




CITATION:
Rouge Valley Health System v. TD Canada
          Trust, 2012 ONCA 17



DATE: 20120112



DOCKET: C53104



COURT OF APPEAL FOR ONTARIO



Laskin, Goudge and Gillese JJ.A.



BETWEEN



Rouge Valley Health System



Plaintiff (Appellant)



and



TD Canada Trust



Defendant (Respondent)



Lincoln Caylor and Ranjan Agarwal, for the plaintiff
          (appellant)



Martin Greenglass, for the defendant (respondent)



Heard: May 31, 2011



On appeal from the judgment of Justice A.D. Grace of the
          Superior Court of Justice dated November 24, 2010, with reasons reported at
          2010 ONSC 4717.



Laskin J.A.:



A.        OVERVIEW

[1]

The appellant, Rouge Valley Health System, and
    the respondent, TD Canada Trust, were the innocent victims of a fraud
    orchestrated by a senior employee of Rouge Valley. The general question on this
    appeal is whether the motion judge erred in determining that Rouge Valley should
    bear the loss for that fraud.

[2]

In brief, Uwe Marshner, a manager at Rouge
    Valley, caused his employer to pay nearly $700,000 worth of invoices rendered
    by Scarborough-York Mobile Rehabilitation, a made-up entity, for services that
    were never provided.  Cheques were issued, payable to S.M.R., also a made-up
    entity. These cheques were deposited by Marshners associate, Sheldon
    Reinsilber, at TD Canada Trust.  Reinsilber put the cheques in an account for
    SMR and Associates, which was his sole proprietorship.

[3]

When the fraud came to light, Rouge Valley sued
    TD Canada Trust for conversion. The bank maintained that it had a valid defence
    under s. 20(5) of the
Bills of Exchange Act
, R.S.C. 1985, c. B-4, which
    provides that [w]here the payee is a fictitious or non-existing person, the
    bill may be treated as payable to bearer.

[4]

The parties agreed to resolve their dispute by motion
    for summary judgment.  Rouge Valley moved for summary judgment on its claim and
    TD Canada Trust sought summary judgment dismissing that claim. The motion
    judge, Grace J., held that Scarborough-York (S.M.R.) was both a non-existing
    and a fictitious person.
[1]
On either basis, TD Canada Trust was not liable in conversion. Accordingly, he
    dismissed Rouge Valleys motion for summary judgment and granted TD Canada
    Trusts motion, summarily dismissing the claim against it.

[5]

Rouge Valley argues three points on its appeal:

(1)       The motion judge erred in finding that Scarborough-York
    (and therefore S.M.R.) was non-existing because it was not a real person. Instead,
    the motion judge ought to have found that Scarborough-York was not non-existing
    because it was
plausibly
real.

(2)       The motion judge erred in finding that Scarborough-York
    was non-existing because its relationship with Rouge Valley was not real.

(3)       The motion judge erred in finding that Rouge Valley had no
    intent to pay Scarborough-York.

[6]

Rouge Valleys first two arguments are related,
    and challenge the motion judges finding that S.M.R. was a non-existing person.
    Its third argument challenges the motion judges finding that S.M.R. was a
    fictitious person. I would reject Rouge Valleys first two arguments and uphold
    the motion judges finding that S.M.R. was a non-existing person under s. 20(5)
    of the Act. For that reason, I would dismiss Rouge Valleys appeal.  It is
    therefore unnecessary to consider Rouge Valleys third argument and the motion
    judges finding that S.M.R. was also a fictitious person.

B.        THE
    LEGAL CONTEXT

(a)       Cheques
    payable to order, bearer cheques and s. 20(5) of the
Bills of Exchange
    Act

[7]

Under s. 20(2) of the
Bills of Exchange Act
,
    a cheque may be payable either to order or to bearer. A bank may validly
    negotiate a cheque payable to order only if the cheque is both delivered and
    endorsed. In contrast, a bank may validly negotiate a cheque payable to bearer
    if the cheque is simply delivered to the bank. Even if a bearer cheque has a
    forged or missing endorsement, the bank can negotiate it on delivery.

[8]

In most cheque transactions, the payor (the
    drawer) issues a cheque on its bank account, which instructs its bank (the
    drawing bank) to pay the stated amount to the person named on the cheque (the
    payee). Ordinarily, if the cheque is made payable to a specific payee it is
    payable to order, and the payee can negotiate the cheque. The payee deposits
    the cheque at its own bank (the collecting bank), which collects the money from
    the drawing bank and credits the payees account. A collecting bank will be
    liable in conversion if it credits the account of someone other than the
    intended payee.

[9]

Conversion  the wrongful interference with the
    goods of another  is a tort of strict liability. That the wrongful
    interference may have been innocent does not afford the bank a defence. In the
    present case, Rouge Valley claims that TD Canada Trust, wrongfully, albeit
    innocently, converted its money by negotiating the cheques in question.

[10]

However, s. 20(5) of the
Bills of Exchange
    Act
provides banks with some reprieve from the harsh result of an innocent
    conversion. That section stipulates that a cheque payable to a specific payee
    that is either a fictitious or non-existing person may be treated as payable to
    bearer, not to order. The person delivering the cheque to the collecting bank
    (the bearer) is deemed to be the rightful payee and the bank is not liable for
    negotiating the cheque. A defence under s. 20(5) is available to both a drawing
    bank and a collecting bank such as, in this case, TD Canada Trust: see
Boma
    Manufacturing Ltd. v. Canadian Imperial Bank of Commerce
, [1996] 3 SCR 727,
    at para. 52.

[11]

Section 20(5) thus protects a bank from fraud on
    the drawer committed by a third party, including an insider in the drawer
    organization. The section allocates the loss to the drawer, who typically is
    better positioned to discover the fraud or to insure against it: see
Bank of
    Nova Scotia v. Toronto Dominion Bank
(2001), 145 O.A.C. 106, at para. 15.

[12]

In the present case, TD Canada Trust claims that
    it is not liable in conversion because S.M.R. is a non-existing and a
    fictitious person under s. 20(5). It submits that the loss is properly
    allocated to Rouge Valley

C.        THE FRAUD

[13]

The facts material to this appeal are largely not
    disputed. My summary here is drawn almost entirely from the thorough reasons
    and analysis of the motion judge.

(a)       Marshners position and authority at Rouge
    Valley

[14]

Rouge Valley is an acute care community hospital
    servicing patients in Toronto, Ajax and Pickering. Marshner was one of five
    program managers employed by Rouge Valley. He managed the hospitals mental
    health program. Though not an officer or director at Rouge Valley, Marshner
    nonetheless had significant responsibility. He oversaw a budget of more than
    $10 million and, on his own, could authorize the payment of invoices of up to
    $10,000. None of the invoices in question in this litigation were for more than
    $10,000.

[15]

Rouge Valley used an automated system for
    issuing cheques. So, for example, when Marshner approved an invoice, an
    accounts payable clerk would input the amount and name of the supplier into the
    system, and a cheque containing mechanical signatures would be produced
    electronically. Marshner did not need anyones approval to issue cheques of
    less than $10,000.

(b)       The previous fraud involving Delisle Youth
    Services

[16]

Delisle Youth Services is a community agency and a member of the United Way. 
    It provides counselling and treatment programs for troubled youth. As well, it
    provides children with mental health problems access to group homes and their resources.

[17]

Reinsilber was the executive director of Delisle until April 2003, when
    he was fired. For several years, Marshner and Reinsilber used Delisle to
    defraud Rouge Valley of over $1.3 million. Although that amount is not in issue
    in this litigation, the fraud involving Delisle provides an important context
    for the issues on this appeal.

[18]

The fraud worked this way: Marshner established a vendor code for
    Delisle (which was later changed to S.M.R.) at Rouge Valley. Reinsilber sent
    Marshner a series of fraudulent invoices, each one for less than $10,000. The
    invoices were purportedly for mental health treatment services rendered to
    young Rouge Valley patients. In fact, Delisle never provided any services to
    Rouge Valley; however, Marshner authorized the payment of these invoices. Eventually,
    Reinsilber forwarded a portion of the money paid to Delisle back to Marshner.

(c)       The fraud involving Scarborough-York and S.M.R.

[19]

After Delisle fired Reinsilber, he and Marshner concocted a new plan to
    defraud Rouge Valley. Reinsilber wrote to Marshner at Rouge Valley to advise
    him that in the future a new company  Scarborough-York Mobile Rehabilitation 
    would be providing services to Rouge Valley. That letter, and the others that
    followed requesting payment, contained the Delisle logo but not the name
    Delisle or Delisles address. Instead, they contained the acronym S.M.R.
    followed by the name Scarborough-York Mobile Rehabilitation, an address and a
    telephone number. Reinsilber signed each letter and asked Rouge Valley to send
    a cheque for the alleged service to S.M.R.

[20]

Scarborough-York Mobile Rehabilitation did not exist; it was a made-up
    entity.  S.M.R. also did not exist, though the acronym bore some resemblance to
    Reinsilbers sole proprietorship, SMR and Associates.

[21]

In all, Marshner approved the payment of 78 cheques to S.M.R., each for
    less than $10,000. Reinsilber deposited the cheques in his account for SMR and
    Associates at TD Canada Trust. He then gave Marshner the bulk of the funds. The
    aggregate fraud amounted to $688,511. The fraud was discovered in 2007 through
    the efforts of a diligent employee of Rouge Valley.

D.        DID THE MOTION JUDGE ERR IN DETERMINING THAT S.M.R. WAS A
    NON-EXISTING PERSON UNDER S. 20(5) OF THE
BILLS OF EXCHANGE ACT?

[22]

A good deal of case law and commentary has considered the meaning of a
    non-existing person and a fictitious person for the purpose of s. 20(5) of the
Bills
    of Exchange Act.
The main authority remains the majority judgment of
    Iacobucci J. in
Boma Manufacturing Ltd. v. Canadian Imperial Bank of
    Commerce
. There, with some modification, he approved of four propositions
    taken from John D. Falconbridges
Banking and Bills of Exchange,
6
th
ed. (Toronto: Canada Law Book, 1956), at pp. 468-469. The four propositions 
    of which propositions 1 and 4 are relevant to my analysis  are as follows:

(1)

If the payee is not the name of any real person known to the drawer, but
    is merely that of a creature of the imagination, the payee is non-existing, and
    is probably also fictitious.

(2)

If the drawer for some purpose of his own inserts as payee the name of a
    real person who was known to him but whom he knows to be dead, the payee is
    non-existing, but is not fictitious.

(3)

If the payee is the name of a real person known to the drawer, but the
    drawer names him as payee by way of pretence, not intending that he should
    receive payment, the payee is fictitious, but is not non-existing.

(4)

If the payee is the name of a real person, intended by the drawer to
    receive payment, the payee is neither fictitious nor non-existing,
    notwithstanding that the drawer has been induced to draw the bill by the fraud
    of some other person who has falsely represented to the drawer that there is a
    transaction in respect of which the payee is entitled to the sum mentioned in
    the bill.

[23]

Two important principles structure these propositions.

·

Whether the payee is non-existing is a simple question of fact not
    depending on anyones intention.

·

Whether the payee is fictitious depends upon the intention of the
    drawer of the instrument, that is the drawer of a bill or cheque or the maker
    of a note.

[24]

In the present case, for the purpose of Falconbridges four propositions,
    the payee is S.M.R., and the drawer is Rouge Valley, the entity out of whose
    bank account the 78 cheques in issue were drawn: see
Boma,
at para. 59. Rouge
    Valley contends that this case falls under Falconbridges fourth proposition:
    S.M.R is neither non-existing nor fictitious.  TD Canada Trust contends that
    this case falls under proposition one: S.M.R. is both non-existing and
    fictitious. I propose to deal with whether S.M.R. is a non-existing person,
    because, in my view, it is and that disposes of the appeal.

[25]

On its face S.M.R. seems to be, beyond doubt, a non-existing person. 
    Falconbridge states that whether a person is non-existing is a question of
    fact. Rouge Valley conceded that Scarborough-York and S.M.R. did not exist, but
    were entities made up by Marshner and Reinsilber to defraud Rouge Valley. In
    other words, they were non-existing. And they certainly were not known to the
    drawer, Rouge Valley.  Falconbridges first proposition thus seems applicable.
    Moreover the motion judge found as a fact that S.M.R. was non-existing. That
    finding is entitled to deference in this court.

[26]

However, as I said earlier, in
Boma
, Iacobucci J. approved
    Falconbridges four propositions with some modification, and it is this
    modification or gloss on which Rouge Valley relies  a gloss that imports the
    notion of plausibility.

[27]

Boma Manufacturing Ltd. and Panabo Sales Ltd. were two small
    family-owned companies controlled by a husband and wife, Mr. and Mrs Mange. Over
    a five-year period, their bookkeeper, Ms. Alm defrauded the companies. Although
    she was not an officer, director or shareholder of either company, Ms. Alm had signing
    authority on cheques and she signed or had a senior officer sign numerous
    cheques payable to a J. Lam or J.R. Lam, neither of whom existed. She then
    deposited the cheques in her bank account at the CIBC. In the companies action
    to recover their money, the bank relied on s. 20(5) of the
Bills of Exchange
    Act.
It claimed that the payees on the cheques were fictitious and
    non-existing.

[28]

The majority of the Supreme Court of Canada held otherwise. Iacobucci J.
    considered whether J. Lam and J.R. Lam were non-existing or fictitious
    payees. He acknowledged that as the cheques were made

payable not to
    actual persons associated with the companies, but to persons with whom the Manges
    had no dealings, Falconbridges first proposition seemed to dictate that J.
    Lam and J.R. Lam were non-existing persons.

[29]

However, the companies had had dealings with a subcontractor named Van
    Sang Lam. Iacobucci J. concluded Mr. Mange honestly believed that the cheques
    were being made out for an existing obligation to a real person known to them. He
    therefore held that the payees J. Lam and J.R. Lam were not non-existing
    and hence not fictitious. The cheques thus fell under Falconbridges fourth
    proposition. He wrote at paras. 60-61:

Many of the cheques, however, were made payable not to actual persons
    associated with the companies, but to J. Lam and J. R. Lam.  The
    appellants had no dealings with any persons of such names.  According to
    the criteria set out in Falconbridge, supra, such a person would be categorized
    as non-existing, and hence, fictitious.  But in my view, it seems that
    Boris Mange was reasonably mistaken in thinking that J. Lam or J. R. Lam
    was an individual associated with his companies. Mange knew that one of the
    subcontractors retained by the companies was a Mr. Lam.  He did not
    specifically recall Lams first name, which, incidentally, was Van Sang. 
    However, when Mange approved the cheques to J. Lam and J. R. Lam, he
    honestly believed that the cheques were being made out for an existing obligation
    to a real person known to the companies.  The trial judges comments in
    this regard were tantamount to a finding of fact, and were not disturbed on
    appeal; as these are concurrent findings of fact, this Court should not
    intervene.

Accordingly, the cheques made out to J.
    Lam and J. R. Lam also fall within the fourth category, and could not be
    treated by the CIBC as payable to bearer.  Rather, the cheques were
    payable to order, and in order to be negotiable to the bank, delivery alone was
    not sufficient.  Valid, non-forged endorsements were required.

[30]

In his text,
The Law of Banking and Payment in Canada
(Aurora:
    Canada Law Book, 2008), Bradley Crawford summarizes the effect of Iacobucci
    J.s gloss on
Boma
:

[T]he law appears to be that if the name of the
    payee is a pure invention of the drawer of a cheque (or the maker of a note),
    the payee may be non-existing within the meaning of BEA, s. 20(5), but only
    if it is also true that the name is of a person having no real connection with
    the drawers business, or
semble
, is not a name that
plausibly
might be identified by the drawer as being a real creditor of his business.
    [Emphasis in original.]: at p. 22-34.

[31]

In the present case, Rouge Valley relies on the notion of plausibility
    to submit that although S.M.R. may in fact be a non-existing person, it is not
    in law under s. 20(5), a non-existing person. In support of this submission,
    Rouge Valley makes two related arguments.

[32]

The first argument is that the motion judge ought to have found
    Scarborough-York and therefore S.M.R. was plausibly a real person because it
    provided services similar to those provided by Delisle, which was a real
    person. The second argument is that even though Rouge Valleys relationship
    with S.M.R. may not have been real, S.M.R. was not non-existing because Rouge
    Valley honestly believed that cheques were being made out for an existing
    obligation to an entity associated with Delisle, a real community agency with
    whom it did business.

[33]

The motion judge rejected these arguments, and in my view, he was
    entirely correct in doing so. Rouge Valleys arguments fail for any one of at
    least three reasons.

[34]

First
, the gloss on Falconbridge based on the notion of
    plausibility is limited to cases where the payee named on the cheque is
    factually non-existent, in other words is not a real entity known to the
    drawer, but has a name similar to the name of an actual person with whom the
    drawer has done business. In those situations, the drawer might plausibly
    maintain that it believed it was writing a cheque to a real creditor of its
    business.

[35]

Boma
itself illustrates this limitation. J. Lam and J.R. Lam
    were creatures of Ms. Alms imagination, but each bore a name similar to that
    of a real creditor of the companies, Van Sang Lam. Thus the owner of the
    companies, Mr. Mange, could plausibly maintain that he honestly believed he was
    paying a real creditor of his business.

[36]

This courts decision in
Westboro Flooring and Décor Inc. v. Bank of
    Nova Scotia
(2004), 71 O.R. (3d) 723, also shows the limited reach of the
    notion of plausibility. There the court was asked to decide whether a made-up
    entity, Ottawa-Hall Carpet was nonetheless not a non-existing person under s.
    20(5) because the drawer, Westboro, believed it had been approving cheques to
    an existing supplier named Terry Govas Ottawa-Hull Carpet Ltd.. This court
    upheld the trial judges finding that Ottawa-Hull Carpet was not a
    non-existing payee. Simmons J.A. wrote at para. 25 that even if the name that
    Westboro used to refer to its supplier was not precisely accurate, the error was
    one of misnomer and did not make the payee non-existing under the Falconbridge
    criteria.

[37]

Here the names Scarborough-York Mobile Rehabilitation and S.M.R., both
    admittedly made-up names, bear no similarity to the name of Rouge Valleys
    alleged real creditor, Delisle. Indeed, Rouge Valley has not even argued that
    in paying S.M.R., it intended to pay Delisle.

[38]

The situation might be different if, for example, Rouge Valley did
    business with a supplier named M.R.S. and made a cheque to S.M.R. honestly but
    mistakenly thinking that it was paying for services M.R.S. had rendered. That,
    however, is not what occurred. To extend the notion of plausibility in the way
    Rouge Valley contends is antithetical to the principles of negotiability,
    certainty and finality that govern cheque transactions: see
Boma,
at para.
    91.

[39]

Second
, Rouge Valleys arguments must fail because they rest on a
    false premise: that just as Van Sang Lam was a real creditor of the companies
    in
Boma
, Delisle was a real creditor of the hospital. However, Delisle
    was anything but a real creditor of Rouge Valley. It was a real agency, but it
    had never provided services to Rouge Valley. Instead, it was a tool of the
    fraud perpetrated by Marshner and Reinsilber. The motion judge put it this way
    in a passage with which I agree, and which by itself is fatal to Rouge Valleys
    position.

Second, in
Boma
the relationship between the
    intended payee and the drawer was a real one. Van Sang Lam was a supplier. 
    There had been real transactions. There was, in other words a factual
    foundation for a finding that the drawers intention to pay Van Sang Lam was
    honest and reasonable or at least plausible. Here there is no such
    foundation. The entire relationship between Rouge Valley and Delisle was a
    façade. No services were rendered. No amounts were due.Ever. It seems to me
    there was a shocking systemic failure within Rouge Valley which allowed a
    middle level employee to perpetrate a fraud based on a relationship that had
never
existed.  It affronts my view of common sense to suggest that this case is
    analogous to
Boma
because Delisle was the type of organization with whom
    Rouge Valley often partnered.  The fact is it never partnered with Delisle. 
    Surely any due diligence by someone in authority at Rouge Valley would have
    revealed that fact. [Emphasis in original.]: at para. 71

[40]

Third
, as the trial judge noted in
Boma
, Mr. Mange, who
    ran the companies, actually considered the name of the payee when the cheques
    in question were drawn. The court could therefore find that he honestly
    believed he was paying a legitimate creditor of his business. Here, in
    contrast, no one responsible for running Rouge Valley considered any of the
    cheques authorized by Marshner. Therefore, no one at Rouge Valley could say
    that the cheques were being issued to a known entity with whom the hospital had
    previous legitimate business dealings.

[41]

For these three reasons, I reject Rouge Valleys arguments. I would
    affirm the motion judges finding that S.M.R. is a non-existing person under s.
    20(5) of the
Bills of Exchange Act.
The purpose of this section is to
    protect banks from fraud on the drawer, even fraud committed, as in this case,
    by an employee of the drawer. As between the drawer and the collecting bank, s.
    20(5) allocates the loss to the drawer who usually is better able to detect the
    fraud or insure against it. Allocating the loss to Rouge Valley is consistent
    with the purpose of s. 20(5).

[42]

Because S.M.R. is a non-existing person, TD can avail itself of the
    defence contained in s. 20(5) of the
Bills of Exchange Act
. It is
    therefore unnecessary to address the question whether S.M.R. is also a fictitious
    person.

E.        CONCLUSION

[43]

The motion judge correctly decided that S.M.R.
    was a non-existing person under s. 20(5) of the
Bills of Exchange Act
and that therefore TD Canada Trust is not liable in conversion.

[44]

I would dismiss Rouge Valleys appeal with costs
    fixed at $16,000 inclusive of disbursements and applicable taxes.

RELEASED:  January 12, 2012                                                     John
    Laskin J.A.

JL                                                                                                  I
    agree S.T. Goudge J.A.

I
    agree E.E. Gillese J.A.





[1]
The motion judge seems to have used the names Scarborough-York and S.M.R.
    interchangeably. Although this does not affect his analysis, the payee was
    S.M.R.


