disclosed business, she found that the “size of individual credits and debits to the accounts was generally consistent with the nature of the business as it was described in writing to TD”. Further, the account activity reviewed showed “no uncertainty as to the source of incoming funds” nor were there any significant cash deposits. Both of these are potential red flags for AML follow-up.

[256] In my view, the undertaking of TD in relation to the Seaquest account cannot be said to extend to an on-going monitoring of account activity for the purpose of detecting potential fraud against third parties. As such, there can have been no reasonable expectation on the part of the plaintiffs that TD was conducting such a review and would safeguard them from a fraud perpetrated by Seaquest if such a review should unearth it.

[257] In reaching this conclusion I have considered the expert evidence of Ms. Joyce and Mr. Curran. I have considered the actual evidence of how Seaquest’s account operated. Deposits were made with whatever teller happened to be on duty. Some were made at different branches. Withdrawals in the form of cheques and electronic transfers happen without human intervention for the most part.

[258] The one individual with some level of direct relationship to the account, Mr. Robinson, did not have an on-going obligation to monitor the account generally nor would it have been useful or practical to require him to do so. All that he saw in fact was the microcosm of account activity that happened to be brought to his attention when a particular service was being requested or issue raised to be addressed.

[259] Absent a continual forensic process of comparing deposits to withdrawals and comparing the origins and destinations of each, I cannot see that it would be likely that TD would have discovered the fraud in this case.

[260] The simple fact is that there is an almost infinite variety of means by which fraud may be worked upon victims by a fraudster with a bank account. Banks themselves are victims of a significant amount of fraud through quite different mechanisms than the ones employed by Seaquest (forgeries, stolen digital data, etc.). They devote considerable time and resources to trying to detect it. It would be a matter of chance if a bank should happen to come across circumstances that might potentially raise a suspicion regarding one customer among millions.

[261] Adding a duty to conduct more regular or detailed account supervision would add a potentially enormous compliance burden without any measurable likelihood of corresponding utility. Banks have only crude and generally inadequate tools to investigate suspicions even if they do arise. There is nothing before me to suggest that there is a single or easily-articulated policy or procedure that TD could have adopted that would have detected Seaquest’s fraud or, if it detected that fraud, that would detect the next variation on such a fraud. If a duty of care is to be imposed, it must be one that is capable of being discharged with reasonable diligence.

[262] Third parties such as the plaintiffs are far better able to protect themselves from fraud than banks are able to detect and avoid fraud directed at third parties. The regulatory burden associated with AML regulations has been quite significant – a fact that emerged quite clearly from the evidence of Ms. Smith and Ms. Joyce in particular. It would be unwise in my view for a civil court to upset the regulatory balance that has been struck except with great care.

[263] The same evidence and these same considerations leads me to the conclusion that the plaintiffs were not in a position to rely reasonably upon TD to monitor Seaquest with a view to detecting, preventing or halting the Ponzi scheme fraud.

[264] I therefore conclude that TD did not owe a duty of care to the plaintiffs that extended to constructive knowledge of fraud or breach of trust.

Conclusion and disposition

[265] For the foregoing reasons, the plaintiffs’ claim is dismissed.

[266] The defendant TD has been successful in its defence of this claim.

[267] I would encourage the parties to discuss costs among themselves for a brief period of time. My practice is to set a timetable for the parties to deliver submissions as to costs but to leave to the parties the discretion to alter my timetable if they are in agreement to do so without the necessity of asking for my approval.

[268] I direct that any submissions be restricted to five pages exclusive of (i) outline of costs; (ii) any relevant offers to settle; or (iii) any cases referred to. Case books are not necessary unless cases are not readily available through on-line sources. A simple list of cases and citations is sufficient. The successful party (in this case, TD) is requested to assemble the submissions of both parties and transmit them to my assistant electronically.

[269] Subject to the foregoing, the following suggested timetable for submissions should be followed:

a. TD submissions and costs outline: March 30, 2018;

b. Plaintiffs responding submissions and costs outline if applicable: April 20, 2018; and

c. BRIEF reply (two pages) if and only if necessary April 27, 2018:

[270] I reserve the right to correct these reasons for clerical and minor grammatical errors. If the parties wish to forward to my assistant’s attention a list of any such errors that they notice, I shall review them prior to finalizing the text of these reasons for the record. Any such comments should be forwarded within fourteen days.

___________________________ S.F. Dunphy J.

Released: March 9, 2018

[^1]: And not all transactions were structured as bridge loans – some were structured as equity investments. Others were investing on loans that had already been advanced.

[^2]: I shall deal with the plaintiffs’ claim that the same duty of care can also arise with only constructive knowledge of the fraud below.

[^3]: As happened on at least one occasion with Mr. Tucker.

[^4]: The plaintiffs did not call the alleged witness to this comment that is only recorded as hearsay in an email whose author similarly did not testify.

[^5]: Many of these have, of course, already been reviewed in connection with the allegation of actual knowledge.