Court File and Parties

COURT FILE NO.: CV-15-22582 DATE: 20180912

ONTARIO SUPERIOR COURT OF JUSTICE

BETWEEN:

Service Mold + Aerospace Inc., SMI Ventilation Products Inc. and Service Mold Associates Plaintiffs – and – Nada Khalaf and Toronto Dominion Bank Defendants

COUNSEL: Myron W. Shulgan, Q.C., for the Plaintiffs No one appearing for the defendant, Nada Khalaf Martin Greenglass, for the Defendant, Toronto-Dominion Bank

HEARD: February 20 and 21, 2018

REASONS FOR JUDGMENT

Hebner J.

[1] The plaintiffs brought a motion requesting partial summary judgment against the defendants. Specifically, the plaintiffs seek relief for amounts paid by the Toronto-Dominion Bank (“TD Bank”) on forged checks. The plaintiffs seek partial summary judgment in the sum of $342,333.68 CAD and $246,094.74 USD. The motion was originally heard April 25, 2017. My reasons for my ruling on the motion were released October 20, 2017 (Service Mold + Aerospace Inc. v. Khalaf, 2017 ONSC 6197).

[2] The plaintiffs rely on the Bills of Exchange Act, R.S.C. 1985, c. B-4, s. 48 and 49. TD Bank agreed that these provisions of the Bills of Exchange Act apply and that, absent agreement to the contrary, TD Bank is subject to strict liability. TD Bank put forth the following two defences:

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

[3] In my ruling released October 20, 2017, I determined that TD Bank’s first defence was without merit and that there was no genuine issue requiring a trial in respect of that defence. In respect of TD Bank’s second defence, I ordered a mini trial on the issue of discoverability. The mini trial has taken place. These are my reasons for judgment.

Background Facts

[4] The facts are summarized in my ruling dated October 20, 2017 (Service Mold + Aerospace Inc. v. Khalaf, 2017 ONSC 6197). They are repeated here for ease of reference.

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

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

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

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

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

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

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

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

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

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

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

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

The Cheque Fraud

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

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

The Payroll Fraud

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

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

The Issue

[17] The plaintiffs issued their statement of claim on August 12, 2015. TD Bank has pleaded and relied upon the provisions of the Limitations Act, 2002, S.O. 2002, c. 24 in its statement of defence. The Limitations Act provides as follows:

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

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

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

(i) that the injury, loss or damage had occurred,

(ii) that the injury, loss or damage was caused by or contributed to by an act or omission,

(iii) that the act or omission was that of the person against whom the claim is made, and

(iv) that, having regard to the nature of the injury, loss or damage, a proceeding would be an appropriate means to seek to remedy it; and

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

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

[18] In the Court of Appeal decision of Fennell v. Deol, 2016 ONCA 249, 97 M.V.R. (6th) 1, the application of the limitation period is described at para. 20 as follows:

The basic two-year limitation period begins to run on the day the claim was discovered. The date of discovery is the earlier of the two dates under s. 5(1) – when (a) the person with the claim had knowledge of, or (b) a reasonable person with the abilities and in the circumstances of the person with the claim first ought to have had knowledge of, the matters referred to in s. 5(1)(a)(i) to (iv). If either of these dates is more than two years before the claim was issued, the claim is statute barred.

[19] The operation of the limitation period in this case requires a determination of (a) when the claim was discovered, or (b) when the claim ought to have been discovered. If that date is prior to August 12, 2013, then the claim is statute barred.

The Positions of the Parties

[20] The plaintiffs take the position that the claim was discovered in early 2015 when Ms. Chekansky informed Mr. Schuurman that she had learned that Ms. Khalaf had been fired by her most recent employer due to allegations of fraud. The plaintiffs therefore take the position that the claim is not statute barred.

[21] TD Bank acknowledges that the plaintiffs did not actually discover the fraud until early 2015 and relies on s. 5(1)(b). The position of TD Bank is as follows:

1. The plaintiffs ought to have discovered the claim at least by 2009 or 2010. TD Bank takes the position that bookkeeper fraud is a well-known risk and a prudent businessman would have measures in place to control it. Mr. Schuurman, in effect, turned a blind eye to the risk. TD Bank therefore invites me to dismiss the action.
2. That I ought not to accept the plaintiffs’ expert’s report and the expert’s evidence as the plaintiffs’ expert was provided with the plaintiffs’ internal financial records while TD Bank’s expert was not. Further, the plaintiffs’ expert’s report was served late.
3. The limitation defence was raised by TD Bank in respect of both the cheque fraud and the payroll fraud. The motion for summary judgment was brought in respect of the cheque fraud only. The payroll fraud is still outstanding and, presumably, will proceed to trial. TD Bank submits that the discoverability issue is equally applicable to both the payroll fraud and the cheque fraud and if I grant summary judgment on the cheque fraud, there is a risk of inconsistent findings by the trial judge on the payroll fraud. Accordingly, I ought not to grant summary judgment.

The Evidence

[22] In addition to the affidavit evidence that was filed on the motion, there were four witnesses who gave evidence on the mini trial. They were:

1. Mr. Schuurman;
2. Ms. Chekansky;
3. Mr. Mueller, the expert called on behalf of the plaintiffs; and
4. Ms. Grogan, the expert called on behalf of TD Bank.

[23] Mr. Schuurman and Ms. Chekansky provided factual evidence. Mr. Mueller and Ms. Grogan gave expert evidence on the issue of discoverability.

The Factual Evidence

[24] Mr. Schuurman is the individual in control of the plaintiffs’ businesses, which is essentially a machine shop. Mr. Schuurman is a machinist by training. He received his training during a three-year program at St. Clair College. He attended at the University of Windsor for engineering for one year.

[25] Mr. Schuurman hired Ms. Khalaf in 2008 as the plaintiffs’ bookkeeper. Between 2008 and 2012, the business had as many as 40 employees and as little as 19 employees during the 2009 recession. When Ms. Khalaf was hired in 2008, there were four people working in the office. In December 2009, at the height of the recession, Ms. Khalaf was the only person in the office. By 2012, there were two employees in the office, namely Ms. Khalaf and one additional person who was Ms. Khalaf’s administration assistant.

[26] Ms. Khalaf was in charge of all things relating to bookkeeping. She received invoices for materials and services. She wrote the cheques and saw to payment of the invoices. She handled the payroll. She reconciled the monthly bank statements. Ms. Khalaf reported directly to Mr. Schuurman.

[27] Mr. Schuurman’s evidence was that he had no concerns about Ms. Khalaf’s work until he discovered the fraud in 2015. He trusted Ms. Khalaf implicitly. He never questioned her integrity. He never reviewed the bank statements or the cancelled cheques. He said he was not capable of doing a bank reconciliation. Although the plaintiffs had online banking, Mr. Schuurman said he did not know how to use it. He did not have anyone check Ms. Khalaf’s work.

[28] The plaintiffs hired a professional accounting firm to prepare annual financial statements. Mr. Schuurman attended meetings annually with his accountant, at year end, for a review of the businesses’ financial records. He attended additional meetings as necessary. The annual financial statements were unaudited statements. They were identified as “Notice to Reader” statements. Canada Revenue Agency (“CRA”) attended once for a payroll audit. The accountant and CRA did not raise any red flags about the fraud.

[29] Ms. Khalaf had stolen close to one million dollars from the plaintiffs over a four-year period. Mr. Schuurman said he did not notice any red flags that would have alerted him to the fraud.

[30] Mr. Schuurman terminated Ms. Khalaf in 2012 without cause. He said that he had caught Ms. Khalaf in a lie at a year-end meeting with respect to the purchase of a piece of equipment. As a result, he no longer trusted her. After she was terminated, he hired a replacement bookkeeper, Mr. Shembry. Mr. Shembry never questioned Ms. Khalaf’s work. He, also, did not notice any red flags. Mr. Shembry worked for the plaintiffs from 2012 to 2013.

[31] Ms. Chekansky was employed by the plaintiffs in June 2013 and worked for the plaintiffs until April 2017. Ms. Chekansky had worked as a bookkeeper at Tool Tech Welding from 2004 to 2010 and at Trent Millwork from 2010 to 2013. She described her duties when working for the plaintiffs as very similar to work that she had completed for these other two employers. She took care of receivables and payables; prepared the bank reconciliations; and filed the cheques away.

[32] When she worked with Mr. Schuurman, she said the two would discuss the finances of the plaintiffs. She would go over the receivables and payables with him. They would discuss the balances in the bank accounts. She would provide Mr. Schuurman with the monthly statements and he would ask questions. She found him to be attentive, with the degree of attentiveness to be very similar to her other employers.

[33] Ms. Chekansky did not see any red flags or indicators of fraud while she was working for the plaintiffs. The fraud came to light in 2015 when Ms. Chekansky received a telephone call from a woman who did contract work providing upgrades to accounting software. This woman told Ms. Chekansky that Ms. Khalaf had been charged with forging cheques at her new place of employment. Ms. Chekansky told Mr. Schuurman, who instructed her to immediately review the cheques written by Ms. Khalaf. She did and the forgeries came to light. She said some of the forgeries were easy to locate and others were not.

[34] Ms. Chekansky said that Ms. Khalaf fabricated information. False invoices were entered into the computer. She would then prepare a cheque purportedly to pay the false invoice and change the payee to herself. There was no corresponding packing slip, paper invoice or purchase order as all of the information was completely fabricated.

[35] As for the bank statements, these were not mailed to the plaintiffs. Ms. Khalaf instructed the bank to send them to a branch near her home. The plaintiffs never did receive the paper copies of the bank statements. Ms. Chekansky accessed these statements and cancelled cheques on line in the course of her investigation.

[36] In terms of the payroll fraud, Ms. Khalaf was in charge of the payroll. She was authorized to complete electronic fund transfers without a second authority required. She prepared the payroll and authorized the transfers herself. Nobody checked the transfers. The T4 slips were forged and did not match the electronic fund transfers.

[37] During the years of the fraud, the businesses were still profitable. Mr. Schuurman said that he did review Ms. Khalaf’s work but that she was able to hide her fraud. He said he had no cause to consider Ms. Khalaf’s dishonesty until he was alerted in 2015. He simply did not see it. He said that he “really only saw what she (Ms. Khalaf) showed him”. There were no controls on her work in place because the banks did not insist on it. He said that he reviewed weekly reports, month-end statements and year-end statements but is not a banker or accountant and nothing in the statements raised his suspicions. Ms. Khalaf was skillful in her deception.

The Expert Evidence

[38] At the mini-trial, there were two experts called to provide evidence. Mr. Mueller, the expert called on behalf of the plaintiffs; and Ms. Grogan, the expert called on behalf of TD Bank.

[39] Mr. Mueller is a Certified Public Accountant (CPA) with Chartered Business Valuator (CBV) credentials. He performs accounting, auditing and advisory functions for companies ranging in size from sole proprietors to multinational companies. He confirmed that Ms. Khalaf was a one person operation. This became more necessary as sales declined and cutbacks occurred during the recession in 2009. The only control in place was that all cheques required two signatures, one of which was to be Mr. Schuurman or his wife. Of course, the fraudster was able to circumvent this control fairly easily. Mr. Mueller pointed out that Ms. Khalaf used multiple accounts and numerous entries that made it easier for her to conceal her fraud.

[40] I found Ms. Grogan’s evidence to be the more helpful evidence and I rely on her evidence over that of Mr. Mueller. She is a CBV as well as a forensic accountant. She is in the business of fraud investigations. After a fraud, Ms. Grogan will examine a business’s records to determine how the fraud occurred and make recommendations for the future.

[41] Ms. Grogan shed some light on bookkeeper fraud. She said that there is a greater risk of fraud when there is no segregation of duties. The opportunity for bookkeeper fraud presents itself when the same person writes cheques, books the transactions into the general ledgers, and reconciles the bank statement. Such a person has the opportunity to perpetuate a fraud without it being detected. In order to prevent the fraud from happening, there ought to be a segregation of duties. For example, one person will write the cheques and pay the expenses and another person will reconcile the bank statements. If that is not possible, another person ought to oversee the bookkeeper and check his/her work.

[42] Ms. Grogan pointed out that there would have been a better chance for the fraud to have been detected if controls had been put in place. The fraud may have been detected if someone other than Ms. Khalaf had completed the bank reconciliations and/or the ledger functions.

[43] Ms. Grogan points out that there were internal control weaknesses that might have contributed to the fraud going undetected. Certainly the lack of segregation of duties and a limited management review of the bookkeeper’s work played a part. But also, there appeared to be a weakness in the cheque printing system that allowed Ms. Khalaf to change the named payee on cheques to herself.

[44] Ms. Grogan’s expert report defines fraud as “a deliberate act of deception or manipulation with the specific intent of cheating or injuring another individual or organization”. She talked about the fraud triangle as a framework designed to explain the reasoning behind the decision to commit a fraud. The triangle is comprised of opportunity, pressure and rationalization. She discussed the framework of the Committee of Sponsoring Organizations of the Treadway Commission as providing a common framework for discussing internal controls and prevention and detection of fraud (the “COSO report”). The COSO report is 198 pages long. There were five sponsoring organizations. The framework was published in 1992 and again in 2013. The genesis of the COSO framework was to a large extent the result of corporate failures in the USA in the 1980’s due to fraud by employees. She said the COSO framework is a framework of “best practices”.

[45] Generally, accountants are aware of the COSO framework. A small business owner is not. Ms. Grogan confirmed that it is virtually impossible to prevent all fraud, but said that the COSO framework is helpful in reducing the risk.

[46] Ms. Grogan said that she has seen many previous cases of bookkeeper fraud; she estimated 40 cases in 20 years. She is brought in when the fraud is detected by which time generally a loss has occurred.

Analysis

Is This a Proper Case for Partial Summary Judgment?

[47] In Mason v. Perras Mongenais, 2018 ONSC 1477, Myers J. dealt with a motion for summary judgment brought by one of several defendants. In finding that the motion was appropriate, Myers J. said at para. 8:

The issue of whether and when partial summary judgment is available when causes of action remain for trial is a difficult one. It brings into sharp focus the conflict between the traditional status of the civil trial process as the gold standard for fact-finding and the “culture shift” heralded by the Supreme Court of Canada in Hryniak v. Mauldin, 2014 SCC 7. The “culture shift” involves a recognition that while trials may be the best method to enable the court to resolve conflicting narratives advanced by the parties, the trial process is so slow and expensive that its use has made civil justice inaccessible and unattainable for many Canadians.

[48] Myers J. referenced the following passage from Hryniak, 2014 SCC 7, para. 60:

The “interest of justice” inquiry goes further, and also considers the consequences of the motion in the context of the litigation as a whole. For example, if some of the claims against some of the parties will proceed to trial in any event, it may not be in the interest of justice to use the new fact-finding powers to grant summary judgment against a single defendant. Such partial summary judgment may run the risk of duplicative proceedings or inconsistent findings of fact and therefore the use of the powers may not be in the interest of justice. On the other hand, the resolution of an important claim against a key party could significantly advance access to justice, and be the most proportionate, timely and cost effective approach.

[49] The Court of Appeal in Butera v. Chown, Cairns LLP, 2017 ONCA 783, 137 O.R. (3d) 561, has counselled the exercise of caution in motions for partial summary judgment. The court is required to consider (1) the risk of duplicative or inconsistent findings at trial and (2) whether granting partial summary judgment is advisable in the context of the litigation as a whole. The Court of Appeal considered problems that arise from partial summary judgment motions, including a delay in the resolution of the main action, the expense to the litigants and the use of judicial resources. Pepall J.A., speaking for the court, said at para. 34:

A motion for partial summary judgment should be considered to be a rare procedure that is reserved for an issue or issues that may be readily bifurcated from those in the main action and that may be dealt with expeditiously and in a cost effective manner. Such an approach is consistent with the objectives described by the Supreme Court in Hryniak and with the direction that the Rules be liberally construed to secure the just, most expeditious, and least expensive determination of every civil proceeding on its merits.

[50] This is not a situation where the entirety of the claim against a sole defendant will be resolved by way of a summary judgment motion. This is a situation where a part of a claim between the same parties would be resolved, leaving another part of the claim to proceed to trial.

[51] In my view, this is an appropriate case for partial summary judgment. I base that on the following:

1. There are two distinct claims against the defendants; the first being the cheque fraud claim and the second being the payroll fraud claim. The two claims represent different actions taken by the fraudster. I received significant evidence on the cheque fraud claim, including viva voce evidence on the mini trial and expert evidence from both parties. The evidence dealt with the manner in which the cheque fraud was perpetrated, the cause of its discovery and the reasons why it was not discovered earlier. I did not receive similar evidence on the payroll fraud claim.
2. The Bills of Exchange Act which applies strict liability applies to the cheque fraud claim. It does not apply to the payroll fraud claim which is grounded in negligence.
3. There is no indication that any additional evidence on the cheque fraud would be available at trial.
4. In the event this court determines the claim for damages as a result of the cheque fraud, a significant claim between the parties will have been resolved. It may well be that, with the resolution of the cheque fraud claim, the payroll fraud claim will be more easily resolved between the parties. If not, and the payroll fraud claim needs to proceed to trial, that trial will be shorter and more focused. The trial judge will be in the position of dealing only with the payroll fraud claim, and hearing evidence only with respect to that claim, as the cheque fraud claim will have been resolved.

[52] In each case, a cost-benefit analysis must be undertaken by the motions judge. Here, the benefit is the resolution of a major claim between the parties as described above. The cost is the risk of an inconsistent finding on the limitation period issue. In my view, the commencement of the limitation period in respect of the payroll fraud claim may or may not be a different date than the commencement of the limitation period in the cheque fraud claim. As I said, I heard extensive evidence on the cheque fraud. I did not hear similar evidence on the payroll fraud. Although there may be some overlap in the evidence, there were possibly different office procedures respecting the payroll fraud and possibly different considerations as to when the plaintiffs ought to have been aware of the loss.

[53] As noted by Myers J. in Mason, the Supreme Court did not provide a hard and fast rule to default to a trial if there is no completely discrete or bifurcated issue. A trial ought not always be the default process. The shift in the approach towards summary judgment motions as a result of the Supreme Court’s decision in Hryniak is that “instead of defaulting to trials, judges will exercise judgment, where possible, to find proportionate processes to allow a fair and just resolution on the facts of each case that avoids the cost and delays of the trial process” (para. 33).

[54] In my view, dealing with the partial summary judgment on its merits in this case resolves much of the proceeding between these parties and achieves the goals of fairness and promoting access to justice. On balance, the risks of an inconsistent determination of the limitation issue is outweighed by the benefits of the partial summary resolution.

The Limitation Defence

[55] Counsel for the parties are agreed that, as between the plaintiff and TD Bank, the applicable limitation period is set out in s. 5 of the Limitations Act. The structure of s. 5 of the Limitations Act is such that s. 5(1) lists certain events, the knowledge of which determines the commencement of the limitation period. Subsection (2) imposes a presumption of knowledge and shifts the burden of proof otherwise on to the plaintiff.

[56] The test under s. 5(1)(b) of the Limitations Act is an objective test. The determination of when a reasonable person, with the abilities and in the circumstances of the person with the claim, ought to have known of the matters described in section 5(1)(a) is a factual determination. The principle is often described as “the discoverability principle”.

[57] The discoverability principle is described in Paul M. Perell & John W. Morden, The Law of Civil Procedure in Ontario, 3d ed. (Toronto: LexisNexis, 2017), at p. 164-65 as follows:

Under the discoverability principle, a limitation period commences when the plaintiff discovers the underlying material facts or, alternatively, when the plaintiff ought to have discovered those facts by the exercise of reasonable diligence. The plaintiff is required to act with due diligence in acquiring facts in order to be fully apprised of the material facts upon which a claim can be based. However, while due diligence is a factor that informs the analysis of when a claim ought to have reasonably been discovered, lack of due diligence is not a separate and independent reason for concluding that a plaintiff’s claim is statute barred. The idea rather is that when a reasonable person with the abilities and in the circumstances of the plaintiff would acquire facts to become knowledgeable about the claim, the limitation period does not stop running if the plaintiff takes no steps to investigate whether he or she has a claim.

What a reasonable person in the same or similar circumstances of the plaintiff knew or ought to have known is a question of fact. The objective test under paragraph 5(1)(b) requires considering the abilities and circumstances of the plaintiff and whether a person in the same or similar circumstances would have been alerted to the elements of a claim.

[58] The issue was addressed by the Ontario Court of Appeal in Galota v. Festival Hall Developments Ltd., 2016 ONCA 585, 133 O.R. (3d) 35. In that case, Ms. Galota broke her arm when she fell off of an elevated dance floor at Republik nightclub. The nightclub was a tenant in a building in downtown Toronto. Festival Hall was the landlord and owner. Ms. Galota retained a lawyer immediately after her accident and sued Republik for damages for negligence. She did not initially sue Festival Hall. More than three years after the accident, during the examination for discovery of a representative of Republik, Ms. Galota learned that Festival Hall may have some liability. One year and 364 days after this revelation, Ms. Galota sued Festival Hall for negligence. Festival Hall moved for summary judgment on the basis of the limitation period. The motions judge dismissed Festival Hall’s motion and found that the limitation period started to run on the day that Republik’s representative was examined for discovery. Festival Hall’s appeal to the Court of Appeal was dismissed.

[59] At para. 15, the Court of Appeal made the following three points about the discoverability principle:

Section 5(1)(b) codifies the common law rule of discoverability. If s. 5(1)(b) applies, the two year limitation period will run from a date later than the date the plaintiff was injured.

Under s. 5(1)(b), a plaintiff "first ought to have known" of the claim when the plaintiff has enough evidence or information to support an allegation of negligence, including facts about an act or omission that may give rise to a cause of action against a possible tortfeasor: Zapfe v. Barnes (2003), 66 O.R. (3d) 397 (Ont. C.A.), at paras. 32-33; Burtch v. Barnes Estate (2006), 80 O.R. (3d) 365 (Ont. C.A.), at para. 24. The plaintiff cannot delay the start of the limitation period until he or she knows with certainty that a defendant's act or omission caused the injury or damage: Longo v. MacLaren Art Centre Inc., 2014 ONCA 526, 323 O.A.C. 246 (Ont. C.A.), at para. 44.

The rebuttable presumption in s. 5(2) means that a plaintiff has the onus of showing that the rule of discoverability in s. 5(1)(b) applies: Fennell v. Deol, 2016 ONCA 249 (Ont. C.A.), at para. 26.

[60] The Court of Appeal, in Authorson v. Canada, 2007 ONCA 501, 86 O.R. (3d) 321, stated at para. 137 that “[I]n the context of the discoverability principle, the plaintiff bears the burden of demonstrating that the cause of action was not discoverable”. The reason for the shift, as articulated by the Court of Appeal, is “On an issue like discoverability (what did the plaintiff know about the claim, and when, and what steps did the plaintiff take to pursue it) it would be at best difficult for the party who is the target of the reverse onus to establish these factors, and at worst unlikely that the party could do so.”

[61] Ms. Khalaf was incredibly skillful in the concealment of her fraud. She was a fraudster extraordinaire. She took control of the books, the ledgers, the cheques and the bank statements and was able to steal over $300,000 in Canadian funds and over $200,000 in US funds as a result. She took control of the payroll records and was able to steal more monies by way of electronic fund transfers in her payroll fraud. She stole these monies over a period of four years and went undetected.

[62] Mr. Schuurman did not detect the cheque fraud before 2015, when he was alerted to its possibility. He trusted Ms. Khalaf. His trust was, obviously, misplaced.

[63] The fraud was not detected by Mr. Schuurman until 2015 because he did not have appropriate measures in place in his business. There was no segregation of duties. There was no person, knowledgeable in financial business affairs, who reviewed Ms. Khalaf’s work.

[64] Mr. Greenglass, on behalf of TD Bank, submits that a reasonable person in Mr. Schuurman’s shoes would have had those measures in place. Accordingly, Mr. Greenglass submits that s. 5(1)(b) of the Limitations Act applies and the claim is statute barred.

[65] A “reasonable person” is defined in Black’s Law Dictionary as:

A hypothetical person used as a legal standard, especially to determine whether someone acted with negligence; specifically, a person who exercises the degree of attention, knowledge, intelligence and judgment that society requires of its members for the protection of their own and of others’ interest. The reasonable person acts sensibly, does things without serious delay, and takes proper but not excessive precautions.

[66] The reasonable person has also been described thus in R.F.V. Heuston, Salmond on the Law of Torts, 17th ed (London: Sweet & Maxwell, 1977) at p. 56:

The reasonable man connotes a person whose notions and standards of behaviour and responsibility correspond with those generally obtained among ordinary people in our society at the present time, who seldom allows his emotions to over bear his reason and whose habits are moderate and whose disposition is equable. He is not necessarily the same as the average man – a term which implies an amalgamation of counterbalancing extremes.

[67] Furthermore, in Longo v. MacLaren Art Centre Inc., 2014 ONCA 526, 323 O.A.C. 246, the Court of Appeal said the following about the reasonable person at paras. 42 and 43:

The plaintiff is required to act with due diligence in determining if he has a claim. A limitation period will not be tolled while the plaintiff sits idle and takes no steps to investigate the matters referred to in section 5(1)(a).

The plaintiff must act reasonably in investigating and determining whether he or she has a claim. A consideration of whether the plaintiff has acted reasonably will include an analysis of not only the nature of the potential claim, but also the particular circumstances of the plaintiff.

[68] Applying these principles to the present case, I note that Mr. Schuurman is a machinist. He has no background or education in bookkeeping, accounting, or finances. He hired Ms. Khalaf, trusted her to do his books, saw nothing untoward with her work, and was completely in the dark as to her fraudulent actions until 2015. As soon as he was alerted that she had stolen from a subsequent employer, he arranged for an investigation into her work and discovered the cheque fraud. He acted diligently as soon as he had an inkling of her theft.

[69] Ms. Khalaf was skilled in her deception. She covered her tracks. She manipulated the records so that her fraudulent actions were concealed. Quite frankly, the only way that Mr. Schuurman could have discovered the cheque fraud earlier is if he had measures in place to prevent it – namely the segregation of duties and/or another trained bookkeeper reviewing her work. Does the fact that he did not have these measures in place disqualify him as a “reasonable person”? In my view it does not.

[70] According to Ms. Grogan, bookkeeper fraud is a common problem. The bookkeeper who is trusted by his or her employer is in a unique position of opportunity. It is when the bookkeeper is a dishonest person that the employer is at risk of being victimized. Mr. Schuurman was such a victim. He was, perhaps, overly trusting and gullible. It can be said that he was imprudent. However, that does not necessarily mean that he was unreasonable.

[71] The reasonable person standard is to be applied taking into account the “abilities” and the “circumstances of the person with the claim”. It seems to me that when the “reasonable person” standard in the context of s. 5(1)(b) is applied in this case, the circumstances of Mr. Schuurman include the organization of his business at the time of the fraud. The organization of the business, and particularly the bookkeeping part of that business, lacked a segregation of duties. Without a segregation of duties as described by Ms. Grogan, the plaintiffs were vulnerable to bookkeeper fraud. To put the analysis another way, the “abilities and circumstances” of Mr. Schuurman included his overly trusting, perhaps gullible nature and his resultant vulnerability.

[72] In the vast majority of cases, like Galota, the plaintiff is aware that he or she has suffered an injury or a loss. The issue is discoverability of a cause of action against a particular defendant for damages for that injury or loss. In this case, the plaintiffs were not aware of the loss itself until three years after it last occurred. A similar situation occurred in the Ontario Court of Appeal decision of Van Allen v. Vos, 2014 ONCA 552, 121 O.R. (3d) 72. In that case, the parties were partners in a dental practice for 20 years. It was discovered by the plaintiff’s accountant during termination of the partnership that profits had not been distributed in accordance with the parties’ agreement for several years. The trial judge concluded that the profits had been misallocated. The defendant appealed, and raised the issue of the limitation period and discoverability. The defendant’s position was that the plaintiff knew or ought to have known that profits were not being allocated in accordance with the terms of their agreement. The court said the following at para. 34:

On the issue of the limitation period, the appellant submits, as he did at trial, that the respondent would have discovered the error had he retained his accountant to review the documentation supporting the financial statements. The observation, even if true, is immaterial. It is reasonable discoverability — rather than the mere possibility of discovery — that triggers a limitation period: Lawless v. Anderson, 2011 ONCA 102, at para. 22. To preclude the respondent from recovery because of his failure to review the underlying financial statements would, in the circumstances of this case, hold him to an unreasonably high standard.

[73] Mr. Sherman was not aware that the plaintiffs had suffered a loss until early 2015. He did not have any evidence or information to support a claim against Ms. Khalaf prior to early 2015. As in Van Allen, to preclude the plaintiffs from recovery because of a failure to have measures in place to detect bookkeeper fraud, such as the segregation of bookkeeping duties, would hold the plaintiffs to an unreasonably high standard.

[74] TD Bank relies upon the decision of Mesbur J. in Manor Windsor Realty Ltd. v. Bank of Nova Scotia, 2011 ONSC 4515, a similar case of bookkeeper fraud. However, in that case the bank had business banking agreements in place that limited its liability and required the plaintiff to review its bank statements each month and report any discrepancies. The bank took the position that each fraudulent cheque was discoverable on the day the bank statement containing that cancelled cheque was delivered to the plaintiff. Mesbur J., at para. 52 said “I agree, particularly since the Financial Services Agreement imposes a positive obligation on the customer to check each bank statement and report errors to the bank.” I found that there were no such agreements in place here. Additionally, the plaintiffs never received the bank statements as the fraudster had them mailed to a different branch, presumably so she could collect them without risk of someone else seeing them. Accordingly, in my view, the decision does not apply to the facts at hand.

[75] For these reasons, in my view, a reasonable person with the abilities and in the circumstances of Mr. Schuurman first ought to have known of the loss suffered by the plaintiffs when Ms. Chekansky was alerted to the allegations of fraud brought against Ms. Khalaf by a subsequent employer. That was early 2015. The limitation period had thus not passed when the statement of claim was issued and the claim is therefore not statute barred.

Disposition

[76] The parties have agreed that the Bills of Exchange Act, s. 48 and 49, result in the bank being strictly liable on the forged cheques. The bank has raised the two defences, both of which I have disposed of. Accordingly, the plaintiffs are entitled to summary judgment against the TD Bank in the sum of $342,333.68 CAD and $246,094.74 USD.

[77] In the event the parties are unable to agree on costs, they may make written submissions, along with a costs outline and any relevant offers to settle, according to the following timelines:

1. The plaintiffs may provide submissions within 20 days;
2. TD Bank may provide submissions within 20 days thereafter;
3. The plaintiffs may provide reply submissions within 10 days thereafter.

Original signed by Justice Pamela L. Hebner Pamela L. Hebner Justice

Released: September 12, 2018