Court File and Parties
COURT FILE NO.: CV-219-628799-CL DATE: 2020-01-08 SUPERIOR COURT OF JUSTICE – ONTARIO (COMMERCIAL LIST)
RE: Canadian Imperial Bank of Commerce and Bank of Montreal, Plaintiffs AND: Bloomforex Corp. and Royal Bank of Canada, Defendants
BEFORE: Penny J.
COUNSEL: Geoff Hall and Trevor Courtis for CIBC Jonathan G. Bell and Meg Bennett for BMO Richard Macklin, Lucinda Bendu and Wei Jiang for Bloomforex
HEARD: December 16, 2019
ENDORSEMENT
Overview
[1] This is another case in which a fraud has been perpetrated through the unwitting instrumentality of a money services business involved in international foreign exchange transactions.
[2] CIBC and BMO’s clients were the victims of the fraud. The banks have made their customers whole and now sue to recover the defrauded funds from Bloomforex as money paid under a mistake of fact. Bloomforex is a recent entrant into the business of transferring money between Canada (in Canadian dollars) and the People’s Republic of China (in Chinese yuan).
[3] Bloomforex seeks summary judgment dismissing the banks’ claim on the basis that it received the funds without knowledge of any fraud and, having received the funds, in good faith changed its position by incurring liabilities to reimburse Chinese currency ultimately paid to the fraudsters’ PRC bank account.
[4] Bloomforex also argues that, as between two innocent victims of a fraud, the banks were better positioned to avoid the loss and should bear the risk of that loss.
[5] The basic issue in dispute is whether there is a genuine issue requiring a trial. The two questions to which that basic issue must be applied are:
(1) did Bloomforex, having innocently received defrauded funds, change its position in good faith? and
(2) does the principle that, as between two innocent victims of a fraud, the one better positioned to avoid the fraud should bear the risk of loss, apply in these circumstances and, if so, does that principle result in the banks bearing the loss?
Background
[6] The basic facts are not complicated.
[7] Seemingly well-informed fraudsters, impersonating legitimate customers of CIBC and BMO, opened foreign exchange accounts with Bloomforex for the stated purpose of depositing Chinese yuan to the PRC account of a “relative,” Ms. Du, to help her with the renovation of a business. The fraudsters then caused the CIBC and BMO to wire money from the customers’ accounts to Bloomforex’ Royal Bank of Canada account. Bloomforex accepted these Canadian dollar deposits and claims to have, on the strength of receipt of these funds and acting on instructions from the fraudsters, arranged for third parties to deposit an equivalent amount in Chinese yuan into the account of Ms. Du in the PRC.
[8] The fraud was discovered. CIBC and BMO alerted RBC, which froze the Canadian funds. RBC paid the money in the Bloomforex account into court and has been released from this proceeding.
Issue 1: Money Paid Under a Mistake of Fact
[9] In B.M.P. Global Distribution Inc. v. Bank of Nova Scotia, 2009 SCC 15, the Supreme Court adopted the test for recovery of money paid under a mistake of fact from Barclays Bank Ltd. v. W.J. Simms Son & Cooke (Southern) Ltd., [1979] 3 All E.R. 522 (Eng. Q.B.). The Supreme Court said, at para. 22:
The test laid down in Simms for recovering money paid under a mistake of fact (at p. 5) is straightforward:
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 a mistake of fact.
His claim may however fail if: (a) the payor intends that the payee shall have the money at all events, whether the fact be true or false, or is deemed in law to so intend; (b) the payment is made for good consideration, in particular if the money is paid to discharge, and does discharge, at debt owed to the payee (or a principal on whose behalf he is authorized to receive the payment) by the payor or by third party by whom he is authorized to discharge the debt; (c) the payee has changed his position in good faith, or is deemed in law to have done so.
[10] Under the first step the Simms test, the banks have a prima facie right to recover. It is common ground that the payments were made under a mistake of fact. The banks made the wire transfers to the Bloomforex RBC account before discovering the transfers were fraudulent. It is also common ground that neither the first (intent to transfer in any event) nor the second (discharge of a debt) ground of defence to the banks’ prima facie right to recover is applicable. The evidence is plain that there was no intent to benefit Bloomforex or Ms. Du in any event, nor was the transfer to discharge a debt. The issue on which the claim for the return of money paid under a mistake of fact turns in this case is whether Bloomforex changed its position in good faith or is deemed in law to have done so.
[11] Bloomforex’ evidence supports the proposition that it is a legitimate money services business, set up in accordance with Canadian law with the assistance of professional legal and accounting advice. Bloomforex spent months setting up and negotiating the terms of its money services banking arrangements with the RBC. Bloomforex’ evidence is that it verified the “clients” identity by examining an original driver’s license and collecting and recording client information (name, address, contact information and occupation). Bloomforex sent a confirmatory email to the “clients” registered email address. Enquiries were also made to determine if the “clients” were “potentially exposed persons” or the heads of an “international organization.”
[12] Two wire transfers were subsequently received from CIBC. Bloomforex confirmed that the address associated with the CIBC account matched information previously received. Noticing that the account was a joint account, Bloomforex called the “client” and was told that the joint account holder was the “client’s” wife. A third wire transfer was received from a different person via a different bank, BMO. Bloomforex explained to the original “client” that the money would have to be returned unless the second person came in and registered as a new client with Bloomforex. That person (“client 2”) did so and presented original, signed identification and personal banking information which matched account information associated with the third wire transfer. All of these transactions were over $10,000 and were reported on a timely basis to FINTRAC.
[13] In each case, following receipt of these funds (and as directed by the “clients”), payment of the equivalent amount of Chinese yuan to Ms. Du in an account at the Industrial and Commercial Bank of China (ICBC) in the PRC was “arranged and completed” by Bloomforex before notification of any alleged wrongdoing. How these payments were arranged and completed to Ms. Du is at the heart of the dispute in this case.
[14] Initially, Bloomforex’ deponent, Mr. Ren, testified in his affidavit that once a Canadian resident pays Canadian dollars into Bloomforex’ account in Canada, Bloomforex then pays the agreed upon yuan to the designated recipient from Bloomforex’ PRC account. As determined by the bank’s expert, Mr. McGuire, and later admitted by Mr. Ren in cross-examination, this was not true. Neither Bloomforex nor its Australian affiliate (Bloomforex Australia) has a bank account in the PRC. At no point were the Canadian dollars that had been deposited in Bloomforex’ RBC account ever converted into Chinese yuan or removed from that account. Likewise, at no point were yuan ever transferred through an account held in the name of Bloomforex or its affiliate to Ms. Du at the ICBC.
[15] In fact, the Chinese yuan came from two sources:
(1) in several “small batch” transactions from a personal PRC bank account in the name of Jing Zhu; and
(2) so-called “offsets” from unidentified clients of Bloomforex Australia who were purchasing Australian dollars from Bloomforex Australia with Chinese yuan.
[16] According to Mr. Ren, Jing Zhu is the wife of Ye Qu. Mr. Qu is apparently a director and shareholder of Bloomforex and the directing mind of Bloomforex Australia. Ms. Zhu, however, is not an employee, officer, director or shareholder of Bloomforex or Bloomforex Australia. Nor is there any evidence that she has any contractual relationship with Bloomforex.
[17] Mr. Ren also testified that the “clients” specifically requested that payment to Ms. Du be split into sums of less than a specified amount out of fear that, if larger sums were involved, Ms. Du’s ICBC account in the PRC might be “frozen” under PRC foreign-exchange laws.
[18] The evidence is that this was all arranged through Skype chats involving Bloomforex and Bloomforex Australia employees. Mr. Ren was not aware of the source of the funds in any of those accounts. There is no evidence from Ms. Zhu, Mr. Qu or anyone else with direct knowledge of these transactions about any due diligence performed, or any interrelated contractual or other cross-indemnity obligations owed between Bloomforex, Ms. Zhu, Mr. Qu, Bloomforex Australia or any of Bloomforex Australia’s customers, or of any claims made for indemnities of this kind.
[19] On this motion, Bloomforex is asking me to infer that Bloomforex is obliged to indemnify Ms. Zhu and Bloomforex Australia for all amounts paid into the ICBC bank account of Ms. Du. This is important because Bloomforex itself, on the evidence, still had the defrauded Canadian funds in its RBC account when the account was frozen. There is no evidence of any pending transactions out of that account.
[20] In B.M.P., the Supreme Court held that “to conduct the change of position inquiry, it is necessary to determine whether the payee parted with the funds.” There is more than one way to “part” with funds, to be sure, and undertaking bona fide, binding financial commitments to third parties on the strength of the initial, innocent receipt of funds might be one of them. However, the banks maintain that Bloomforex’ conduct, or at least that of its affiliate, Bloomforex Australia, and its alleged “remittance agent,” Ms. Zhu, was not bona fide. The banks rely for this argument on evidence of the kind cited above and on the expert evidence of Mr. McGuire.
[21] It must be noted that there is nothing per se illegal about the transactions effected by Bloomforex (assuming no knowledge of the initiating fraudulent transfers). However, Canada’s anti-money-laundering legislation does apply to money services businesses like Bloomforex and, among other things, it requires:
(a) the development and implementation of an up-to-date compliance program with a designated compliance officer;
(b) a documented assessment and management plan for anti-money laundering risks;
(c) policies and procedures approved by a senior officer;
(d) a training program; and,
(e) a biennial review of compliance effectiveness.
[22] Mr. McGuire is a certified public accountant. He is, among other things, certified as an anti-money-laundering specialist and has taught courses on money-laundering, asset tracing and recovery and international aspects of fraud. He has been qualified and accepted as an expert witness in both civil and criminal proceedings before the Ontario Superior Court of Justice in connection with forensic accounting, loss quantification and money-laundering. Without getting into the details[^1], Mr. Maguire’s opinion is that Bloomforex had a number of documents developed for its money services program, but these were untailored drafts which did not consider all of the legislative obligations applicable to Bloomforex and contained elements which conflicted with the known business model of Bloomforex as described in the documents themselves. Further, Mr. Maguire concluded that many of the practices described in Bloomforex’ program were not followed for the transactions question.
[23] Mr. Maguire also concluded that the transactions in question exhibited many indicators of money-laundering risk, both in light of Bloomforex’ own risk assessment criteria and published guidance from FINTRAC. All of the transactions, he said, ought to have been treated as high or unacceptable risk. He also opined that Bloomforex conducted no meaningful enhanced measures or suspicious transaction analysis for the transactions in question. As a result, the risks involved in these transactions were not met with adequate measures either prescribed by Bloomforex’ own program or objectively proportionate to the risk.
[24] Bloomforex filed a responding expert report from Amber Scott. Ms. Scott has an MBA and a background in consulting about financial compliance. She too is a certified anti-money laundering specialist and worked for a major accounting firm providing anti-money laundering and counterterrorist financing compliance advice. She formed her own boutique firm in 2013 where she continues to provide consulting advice on anti-money laundering and related areas of financial compliance.
[25] Ms. Scott notes that the McGuire report does not opine on whether Bloomforex could be subject to administrative or criminal penalties as a result of its alleged infractions. In Ms. Scott’s opinion, Bloomforex was in substantial compliance with all Canadian anti-money laundering legislation. There is no expectation that regulatory compliance be “perfect.”
[26] Further, Ms. Scott concludes there is no causal relationship between the alleged shortcomings in Bloomforex’ procedures, the conduct of these transaction and the resulting loss – in other words, Ms. Scott says there is no evidence that Bloomforex was in a position to discover or interrupt the fraud and that, even if it was, it could not have done so at a time or in a manner that would have prevented the loss.
[27] Ms. Scott is also critical of the McGuire report for not analyzing whether the facts, context and indicators which he regards as leading to reasonable grounds for suspicion were properly analyzed as against CIBC and BMO in addition to Bloomforex. Ms. Scott goes on to subject the conduct of the banks to a searching analysis and concludes that, in contrast to her view of Bloomforex’ role, both banks had opportunities to recognize and halt the fraud before funds were sent to Bloomforex.
[28] To succeed on a motion for summary judgment, the moving party must establish that there is “no genuine issue requiring a trial.” The judge hearing the motion must be able to reach a fair and just determination on the merits from the record filed on the motion or by using the “enhanced powers” provided under Rule 20 of the Rules of Civil Procedure, Hryniak v. Mauldin 2014 SCC 7.
[29] A conclusion that there is no genuine issue requiring a trial may be reached where the record on the motion:
(a) allows the judge to make the necessary findings of fact on a balance of probabilities;
(b) allows the judge to apply the law to the facts; and
(c) is a proportionate, more expeditious, less expensive means of achieving a just result.
The focus, on a motion for summary judgment, is on a fair and just adjudication.
[30] Where the record on a summary judgment motion allows the judge to find the necessary facts and finally resolve the dispute, proceeding to trial would generally not be proportionate, timely or cost-effective. By contrast, a process that does not give the judge confidence that he or she can make the necessary findings of fact and finally resolve the dispute can never be the proportionate way to resolve that dispute.
[31] Parties on a motion for summary judgment are generally required to put their “best foot forward.” However, the nature and complexity of the issues sometimes demand that the normal process of production and oral discovery be completed before a party can be called upon to put their “best foot forward,” Combined Air Mechanical Services Inc. v. Flesch, 2011 ONCA 764 at para 57.
[32] I am also concerned about hearsay and the best evidence rule. The so-called “offset” transactions are an important element of the actus reus in this case. That is to say, the fraud did not end with the deposit of Canadian dollars in Bloomforex’ RBC account. The deposit of yuan into the ICBC account of Ms. Du in the PRC is as much a part of the fraud as the wire transfers from CIBC and BMO to RBC. All the evidence about these downstream transactions is effectively hearsay from Mr. Ren. Neither Mr. Qu nor Ms. Zhu have given any evidence; nor have any of the Bloomforex employees who actually sourced and conducted these offset transactions.
[33] In addition to the lack of evidence about how these transactions were carried out is the lack of evidence about relevant foreign-exchange laws which governed these transactions, possibly from Australia and certainly from the PRC.
[34] And, if this were not enough, I am also faced with the problem of competing expert reports concerning Canadian compliance measures and best practices. Not the least of these disputes, to which I will return below, involves who, as between the banks and Bloomforex, was better positioned to detect or avoid the fraud and who was the more careless or less rigorous in their supervision and conduct of these transactions.
[35] The Court of Appeal has frequently emphasized that while a motion for summary judgment is an important tool, it is not a tool to be applied in all, or even most cases. There is no default to the summary judgment procedure; summary judgment is not the “new normal.” The fact that the summary judgment process is well-intentioned and can be beneficial cannot impose an imperative on the court to use it in every case. One must be cautious of the risk that, in an effort to dispose of the case, the evidence is not properly presented and analysed. The principal goal must remain a fair process that results in a just adjudication of the dispute.
[36] To paraphrase what I said in Trade Capital Finance Corp. v. Cook 2019 ONSC 4950, in circumstances like this one cannot help but feel hamstrung by the inability to see the witnesses testify in their own words, not those drafted by their lawyers, to answer questions under oath in chief and in cross in the presence of the trier of fact and, especially important in relation to expert witnesses, for the court to ask its own questions to clarify and understand the evidence.
[37] Whether Bloomforex changed its position at all, or, if it did, whether it did so innocently and in good faith, are disputed issues of fact in this case. The paper record on this motion is insufficient to permit me, with the requisite confidence, to resolve that issue in a fair manner that would result in the just adjudication of this dispute.
[38] For these reasons I am not prepared to grant summary judgment.
Issue 2: Two Innocence Victims of a Fraud
[39] The defendant also relies on two decisions from this Court to set up what it refers to as an additional defence: the “two innocent parties to a fraud” test. In Rogers v. Priyance Hospitality Inc. 2016 ONSC 7851, Mesbur J. dealt with a case in which a law firm, having received a deposit from its client, issued a certified cheque to a third party secured creditor which was clearly owed the money. The law firm later discovered the deposit received from its client was invalid and sought the return of the money from the payee. Mesbur J. dismissed the law firm’s motion. She relied, among other things, on a “long-standing principle” that, as a general proposition, as between two totally innocent parties, justice requires that the party who is in a position to prevent the loss should bear it.
[40] This approach was considered in another decision of this court in Bank of Montreal v. Asia Pacific International Inc., 2018 ONSC 4215. In a judgment following a three day trial, Nishikawa J. dealt with a claim by BMO seeking the return of $428,000 as money paid under a mistake of fact. A fraudster impersonated a client and authorized a wire transfer to Asia Pacific. In consideration for this wire transfer Asia-Pacific sold gold to a third party (who was an accomplice to the fraud) before knowing the wire transfer was fraudulent.
[41] Nishikawa J. referred to the decision in Rogers and to a decision of the Supreme Court of Canada in Marvco Colour Research Ltd. v. Harris, 1982 CanLII 63 (SCC), [1982] 2 S.C.R. 774 in which the Supreme Court stated that “as between two innocent parties there remains a distinction significant in the law, namely that the respondents, by their carelessness, have exposed the innocent appellant to risk of loss.”
[42] The banks argue there is no freestanding “two innocent parties to a fraud” test and that the B.M.P. approach occupies the field. Under that approach, the “fault” of the payor is irrelevant. In every case of money paid under a mistake of fact, there is, by definition, a “mistake.” If the issue turned on whether the payor was careless, there could rarely be a claim for the return of money paid under mistake of fact. This is, effectively, the learning from the B.C.C.A. in ILWU Canada, Local 502 v. Ford, 2016 BCCA 226. The analytical framework for money paid under a mistake of fact does not include an open invitation to the court to undertake a loose examination of what might be fair. To the extent that the equities are considered in cases of money paid under a mistake of fact, the jurisprudence indicates they are considered in assessing the change of position defence. In that context, the court is required to consider if it would be inequitable to require payment because of the manner in which the recipient has relied on the funds paid by mistake, Ford, supra, at para 30. This suggests, if anything, that the focus is on the conduct of the recipient not that of the payor.
[43] Mr. Hall further argues that the “two innocent parties” test is unnecessary to justify the result in either Rogers or Asia Pacific and stems from a misreading of the Marvco Colour case, which was a case of non est factum, not a case of money paid under a mistake of fact at all.
[44] Whatever may be the right analysis in law, the evidence necessary to address the “two innocent parties” test does nothing but compound the problem of trying to deal with this case on a motion for summary judgment. This is because once one is into a weighing of the relative conduct of both parties as to reasonableness, carelessness and rigor (or lack thereof), there are even more disputed issues of fact, credibility and inference that necessarily arise. And, as noted above, there is still the problem of the competing experts whose analysis must be examined with great care.
[45] I tend to agree with the defendants that the “two innocent parties” test involving an analysis of the relative fault or carelessness of both parties has no application to a claim for money paid under a mistake of fact and that the carelessness of the payor is, therefore, irrelevant to such a claim. The issue is whether the payee has, in good faith, changed its position. However, the role, if any, of the “two innocent parties” test, while largely a legal one, should be decided on a full and appropriate record. In the present context, I am not satisfied there is before the court the full, appropriate record necessary for the fair and just resolution of this dispute. For this reason as well, I decline to grant summary judgment.
Conclusion
[46] In conclusion, the Bloomforex motion for summary judgment is dismissed.
[47] This does seem to me an appropriate case for case management and for an expedited and streamlined trial in which there could easily be a substantial agreed statement of facts and agreed documents, all of which would greatly narrow the disputed issues and shorten the trial.
[48] Having managed this case to date and heard this motion, I would normally assume this role. But, as I have left the Commercial List team for 2020, the parties should communicate with the Commercial List team leader, Mr. Justice Hainey, for the appointment of a new case management judge.
Costs
[49] The parties filed partial indemnity cost outlines as follows:
Bloomforex $81,770
CIBC $46,260
BMO $52,600
In the circumstances, I do not think the motion for summary judgment was unreasonable and a good deal of the work necessary for the ultimate adjudication of this case has now been done. Costs in the cause.
Penny J.
Date: January 8, 2020
[^1]: There are security and confidentiality reasons for not doing so.