COURT FILE NO.:
06CV320635PD3
DATE:
20081103
ONTARIO
SUPERIOR COURT OF
JUSTICE
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B E T W E E N: |
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Satwant Singh
Khosla
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Martin Sclisizzi,
for the Plaintiff |
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Plaintiff |
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- and - |
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Korea Exchange Bank
of Canada |
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Avrum D. Slodovnick,
for the Defendant |
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Defendant |
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HEARD:
May 22, 2008 |
Kiteley J.
[1]
This is a motion for summary judgment brought by the plaintiff
pursuant to Rule 20.04(1) that turns on the principle that conversion is a
tort that attracts strict liability. The defendant has brought a
cross-motion for leave to add a counterclaim.
Background
[2]
In March 2006, Paul Reviczky rented his residential property to a
fraudster. In April 2006, posing as a relative of Reviczky with the
authority to sell the property under a power of attorney, the fraudster
listed the property for sale. The fraudster accepted the offer of
Meleknia. Mr. Khosla acted as solicitor for the purchaser. The purchaser
borrowed most of the purchase money from HSBC Bank Canada on the security
of a mortgage registered against title to the property. While Mr. Khosla
was aware that the vendor was selling through a power of attorney, he did
not requisition proof of authenticity and validity.
[3]
The transaction closed on May 15, 2006. HSBC Bank Canada
advanced funds to Mr. Khosla who deposited the funds into his trust
account at the Royal Bank of Canada. Pursuant to a direction given by the
lawyer on behalf of the fraudster, Mr. Khosla made a cheque payable to
Paul Reviczky for $429,481.06. It was certified by the RBC and delivered
to the lawyer for the fraudster who delivered it to the fraudster.
[4]
During the previous month, using apparently authentic
identification, the fraudster had opened an account at the Korea Exchange
Bank of Canada (KEBOC) in the name of “Aaron Paul Reviczky”. The cheque
was not negotiated by Paul Reviczky. The fraudster forged the signature
of Paul Reviczky and deposited the cheque to that account. KEBOC sought
and obtained verification from the Royal Bank regarding the certified
cheque before accepting it for deposit. KEBOC was not privy to or
familiar with the sale of the property, and had no notice of any power of
attorney. The fraudster withdrew the monies from the KEBOC account
before the fraud was discovered.
[5]
The title insurer, Stewart Title, paid the purchaser and HSBC and
Meleknia the amounts that had been advanced.
[6]
Stewart Title, standing in the shoes of HSBC, brought an
application to maintain the mortgage on title. In December 2007,
Macdonald J.
issued a declaration that the bank’s charge was not valid and he directed
the Land Registrar to delete the charge from the parcel register.
[7]
Khosla issued a statement of claim alleging that by collecting the
cheque on a forged and unauthorized endorsement, KEBOC was liable for
damages in the amount of $429,481.26 for conversion. KEBOC filed a
statement of defence denying that conversion had occurred; alleging that
Khosla had, inter alia, been negligent and was estopped from making the
claim; asserting that KEBOC was a holder in due course and had paid upon a
forged endorsement without notice and without negligence; pleading that
Khosla was no longer the true owner of the cheque because the cheque was
issued to the payee and consideration had been received for it; and
relying on s. 20(5) of the Bills of Exchange Act
(BEA).
[8]
KEBOC issued a third party claim against the lawyer
who acted for the fraudster and the listing realtor and listing agent.
The third parties have defended and the realtor and agent filed a
crossclaim that was also defended.
The Issue
[9]
Counsel for the plaintiff argues that this is a simple legal
issue. Conversion is a strict liability tort. KEBOC’s only possible
defence, s. 20(5) of the BEA, is not available because the payee of
the cheque, Paul Reviczky is not fictitious nor is he non-existing. There
are no material facts in dispute and no credibility issues. This is a
question of law that ought to be determined in favour of the plaintiff on
this motion.
[10]
Counsel for the defendant takes a far
different position best illustrated by quoting paragraph 3 of the factum:
The Plaintiff has narrowly framed this
action, and this motion for Summary Judgment, as a simple claim for
damages for conversion based on a fraudulent endorsement, and asks the
Court to therefore disregard (and to treat as legally irrelevant) the
broader context of this case and the equities between the parties. The
Defendant KEBOC asks the Court to do precisely the opposite.
[11]
The factum and submissions vigorously argue
that the motion should be dismissed because the payee is fictitious and
KEBOC could treat the cheque as payable to bearer and allow negotiation by
delivery without endorsement; alternatively, if s. 20(5) is not available,
counsel for KEBOC argues that there is a genuine issue for trial as to
which of two innocent parties is to suffer from the fraud.
Analysis
[12]
For purposes of this analysis, KEBOC is the
collecting bank. Khosla is the drawer of the cheque. The Royal Bank of
Canada is the drawee. Paul Reviczky is the payee.
[13]
The tort of conversion is the wrongful
interference with the goods of another. As the Supreme Court held
in the banking context:
A bank converts an instrument, including a
cheque, by dealing with it under the direction of one not authorized, by
collecting it and making the proceeds available to someone other than the
person rightfully entitled to possession. It should be noted that the
tort of conversion is one of strict liability.
[14]
As drawer of the cheque, Khosla is the
possessor. I agree with counsel for the plaintiff that KEBOC converted
the cheque drawn by Khosla by making the proceeds available to the
fraudster. KEBOC is liable unless it can establish a defence that raises
a genuine issue for trial.
[15]
Section 20(5) of the BEA provides that “where
the payee is a fictitious or non-existing person, the bill may be treated
as payable to bearer”. A cheque that is payable to bearer can be
negotiated by simple delivery to the bank. An endorsement is not
required. The collecting bank is not liable if it negotiates a bearer
cheque on delivery even if the cheque has a forged endorsement. On the
other hand, the collecting bank can negotiate a cheque payable to order
only if the cheque is both delivered and endorsed.
[16]
KEBOC takes the position that the payee was
fictitious, the cheque was a bearer cheque and on delivery, KEBOC became a
holder in due course and was entitled to negotiate the cheque despite the
endorsement forged by the fraudster.
[17]
Falconbridge
is the source of four often repeated propositions with respect to
fictitious payees. To illustrate the point, in his factum, counsel for
the plaintiff replaced “Paul Reviczky” for the legendary “Martin
Chuzzlewit”:
If Paul Reviczky is the name of a real
person, intended by Khosla to receive payment, the payee is neither
fictitious nor non-existing, notwithstanding that Khosla has been induced
to draw the bill by the fraud of some other person (the person posing as
Paul Aaron Reviczky) who has falsely represented to Khosla that there is a
transaction in respect of which Paul Reviczky is entitled to the sum
mentioned in the bill.
[18]
Khosla’s affidavit indicates that he intended
the cheque to be negotiated by the true owner of the property. There was
no cross-examination on that evidence. As para. 46 of Boma
indicates, whether the payee is fictitious depends on the intention of the
drawer.
[19]
I agree with counsel for the plaintiff that
Falconbridge’s 4th proposition illustrates that the cheque
drawn by Khosla payable to Paul Reviczky was not payable to a fictitious
person. Paul Reviczky existed. Section 20(5) does not apply. KEBOC
cannot treat the cheque as payable to bearer. The cheque was not validly
negotiated since it was payable to order and bears a forged endorsement.
[20]
Counsel for KEBOC also relied on s. 165(3) of
the BEA that provides that where a cheque is delivered to a bank
for deposit to the credit of a person and the bank credits the person with
the amount of the cheque, the bank acquires all the rights and powers of a
holder in due course of the cheque.
[21]
In Boma, the Supreme Court rejected
this argument on the basis that the cheque could be deposited without
endorsement only as long as a payee or endorsee is entitled to the
proceeds of the cheque. “Delivery” is only effective when made by an
authorized party.
I agree with counsel for the plaintiff that since the cheque was not
delivered to KEBOC by Paul Reviczky, the cheque was not “delivered” within
the meaning of s. 39(1). KEBOC is not a holder in due course.
[22]
Counsel for KEBOC observes that Boma
and Westboro were both decisions of trial judges and therefore they
illustrate that intention is a genuine issue for trial. As indicated
above, the evidence of Kholsa’s intention is not controverted. Simply
because it was a triable issue in another case does not make it a triable
issue here.
[23]
Counsel for KEBOC also attempts to distinguish
Boma on the basis that the bank there knew it was accepting a third
party cheque without endorsement and liability was found because it failed
to follow its own policies, whereas here, KEBOC did follow all
institutional protocols. I agree with counsel for the plaintiff that the
cheque here is not a third party cheque.
[24]
In its factum and in submissions, counsel for
KEBOC sought to position the issue between the parties as a determination
of which of two innocent parties is to suffer for the fraud of a third.
At paragraph 5(k), KEBOC asserts that this motion amounts to narrowly
emphasizing the “technical point” of KEBOC as a collecting bank while
disregarding the role the plaintiff paid in the fraud not being avoided.
At paragraph 7 of its factum KEBOC relies on the principle enunciated by
the Supreme Court of Canada, that, as between two innocent victims of a
fraud, the one who is better suited to avoid the fraud must bear the
loss. KEBOC argues that if any of the plaintiff or the third parties had
questioned the power of attorney, the fraudulent scheme would have been
exposed and the cheque would not have been drawn or negotiated. On that
basis, KEBOC asserts that it is “contrary to principle” for a plaintiff to
make a claim based on a situation created by his own negligence or
carelessness.
[25]
Furthermore, after reciting the allegations of
errors and omissions on the part of the plaintiff and against the third
parties (some of which constituted findings of fact by the trial judge in
Reviczky v. Meleknia, supra), the factum at paragraph 13 argues
that since the plaintiff (and others) caused and created the event on
which the plaintiff’s claim against KEBOC is made, it would be “in the
interest of justice” to reserve any judgment as to liability and
apportionment of liability, until all of the parties are before the court
at trial. At paragraph 29, the factum contains the observation that
“what irks one’s sense of justice here” is that the plaintiff in this
motion seeks to distinguish between the owner and the fraudulent attorney
while, during the transaction, when he had the opportunity to do so, the
plaintiff failed to exercise proper diligence. In paragraph 35, the
factum includes the submission that “to treat KEBOC as a holder in due
course under section 165(3) in relation to the plaintiff would do no
injustice”.
[26]
Counsel for KEBOC attempts to distinguish
Boma and Fok
on the basis that they were fraudulent bookkeeper cases whereas this case
dealt with title fraud that has become insidious and pervasive and demands
heightened diligence particularly on the part of lawyers in real estate
transactions. He takes the position that this case falls outside
Falconbridge’s illustrations and should be decided on the basis of
which of the two parties was able to prevent the risk.
[27]
KEBOC concedes that it is the collecting
Bank. While the factum and the submissions contained repeated assertions
of the unjustness and unfairness visited on KEBOC if the motion is
granted, if a negotiable instrument is involved, the BEA applies.
The principles applicable to negotiable instruments are relevant, not the
principles applicable to negligence and contributory negligence.
[28]
In Boma,
the Supreme Court made the following observation on allocation of risk:
To some, the allocation of risk in the bills
of exchange system may seem arbitrary, but in my view a necessary and
coherent rationale sustains this allocation. With respect to forged
endorsements, for example, no party in particular is in any better
position to detect the fraud than any other. It is a risk that all
parties must bear, including collecting banks. It is a price that must
be paid if one wishes to enjoy the significant benefits of the bills of
exchange scheme, not the least of which is, from the bank’s perspective,
the facilitation of huge numbers of financial dealings conducted rapidly,
and without overwhelming transaction costs. While the banks are accorded
the important advantage of holder in due course status in many situations,
it would not be appropriate, as the respondent would have it, to exempt
any party, including collecting banks, from all exposure to the risk and
consequences of fraud.
[29]
This
motion requires the application of legal principles articulated in ss.
20(5), 39 and 165(3). These are questions of law, not equity. Absence
of fault by the collecting bank, the presence of due diligence and the
presence of contributory negligence on the part of the drawer are
irrelevant. Even if I accept for purposes of the motion that Kholsa was
in a better position than KEBOC to detect the fraud and that KEBOC
exercised due diligence, KEBOC’s defences to the claim for conversion
cannot succeed. KEBOC is strictly liable to Khosla for conversion.
There are no genuine issues for trial.
[30]
In its factum, KEBOC takes that position that
once the plaintiff’s cheque was certified by the RBC, the drawer was
released and the certifying bank became solely liable on the cheque, such
that the plaintiff was no longer the true owner of the cheque. In
addition, it argues that to the extent that an insurer is behind the
plaintiff’s action, the plaintiff is no longer the true owner of the
cheque. Suffice it to say that these submissions are based on a
misconception of the law as it relates to certification of cheques and as
it relates to subrogation.
Motion to
amend the Statement of Defence and Stay of Execution
[31]
In its original statement of defence, KEBOC
had pleaded set-off and equitable set-off. In response to the plaintiff’s
motion, the defendant brought a motion for leave to amend the statement of
defence by adding a counter claim to parallel those claims for set-off.
Counsel takes the position, quite apart from the application of the
BEA, that KEBOC is entitled to set off on the grounds that the
plaintiff was in a superior position to prevent the fraud.
[32]
In the alternative, the KEBOC’s factum asserts
that if “the plaintiff’s technical argument” succeeds on the motion, then
the court should order the amendment and should order a stay of execution
pending disposition of the third party claim and the proposed
counterclaim. Again it is asserted that it would be “in the interest of
justice to stay the enforcement of judgment pending the Court’s
opportunity to apportion liability in accordance with considerations of
fairness, equity, and the emerging judicial policy regarding title fraud”.
[33]
While counsel for the plaintiff concedes that
rules 26 and 27.07(1) are mandatory, he argues that such an amendment
would not alter the outcome of this motion.
[34]
While there is a motion to amend, there is no
motion to stay pending resolution of the counterclaim. For the reason
indicated by counsel for KEBOC, I am prepared to entertain the request for
a stay without a formal notice of motion and on the basis of the affidavit
of Park filed in response to the plaintiff’s motion. However, I am not
persuaded that a stay is in order on this record.
Claim for
interest
[35]
In the statement of claim, the notice of
motion and the factum, counsel for the plaintiff claims prejudgment
interest from May 16, 2006 (the date when the cheque was negotiated) to
September 20, 2006 (the date that KEBOC was notified of the conversion)
and thereafter compound interest to the date of judgment or payment.
There is no justification for compound interest. No submissions were
made on the point. While pre-judgment interest pursuant to the Courts
of Justice Act is not controversial, the basis upon which
compound interest from September 20, 2006 might be awarded has not been
established.
ORDER TO GO AS
FOLLOWS:
[36]
The motion on behalf of the plaintiff is
granted. Judgment to issue against the defendant for the sum of
$429,481.26 together with pre-judgment interest pursuant to the Courts
of Justice Act from May 16, 2006 to the date of these reasons and
post-judgment interest pursuant to the Courts of Justice Act
thereafter.
[37]
On consent of counsel as to the amount of
costs, the defendant shall pay costs of the action (including the motion)
fixed at $6000.00.
[38]
Leave is granted to amend the statement of
defence to add a counterclaim in accordance with tab 2A of the defendant’s
motion record, subject to any motion on behalf of the plaintiff to strike
the counterclaim as disclosing no cause of action against Khosla.
___________________________
Kiteley J.
Released:
November 2008
