SUPERIOR COURT OF JUSTICE - ONTARIO
RE: CITY OF SASKATOON, Plaintiff
AND:
JOHN DOE, Defendant
BEFORE: Penny J.
COUNSEL: Catherine Francis and Samantha Bogoroch for the Plaintiff
Michael Title for Mohammad Abazari
Timothy Duggan for Ali Ziloubaf
Nicholas Fitz for The Toronto-Dominion Bank
Ibrahim Bangura on his own behalf
HEARD: November 5, 2019
ENDORSEMENT
Overview
1A contractor for the City of Saskatoon provided construction services and was paid by electronic transfer. Fraudulent emails claiming to be from the chief financial officer of the contractor were sent to the City purporting to change the deposit details for payment to a new bank account at TD Bank. The City changed the deposit details as instructed and subsequently deposited a payment of $1,038,744.74 owing to the contractor into the new TD account. Within a day or two, the contractor advised the City it had not received payment. On investigation, the City learned that the TD account did not belong to the contractor and that no change of banking information had issued from the contractor. With the assistance of the Bank, counsel for the City, Minden Gross, was quickly able to trace all the funds and obtained a freezing order preventing any disposition.
2As of November 5, 2019, when this motion was argued, the majority of the money had been returned. Disputes remain involving $345,000 of the $1,038,744.74 that was stolen from the City. The remaining disputes are as follows:
Ziloubaf: $60,000 in the 267 account
$35,000 uncashed money order (funds drawn from the 267 account)
Abazari: $200,000
Bangura $50,000
3Each of these individuals claims to be an innocent victim of the fraud and to have paid valuable consideration for the transfer of the fraudulently stolen funds. As such, they claim to have established at least a triable issue about who, as between innocent victims of a fraud, should bear the risk of loss.
Background
4There is no dispute that the City was defrauded of $1,038,744.74 when it was fraudulently induced to deposit a payment meant for its contractor into a TD Bank account mistakenly believed to be the contractor’s account.
5The TD account into which the funds were transferred belonged to 2677367 Ontario Inc. The directors of 267 were Khalaghi and Yousefian. Unbeknownst to TD Bank, however, 267, Khalaghi and Yousefian did not use the account. Rather, they permitted Ali Ziloubaf to operate a money services business out of 267’s TD account. Ziloubaf owns 2570701 Ontario Inc., carrying on business as Ace Financing Centre, which is a registered money services business with FINTRAC. TD Bank was completely unaware that this account was being used by Ziloubaf/Ace to operate a money services business. Ziloubaf dispersed all but $95,000 of the $1,038,744.74 received into this account to other persons or entities. Due to prompt discovery and action, these funds were all traced and frozen almost immediately.
6Ziloubaf admitted in cross-examination that:
(a) he had a prior TD account closed down because he used it to conduct a money services business;
(b) he tried to open accounts at the Bank of Nova Scotia and CIBC but could not do so because he planned to conduct a money services business through those accounts;
(c) he approached a friend, Khalaghi (who works in a Tim Horton’s) to incorporate 267 and open an account. He paid Khalaghi between $500 to $1,500 per money service transaction as a fee for using the account;
(d) he never told TD Bank that 267’s account was being used for a money services business and TD Bank did not know he or Ace was involved in using the account at all;
(e) all of the prior deposits into the account came from Dubai, none came from Canada (later, he contradictorily said that no funds ever moved from Dubai to Canada);
(f) his money services were offered as a workaround of the embargo on financial dealings with Iran and the restrictions on taking money out of Iran;
(g) other than the TD account, there were no written agreements or paper or electronic records of his money services business;
(h) his sole method of determining whether a deposit was “legitimate” was to wait a few days before paying out the money;
(i) although he and 257/Ace were registered with FINTRAC, 267 was not;
(j) the people he dealt with were not his own clients, they were clients of “other” money exchanges;
(k) he never verified the identity or personal information of people he dealt with because his business was based on “trust;”
(l) he never made enquiries as to the source of any funds deposited to the account;
(m) in August 2019, a person in Dubai he had never met called and told Ziloubaf that someone named Gavin Kolner would be depositing $1 million into the Ace account;
(n) Ziloubaf met Kolner on the street for a signature. Kolner did not get out of his car but passed a photocopy of his passport through the window to Ziloubaf. Beyond looking at the photocopy of Kolner’s passport, Ziloubaf made no inquiries and had no information about Kolner;
(o) although Ziloubaf thought the money originated in Dubai, he had no paper or electronic records. His customers did not use bank accounts he said; it was all done in cash. He also maintained that no money ever flowed from Dubai to Canada;
(p) his contacts in Dubai had the TD Bank account information;
(q) he “did not notice” that the deposit of $1,038,744.74 into 267’s TD Bank account showed as coming from the City of Saskatoon.
7The TD Bank statements attached to Ziloubaf’s affidavit show that although there was as much is $9.8 million in the account in May 2019, by the end of July the account was depleted to $258. Ziloubaf also attached his FINTRAC reports. They do not, however, match the transactions in the TD account. In particular, there is no report of the alleged $1,038,744.74 transaction with Kolner. All of the reports are marked “incomplete.”
Analysis
The Process
8The hearing on November 5, 2019 was the result of a consent Order made by McEwen J. on August 26, 2019. Para 2 of the Order provides that:
…the entitlement to proceeds of the sum of $1,038,744.74 between the Plaintiff, City of Saskatoon, and any person claiming entitlement to the funds which remain restrained pursuant to the Order of Mr. Justice Penny shall be determined on October 3, 2019 pursuant to the following schedule…
9The schedule establishes a timetable for the filing of responding material, reply, cross examinations and the delivery of factums, concluding with “October 3, 2019: Hearing on substantive issues (two hours booked).”
10The order also incorporates a Schedule A dealing with the treatment of a $50,000 down payment made by Bangura to Oakdale Village Homes Inc. I will return to this schedule when dealing with the Bangura claim below.
11The hearing did not proceed on October 3 at the request of Bangura. Bangura claimed that he was in the process of retaining counsel and requested an adjournment. On the strength of this representation, an adjournment was granted to 10:00 AM on November 5, 2019. Bangura did not retain a lawyer, however. Bangura also did not comply with Schedule A to the Order of McEwen J. Bangura filed no evidence and appeared in court on November 5 after 11:00 AM to make oral submissions on his own behalf.
12Counsel for Ziloubaf and Abazari complained that there are no pleadings, no discovery and that a trial is required to explore, for example, whether the City was contributorily negligent in following the fraudulent instructions to change bank details and directing payment to the 267 account. I am unable to agree.
13The order of McEwen J. was made on consent. The respondents are bound by that order and that consent. As I will discuss further below, I do agree that it was open to Ziloubaf, Abazari and Bangura to show, with appropriate evidence, that they were bona fide purchasers for value without notice of any fraud or that they changed their position as a result of the disbursement to them of the fraudulent funds. Had they done so, I might have agreed with them that a summary disposition is not warranted because additional evidence, such as on the question of contributory negligence, would be required to determine who, as between two innocent victims of a fraud, should bear the loss. For reasons I will addressed below, however, none of the respondent parties have met that burden. There is, accordingly, no “triable” issue raised on the evidence.
The Law
14Cases of this kind have been dealt with under principles of constructive trust, J. Todd Holmes v. Amlez International Inc., 2009 CanLii 58984 (ONSC), and money paid under mistake of fact, Arrow ECS Norway AS v. John Doe, 2017 ONCA 664. In both approaches, however, as I understand, if the recipient of fraudulently obtained money wishes to retain that money in priority to the defrauded party, they must show that they had no knowledge that the source of the funds was from a fraud and either paid value valuable consideration for the receipt of the fraudulent funds or innocently changed their position as a result of the receipt of the fraudulent funds. This is, for example, set out by the Court of Appeal in Arrow, supra, in the context of reviewing the decision of the SCC in BMP Global Distribution Inc. v. Bank of Nova Scotia, 2009 SCC 15:
The court accepted the test in Simms for recovering money paid under a mistake of fact (at p. 535): “if a person pays money to another under a mistake of fact which causes him to make the payment, he is prima facie entitled to recover it as money paid under mistake of fact.” However, the court noted three defences under which the claim may fail: first, where: “the payer intends that the payee shall have the money at all events, whether the fact be true or false, or is deemed in law so to intend”; second, where “the payment is made for good consideration, in particular if the money is paid to discharge, and does discharge, a debt owed to the payee (or a principal on whose behalf he is authorized to receive the payment) by the payer [or] by a third party by whom he is authorized to discharge the debt”; and third, “where the payee has changed his position in good faith, or is deemed in law to have done so.”
Ziloubaf/Ace Claim to $95,000
15Regrettably, there is nothing bona fide about Ziloubaf’s conduct. Leaving aside entirely whether the evidence supports an inference he was complicit in the fraud, it at least supports the inference that he was wilfully blind to it. Ziloubaf has proven utterly unable to establish that the deposit of $1,038,744.74 into his Ace account was for valuable consideration or matched by a concomitant obligation to pay. Further, with respect to the $60,000 frozen in the account and the $35,000 money order, there is no evidence there is any bona fide obligation to pay out this money to anyone. Nor is there any evidence to support a change of position in reliance upon the receipt of this money. The funds were clearly stolen from the City by fraudulent means. Ziloubaf has not shown a bona fide receipt of these funds. Nor has he shown valuable consideration or change in position. The funds belong to the City and must be repaid to the City. The money order for $35,000 and the remaining cash, in the order of about $60,000, in the 267 account, less $258, shall be released to the City, care of Minden Gross in trust, immediately.
Abazari Claim to $200,000
16In Abazari’s affidavit he says he knows Ziloubaf “simply as a tenant” in the building Abazari owns. However, Ziloubaf testified that they are friends and that Abazari used to run a currency exchange out of the same office. In any event, Abazari says he asked Ziloubaf to act as his agent to receive funds in Iranian rial in Tehran, transfer the funds to a currency exchange in Dubai and convert and issue to him CDN $200,000.
17He says he received a bank draft drawn on the Ace TD bank account for $200,000 on August 9 which he deposited into his account at CIBC. Abazari’s account was frozen shortly thereafter as a result of my order of August 16, 2019.
18Abazari goes on to say he exchanged 18 billion rial for this money but does not say when. He has provided no documentary or other evidence that valuable consideration was paid either before or after receipt of the $200,000 draft from TD Bank. Further, there is no evidence that Abazari changed his position in innocent reliance on receipt of this money.
19In light of the clear evidence that the funds delivered to Ace/Ziloubaf were fraudulently stolen from the City, Abazari was obliged to put forward cogent evidence that he was a bona fide purchaser for value without notice or, if not for valuable consideration, that he innocently changed his position in reliance on receipt of the funds. He has not done so. Abazari has not even raised a triable issue on either of these points.
20Even if Iranian rial were paid to Ziloubaf’s credit in Tehran, Ziloubaf could not pay Abazari back with stolen Canadian money. In the circumstances, Abazari must look to Ziloubaf, not money stolen from the City, for the performance of Ziloubaf’s obligations, if any, to him. The $200,000 frozen in Abazari’s CIBC account shall be paid in trust to Minden Gross immediately.
Bangura Claim to $50,000
21Bangura filed no evidence. At the hearing, Bangura admitted he had no documents to support the claim that he gave someone in Tehran or Dubai CDN$50,000 worth of foreign currency. He said there were no such documents.
22Unlike in the Arrow case, supra, there is also no evidence that the foreign currency was paid after receipt of the Canadian currency or that Bangura otherwise changed his position in reliance on innocent receipt of this money. While there is some evidence (filed by Oakdale Village) that Bangura entered into an agreement of purchase and sale for a home and agreed to pay a $50,000 deposit, this agreement predates Bangura’s receipt of the $50,000. Bangura used the $50,000 paid to him by Ziloubaf to pay Oakdale the deposit. But, the Oakdale account was also frozen and Oakdale returned the $50,000 to Minden Gross. Schedule A to McEwen J.’s August 26, 2019 Order required Bangura to provide a replacement cheque to Oakdale by September 13, 2019. Bangura did not do so. The agreement of purchase and sale therefore came to an end.
23Bangura has completely failed to establish any basis upon which to conclude that he paid valuable consideration for the $50,000 transferred to him by Ziloubaf or that he changed his position in innocent reliance on receipt of that money. The funds held by Minden Gross are therefore released to the credit of the City immediately.
Conclusion
24In conclusion, the three claimants have failed to show there is an issue requiring a trial about whether they are bona fide purchasers for value or that they changed their position in innocent reliance on receipt of the funds. Accordingly, they do not get to the question of whether there needs to be pleadings, discovery and trial to determine whether the City was contributorily negligent. The claimants’ remedy, if any, is against Ziloubaf or those to whom they made the alleged payments in Tehran or Dubai, not funds fraudulently stolen from the City.
Costs
25Abazari filed a bill of costs of $10,800 partial indemnity. Ziloubaf’s cost summary was for $12,600. The City filed a bill, from the very commencement of this matter, for $63,800.
26The City is not entitled to recover its entire cost of investigation and enforcement from these parties. There is no evidence they were direct participants in any fraud. Ziloubaf should bear a greater burden. I award $15,000 in costs against him. I award $10,000 in costs against Abazari. Since essentially no time was spent on the Bangura claim and Minden Gross had already
recovered those funds from Oakdale, I make no cost order as against Bangura.
Penny J.
Date: November 22, 2019