



COURT OF APPEAL FOR ONTARIO

CITATION: Toronto-Dominion Bank, N.A. v. Lloyds
    Underwriters, 2017 ONCA 1011

DATE: 20171221

DOCKET: C63278, C63280, C63281 and C63282

Simmons, Brown and Fairburn JJ.A.

BETWEEN

TD Bank, N.A.

Plaintiff/Respondent

and

Lloyds
    Underwriters that subscribe to policy number

MMF/1710,
    primary London reference number B0509QA025509 and

excess
    London reference numbers QA025609, QA025709, QA025809,

and
    QA025909, Antares Underwriting Limited for itself and on

behalf
    of all members of Lloyds Syndicate 1274 (Aul) for the

operating
    year of 2009, Catlin Syndicate Limited for itself and

on
    behalf of all members of Lloyds Syndicate 2003 (SJC) for the

operating
    year of 2009, Novae Corporate Underwriting Limited

and/or
    Novae Syndicates Limited for themselves and on behalf

of all
    members of Lloyds Syndicate 2007 (NVA) for the

operating
    year of 2009, Ace Capital Limited, ACE Capital IV Limited,

and Ace
    Capital V Limited for themselves and on

behalf
    of all members of Lloyds Syndicate 2488 (AGM) for the

operating
    year of 2009, Brit UW Limited for itself and on behalf of

all
    members of Lloyds Syndicate 2987 (Brit) for the

operating
    year of 2009, Chaucer Corporate Capital (No. 3) Limited

(formerly
    known as Pembroke 4000 Limited) and/or

Pembroke
    4000 Limited, Chaucer Corporate Capital (No. 2) Limited,

and/or Ironshore
    Corporate Capital Ltd. for themselves and on

behalf
    of all members of Lloyds Syndicate 4000 (Pem) for the operating

year of
    2009, Aspen Insurance UK Limited, Great Lakes Reinsurance

(UK)
    PLC, Lexington Insurance Company, AIG Insurance Company of Canada (formerly
    known as AIG Commercial Insurance Company of Canada) and/or

AIG
    Commercial Insurance Company of Canada, Chartis Excess Limited

(formerly
    known as AIG Excess Liability Insurance International Limited)

and/or
    AIG Excess Liability Insurance International Limited, Allied World Assurance
    Company Ltd., Arch Insurance Company and/or Arch Insurance

Canada
    Ltd., Axis Specialty Insurance Company and/or Axis Specialty Limited,

Chubb
    Insurance Company of Canada, Endurance Speciality Insurance Ltd.,

Houston
    Casualty Company, Liberty Mutual Insurance Company,

Markel
    Bermuda Limited (formerly known as Max Bermuda Ltd.) and/or

Max
    Bermuda Ltd. and XL Insurance Company PLC (formerly known as

XL
    Insurance Company Limited) and/or XL Insurance Limited

Defendants/Appellants

Gary H. Luftspring and Sam R. Sasso, for the appellants
    London Underwriters and Axis

Jamieson Halfnight and Anne Juntunen, for the appellants
    Chubb Insurance Company of Canada and Liberty Mutual Insurance Company

Christopher Reain and Clarence Lui, for the appellant
    Arch Insurance Company and Arch insurance Canada Ltd.

Peter Greene and David Vaillancourt, for the appellant
    AIG Insurance Company of Canada and/or AIG Commercial Insurance Company of
    Canada and/or AIG Excess Liability Insurance International Limited

William Blakeney and Thomas Galligan, for the
    appellants, XL Insurance company PLC and/or XL Insurance Limited, Endurance
    Speciality Insurance Ltd., Houston Casualty Company and Markel Bermuda Limited
    and/or Max Bermuda Ltd.

Eric A. Dolden and Gerry J. Gill, for the appellants
    Allied World Assurance Company Ltd.

William G. Scott and Housep Afarian, for the respondent
    TD Bank, N.A.

Heard: November 28 and 29, 2017

On appeal from the judgment of Justice S.F. Dunphy of the
    Superior Court of Justice, dated December 22, 2016 and April 20, 2017.

REASONS FOR DECISION

OVERVIEW

[1]

The issues on appeal relate to a partial summary judgment granted in
    relation to an insurance policy.

[2]

TD Bank, N.A. (the Bank) is a named insured under a Bankers
    Comprehensive Crime, Professional Indemnity and Directors and Officers
    Liability Programme (the insurance policy) issued by the appellants, a
    syndicate of insurers (the insurers).

[3]

The insurance policy is divided into two parts. The second part provides
    directors and officers liability coverage. The first part is divided into two
    sections: a financial institutions bond (fidelity coverage, for, among other
    things, claims involving employee dishonesty) and a financial institutions
    professional liability policy (professional liability coverage, for, among
    other things, claims involving errors or omissions by the financial institution).

[4]

A Florida lawyer and customer of the Bank ran a Ponzi scheme involving
    the fraudulent sale of non-existing interests in structured settlements
    supposedly handled by his law firm. Substantial funds placed by investors in
    the scheme flowed through the law firms accounts at the Bank. After the scheme
    collapsed, about 19 investor groups sued the Bank. One investor group obtained
    judgment against the Bank based on claims for fraudulent misrepresentations by Bank
    employees and conduct by Bank employees that aided and abetted the fraudster.

[5]

Following that judgment, the Bank settled the other investor claims. The
    Bank then sought indemnity under both the professional liability coverage and
    fidelity coverage sections of the insurance policy for amounts paid to the
    investor groups. The appellants have denied coverage under both sections.

[6]

In this action, the Bank seeks a declaration that it is entitled to
    indemnity under the professional liability section of the insurance policy for
    loss relating to the Ponzi scheme and damages for breach of contract in the
    amount of $300,000,000, the amount of the available coverage. Further, to the
    extent that coverage is excluded under that section of the policy, the Bank
    seeks a declaration that it is entitled to indemnity and damages under the
    fidelity coverage section of the policy.

[7]

The Bank brought a motion for partial summary judgment while documentary
    production was underway and prior to oral discovery. In its motion, the Bank sought
    a declaration concerning the interpretation of one element of the preamble to
    the fidelity coverage section of the insurance policy. The interpretation
    sought related to the conduct of one former employee in relation to three of
    the investor groups. In support of its motion, the Bank asserted that
    resolution of these test claims would contribute to the resolution of the
    coverage issues. The element at issue is the underlined portion of the second
    paragraph of the preamble set out below:

NOW WE the Underwriters hereby undertake and agree, subject to
    the following terms, exclusions, limitations and conditions, to make good to
    the Assured, as stated in the Insuring Clauses
such
    direct financial loss sustained by the Assured
.

[8]

The motion judge granted partial summary judgment. He declared that the
    Bank sustained direct financial loss within the meaning of the second
    paragraph of Section One (A) of the Policy regarding at least some of the funds
    deposited [in the law firms] accounts at [the Bank] by [three of the investor
    groups].

[9]

The insurers appeal from the partial summary judgment.

[10]

In
    our view, this appeal must be allowed. In granting partial summary judgment,
    the motion judge made four material errors, rendering the judgment
    fundamentally flawed.

FIRST ERROR: FAILING TO PROPERLY INTERPRET RULE 20

[11]

First,
    the motion judge erred in entertaining and then granting the kind of summary judgment
    sought by the Bank. Rule 20 of the
Rules of Civil Procedure
, R.R.O.
    1990, Reg. 194, permits a party to seek summary judgment on all or part of the
    claim in the statement of claim: r. 20.01(1). The Banks motion did not seek
    judgment on all or part of any of the claims set out in the prayer for relief
    in its Statement of Claim. Instead, the Bank broke down its claim for indemnity
    under the fidelity coverage section of the insurance policy into its
    constituent elements and sought partial summary judgment on only one of the
    elements. Further, it sought an interpretation of that element only as it might
    apply to the damages it paid out to just three of the 19 investor groups.

[12]

Such
    a request for an order in respect of only one of several constituent elements
    of a claim for which relief is sought, and then only as it might affect a portion
    of that claim, is not a proper request for summary judgment on part of the
    claim in the statement of claim; it is merely a request to determine one of
    several issues of fact or mixed fact and law necessary to establish entitlement
    to relief in respect of a pleaded claim under the fidelity coverage section of
    the insurance policy. (The rules recognize an exception where the element
    involves a question of law.)
[1]
The result of the judgment is that no claim for which the Bank has sought
    relief has been granted, nor have any of its claims been dismissed. All of its
    claims for indemnification remain for determination at trial  on what will likely
    be a more fulsome factual record
[2]
.
    And no party has been released from the action. Given this result, the kind of
    partial summary judgment granted by the motion judge was not available under
    Rule 20:
CIBC v. Deloitte & Touche
, 2016 ONCA 922, 133 OR (3d)
    561, at para. 39. Accordingly, the motion judge failed to properly interpret
    the scope of relief available under Rule 20.

SECOND ERROR: FAILING TO INTERPRET THE POLICY AS A WHOLE

[13]

Second,
    the motion judge ignored the fundamental principle of contractual
    interpretation that a provision in a contract must be interpreted in light of
    the contract as a whole:
Ventas, Inc. v. Sunrise Senior Living Real Estate
    Investment Trust
, 2007 ONCA 205, 85 O.R. (3d) 254, at para. 24;
Dumbrell
    v. The Regional Group of Companies
2007 ONCA 59, (2007) 85 O.R. (3d) 616,
    at paras. 52-56. This led him to commit two interpretive errors.

[14]

Error
    one is that the Bank claims indemnification for the amounts it paid to
    investors pursuant to the American jury verdict and settlements under both the professional
    liability coverage and fidelity coverage sections of the insurance policy. Its
    claim under the fidelity coverage section is pleaded as an alternative to that
    under the professional liability coverage section. Given that structure of the
    Banks claim, an interpretation of part of one insuring clause in one section
    of the insurance policy to ascertain whether it would afford coverage would
    require taking into account the provisions of both sections of the policy. The
    motion judge failed to do so. He completely ignored how the provisions of the professional
    liability coverage section of the insurance policy might inform the
    interpretation of the insuring clause in the fidelity coverage section.

[15]

Error
    two is that the Banks claim for indemnity under the fidelity coverage section
    of the insurance policy would require establishing several constituent elements
    of a claim under the first insuring clause.
[3]
The motion judge limited his analysis to only some of those elements. He
    further confined his analysis to how those elements might apply to only three
    of the 19 investors settlements. His interpretive analysis failed to take into
    account how the remaining elements of the insuring clause might inform the
    interpretation of the few elements put in issue by the Bank on the motion. In
    so doing, the motion judge failed to interpret one provision of the contract by
    reading the text of the insurance policy as a whole.

THIRD ERROR: ADOPTING A THEORY OF LIABILITY NOT ADVANCED BY THE PARTIES

[16]

The
    third material error committed by the motion judge concerns a matter of
    procedural fairness. In concluding that the judgment and settlements paid to
    three of the investor groups constituted a direct financial loss sustained by
    the Assured in that it was a loss of funds or Property of the Bank within
    the meaning of the fidelity coverage sections ownership clause
[4]
,
    the motion judge adopted a theory not pleaded or advanced by the parties  that
    the Bank held the funds deposited by investors into the law firms accounts as
    a constructive trustee. The motion judge raised this theory on his own during
    the course of oral argument of the motion, without affording the parties an
    opportunity to properly brief the theory or develop the record to address the
    theory. That resulted in material unfairness to the appellants:
Rodaro v.
    Royal Bank of Canada
(2002), 59 O.R. (3d) 74, at paras. 60-63. In this
    regard, the motion judges theory went well beyond the Banks reliance on the
    doctrines of knowing assistance in a breach of trust and knowing receipt of
    trust funds.

FOURTH ERROR: MISCONSTRUING THE RELIEF SOUGHT BY THE APPELLANTS

[17]

Fourth,
    in determining this was an appropriate case in which to grant partial summary
    judgment, the motion judge relied on his view that the insurers were asking him
    to grant reverse summary judgment  in other words, to hold that the Bank did
    not suffer a direct financial loss  and thus were effectively acknowledging
    that this was an appropriate case for summary judgment.

[18]

In
    reaching this conclusion, the motion judge relied on the Order Requested
    section of the insurers joint factum filed on the summary judgment motion,
    which reads as follows:

For all the above reasons, the Insurers respectfully request an
    Order denying TDs summary judgment, with costs,
on the basis that TD has
    not shown it suffered any direct financial loss within the meaning of that
    term as used in the preamble
. [Emphasis added by the motion judge].

[19]

We
    do not accept that the emphasized language gives rise to a conclusion that the
    insurers were seeking a reverse summary judgment in their favour. The
    immediately preceding section of the insurers factum is titled The Issues on
    this Motion should be left for determination on a fuller record or at trial. Read
    in context, the only reasonable conclusion is that the only order the insurers
    sought was the one they asked for  an order denying the Banks request for
    summary judgment with costs on the basis that the Bank failed to meet its
    burden on the motion.

[20]

This
    finding by the motion judge, too, was procedurally unfair to the Bank.

DISPOSITION

[21]

Cumulatively,
    the errors we have identified resulted in the motion judge granting partial
    summary judgment of a kind not available under Rule 20, following a
    procedurally unfair motion process, which was characterized by the motion judge
    ignoring a fundamental principle of contractual interpretation. As a result, we
    allow the appeals, set aside the order, and direct the action proceed to trial
    subject to any further order in the court below.

[22]

The
    insurers are awarded their costs of the appeal on a partial indemnity scale
    fixed in the global amount of $45,000 inclusive of disbursements and applicable
    taxes.

Janet Simmons J.A.
David Brown J.A.
Fairburn J.A.





[1]
Where one element of a cause of action involves a question of law, such as the
    existence of a duty of care in a negligence claim, the rules provide a summary
    mechanism by which to determine that legal issue before trial, either by way of
    r. 21.01(1)(a)  where the determination of the question may dispose of all or
    part of the action, substantially shorten the trial or result in a substantial
    savings of costs, or under r. 20.04(4), where on a summary judgment motion
    the court is satisfied that the only genuine issue is a question of law.



[2]

The factual record in this case consisted of two affidavits.
    One was from a Bank employee who accessed the Banks archived wire transfer
    database to confirm that four wire transfers at issue were made. The second was
    from a law clerk employed by the Banks solicitors. She attached numerous
    documents to her affidavit without identifying, in many instances, the source
    of her knowledge of the origins of the document and without asserting a belief
    in the truth of the contents. Although the authenticity of many of the
    documents was uncontested, the truth of the contents of some of the documents
    could be disputed at trial.

In relying
    on the factual record, the motion judge noted that: the insurers did not file
    responding material; neither of the affiants was cross-examined; and many of
    the public record documents were referenced and relied on by the insurers in
    their pleadings. These comments contrasted with those made by the motion judge
    on an earlier preliminary motion to stay the summary judgment motion. At that
    time, the motion judge stated that given the early stage of the proceedings an
    exceptional degree of caution would be required to avoid imputing an adverse
    inference from the failure to call evidence that the insurers did not yet have.

Based on
    our review of the record and the outstanding issues, we are far from persuaded
    that inconsistent findings of fact would be unlikely to occur if this judgment
    were to stand and if this case were to proceed to trial.



[3]

Insuring Clause Number 1 in the fidelity
    coverage section, when read together with the Preamble, provides, in part:

NOW WE the Underwriters hereby
    undertake and agree, subject to the following terms, exclusions, limitations
    and conditions, to make good to the Assured,  such direct financial loss
    sustained by the Assured  [b]y reason of and directly caused by dishonest or
    fraudulent acts by Employees of the Assured.



[4]

The Ownership provision, Clause
    Number 39 of the fidelity coverage section reads as follows:

This Policy shall apply to loss
    of funds or Property (1) owned by the Assured, (2) held by the Assured in any
    capacity, (3) for which the Assured is legally liable and/or responsible or for
    which the Assured has instructions to insure


