



COURT OF APPEAL FOR ONTARIO

CITATION: Teva Canada Limited v. Bank of Montreal, 2016 ONCA
    94

DATE: 20160202

DOCKET: C58546

Weiler, Laskin and Cronk JJ.A.

BETWEEN

Teva Canada Limited

Plaintiff (Respondent)

and

Bank of Montreal, Canadian Imperial Bank of
    Commerce,
TD Canada Trust and Bank of Nova Scotia

Defendants (
Appellants
)

AND BETWEEN

Bank of Nova Scotia

Plaintiff by Counterclaim

and

Teva Canada Limited, Neil Kennedy McConachie, Renzo
    G. Tittarelli and Florindo Costanzo

Defendants by Counterclaim

Frank J. McLaughlin, Jeffrey E. Feiner, for the
    appellant TD Canada Trust

Martin Sclisizzi and Heather Pessione, for the appellant
    Scotiabank

Colby Linthwaite and Sean Cumming, for the respondent
    Teva Canada Limited

Heard: May 14 and 15, 2015

On appeal from the order of Justice Kevin W. Whitaker of
    the Superior Court of Justice, dated February 19, 2014.

Laskin
    J.A.:

A.

Overview

[1]

The appellants TD Canada Trust and Bank of Nova Scotia and the
    respondent Teva Canada Limited, a manufacturer of generic pharmaceuticals, were
    the innocent victims of fraud of over 5 million dollars, perpetrated by Neil
    McConachie, a former employee in Tevas finance department. The general
    question on this appeal is did the motion judge err in determining that the
    banks should bear the loss for the fraud. The principal issues raised by the
    parties concern the application of two sections of the
Bills of Exchange
    Act
, R.S.C. 1985 c. B.4 (
BEA
) that create statutory defences for
    the banks in certain circumstances: s. 20(5), which deals with fictitious and
    non-existing payees, and s. 165(3), which deals with holders in due course.

[2]

Between 2003 and 2006, McConachie requisitioned numerous cheques payable
    to six entities he designated. Two of the entities had names he invented; the
    other four were current or former customers of Teva. None of the entities was
    owed any money by Teva. The cheques were issued by Tevas accounts payable
    department and given to McConachie, even though he had no authority either to
    requisition cheques or approve payments to customers and Tevas own internal
    approval policies had been ignored.

[3]

McConachie and several accomplices opened accounts in the names of the
    six entities and deposited 63 cheques, which the banks negotiated, into these
    accounts. When the fraud was discovered in 2006, McConachie was fired.

[4]

Teva then sued the banks for damages for conversion  for the
    misappropriation of its property. As neither McConachie nor his accomplices
    were lawfully entitled to the cheques, the banks were
prima facie
liable to Teva for converting them. The banks, however, put forward three
    defences:

·

The cheques were payable to non-existing or fictitious payees,
    and thus under s. 20(5) of the
BEA
, the banks were lawfully entitled to
    negotiate them.

·

The banks became holders in due course of the cheques under s.
    165(3) of the
BEA
, and therefore were not liable to Teva in conversion.

·

For 17 of the cheques, Tevas claim was barred by the
Limitations
    Act
[1]
,
    as the banks negotiated those cheques more than two years before Teva issued
    its statement of claim.

[5]

Each party then brought motions for summary judgment, which were heard
    by the motion judge over two days in October 2014. In a short endorsement, the
    motion judge rejected the banks defences and granted Teva judgment in the
    amount of $5,483,249.40. The banks cross-motions were dismissed. On their
    appeals, the banks argue that the motion judges reasons are inadequate, that
    he erred in failing to give effect to the banks defences, and that he erred in
    his award of prejudgment interest in favour of Teva.

[6]

The banks appeals give rise to these six issues:

(1)

Are the motion judges reasons so deficient that his decision is not
    entitled to deference, and the standard of review is thus correctness?

(2)

Did the motion judge err by failing to hold that the banks had a valid
    defence under s. 20(5) of the
BEA
for two of the payees because they
    were non-existing?

(3)

Did the motion judge err by failing to hold that the banks had a valid
    defence under s. 20(5) of the
BEA
because all six payees were
    fictitious?

(4)

Did the motion judge err by failing to hold that the banks were holders
    in due course of the cheques under s. 165(3) of the
BEA
, and therefore
    not liable to Teva in conversion?

(5)

Did the motion judge err by failing to hold that the banks
Limitations
    Act
defence raised a genuine issue requiring a trial?

(6)

Did the motion judge err by failing to exercise his discretion properly
    in his award of prejudgment interest?

[7]

I would answer yes to the questions raised by the second and third
    issues and for those reasons, would allow the banks appeals. It is thus
    unnecessary to consider the other two defences raised by the banks, or the
    motion judges award of prejudgment interest, or the adequacy of his reasons.

B.

The Fraud

(1)

McConachies employment at Teva

[8]

McConachie worked in Tevas finance department in Toronto from August
    2002 until July 2006, when he was fired. In 2005, he was made finance manager.
    He was never an officer or director at Teva, and he never had authority to sign
    cheques. He reported to Tevas controller, and later to its chief financial
    officer, Michael Schmid.

(2)

McConachie uses Tevas rebate program to perpetrate his fraud

(a)

The Program

[9]

During the time McConachie worked at Teva, the company maintained a
    rebate program it called the Continuing Education (CE) Program. The CE Program
    was designed to encourage Tevas customers and service providers to buy its
    products.

[10]

The
    prices of pharmaceuticals are tightly controlled by provincial drug
    formularies. But typically a pharmacist, for example, has a choice of products
    to sell to consumers. Under the CE Program, Teva would refund its customers 
    the pharmacists in my example  part of the formulary purchase price as an
    inducement to buy Tevas products. Teva paid tens of millions of dollars under
    its CE Program until Ontario banned the practice, shortly after McConachies
    fraud was uncovered.

[11]

McConachie
    was responsible for administering Tevas CE Program. The Program was to work as
    follows: McConachie would prepare or print a CE form and cheque requisition,
    and send it to Tevas accounts payable department in Mirabel Quebec; the
    department was to process the form and requisition; one technician was supposed
    to ensure that the requisition corresponded to a customer account number and
    that the requisition for payment had been approved; another technician was to
    enter particulars of the request into Tevas accounting system; once a week a
    batch of cheques would be prepared, and signed by the mechanical application of
    the signature of two authorized signing officers; the cheques would then be sent
    back to McConachie for distribution to the appropriate account manager, and
    ultimately to Tevas customers and service providers.

(b)

Tevas approval policies for CE payments

[12]

Before
    June 2005, Teva had no express policy for the approval of payments under its CE
    Program. Any sales employee could prepare a cheque requisition for any amount
    and forward it to McConachie, who would then send it on to the accounts payable
    department. The sales employees signature on the requisition form provided the
    necessary approval. Importantly, however, McConachie was not authorized either
    to requisition or approve cheques for CE payments.

[13]

In
    June 2005, Teva implemented an electronic system for payments and an express
    policy requiring approval for CE payments. McConachie was involved in the
    implementation of the electronic system and obtained administrative rights in
    the system. For larger amounts, the approval for CE payments had to be given by
    designated corporate officers. If the requested cheque was for over $50,000,
    Tevas chief financial officer had to approve the payment. If the requested
    cheque was for over $100,000, both the chief financial officer and the
    vice-president of sales and marketing had to approve the payment. Once the
    necessary approval was obtained and recorded in Tevas electronic system,
    McConachie was to review the form and forward it to the accounts payable
    department for processing.

(c)

Teva ignored its approval policies

[14]

McConachie
    exploited his administrative role and Tevas failure to follow its own approval
    policies to perpetrate his fraud. All the fraudulent cheques deposited in the
    two banks were requisitioned and approved solely by McConachie, though he had
    no authority to approve CE payments for any amount.

[15]

Before
    June 2005, McConachie sent cheque requisitions in paper form even though these
    requisitions did not have a sales persons signature. After June 2005
    McConachie, using the administrative rights he retained in the electronic
    system, created CE forms requesting CE payments to the entities he designated.
    Of the 40 cheques McConachie requisitioned after June 2005, 36 were for more
    than $50,000, and of those, seven were for more than $100,000. Not a single
    cheque he fraudulently requisitioned was approved either by the chief financial
    officer or the vice-president of sales and marketing of Teva. Although all
    these cheque requisitions lacked the required officer approval, Tevas accounts
    payable department generated cheques based on McConachies fraudulent forms,
    applied a mechanical signature to the cheques and sent the cheques to him. In
    total, McConachie requisitioned and received 63 fraudulent cheques in the
    amount of $5,483,249.40, which he and five accomplices later deposited in
    accounts at the two banks.

[16]

Schmid,
    Tevas former chief financial officer, and the only Teva employee to give
    evidence on the motions, admitted on cross-examination that all the forms were
    not approved in accordance with the proper policy, and that, though the
    accounts payable department knew that McConachie had no authority to approve
    these payments, they nevertheless issued cheques. In short, Tevas failure to
    follow its own approval policies allowed McConachie to carry out this fraud.

(3)

McConachie designates six entities
    as payees of the fraudulent cheques, and deposits the cheques in TD and
    Scotiabank accounts in the names of these entities

[17]

McConachie
    designated six entities to be payees of his fraudulent cheques: (1) PCE
    Pharmacare, (2) Pharma Team System, (3) Phamachoice, (4) London Drugs, (5)
    Pharma Ed Advantage Inc., and (6) Medical Pharmacies Group. McConachie invented
    the names of the first two entities, PCE Pharmacare and Pharma Team System.
    They were imaginary entities. The other four entities were legitimate Teva customers
    or service providers. Three were existing customers at the time of the fraud;
    the other was a former customer. Although Teva had made legitimate payments to
    each of these four entities, none of the cheques McConachie requisitioned and
    obtained was for a legitimate debt owed by Teva.

(a)

The Scotiabank accounts and cheques

[18]

McConachie
    and his accomplices opened three small business accounts at Scotiabank, each
    under the name of a sole proprietorship registered under Ontarios
Business
    Names Act
, R.S.O. 1990 c. B. 17. The name on each account corresponded to
    the names of three of McConachies designated payees: PCE Pharmacare,
    Pharmachoice and London Drugs.

[19]

Into
    these three accounts, McConachie and his accomplices deposited 43 cheques, in
    the total amount of $3,949,481. The main payee was PCE Pharmacare, one of the
    two entities that was a creature of McConachies imagination. 31 cheques
    amounting to $2,853,002 were payable to PCE Pharmacare and deposited into a
    business account at Scotiabank with the name Neil McConachie operating as PCE
    Pharmacare.

(b)

The TD accounts and cheques

[20]

McConachie
    and his accomplices opened four small business accounts at TD, again under
    registered sole proprietorships, this time with names corresponding to four of
    McConachies designated payees: PCE Pharmacare, Pharma Team System, Pharma Ed
    Advantage, and Medical Pharmacies Group.

[21]

Into
    these accounts, McConachie and his accomplices deposited 20 cheques totalling
    $1,533,768.43. Seven of the cheques for over $1.2 million were payable to PCE
    Pharmacare and Pharma Team System, the two imaginary entities.

(4)

Discovery
    of the fraud

[22]

In
    July 2006, Scotiabank notified Teva about a suspicious cheque payable to
    Overwaitea Food Group. Teva investigated the cheque, and eventually uncovered
    McConachies fraud. Teva has accepted that the banks were innocent dupes of
    McConachies fraudulent scheme.

C.

The statutory AND legal context for
    the issues under section 20(5) of the
BEA

(1)

Terminology

[23]

In
    this section I will use what I believe is accepted banking terminology.

·

Collecting Bank is the bank in which a cheque is deposited,     in
    this case Scotiabank and TD;

·

Drawer is the person on whose account a cheque is drawn,     in
    this case Teva;

·

Drawee or Drawing Bank is the bank on which a cheque is    drawn
    and is directed to pay the cheque, in this case Tevas       bank;

·

Payee is the person to whom the cheque is payable;

·

Bearer is a person delivering a cheque to a bank.

(2)

The tort of conversion

[24]

Conversion
    is the wilful interference with the goods of another  that is taking, using or
    destroying these goods in a manner inconsistent with the owners right of
    possession.  In
Boma Manufacturing Ltd. v. Canadian Imperial Bank of
    Commerce
, [1996] 3 S.C.R. 727, which remains the principal authority on
    the
BEA
issues in this appeal, Iacobucci J., in his majority reasons,
    described at para. 83 the tort of conversion 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.

[25]

Boma
also confirmed that the drawer of a cheque (Teva) has an action in conversion
    against a collecting bank (Scotiabank or TD). A collecting bank is liable in
    conversion if it credits the account of someone not authorized to deal with the
    cheque. As McConachie and his accomplices were not lawfully in possession of
    the 63 cheques and deposited them into accounts they controlled, the two banks
    are
prima facie
liable to Teva for converting its cheques.

[26]

As
    Iacobucci J. also noted in the above passage, conversion is a strict liability
    tort. That the banks committed these wrongful acts, as they did, innocently and
    in good faith, affords them no defence. Equally, a drawers negligence cannot
    provide a bank with a defence to a conversion action, and a court cannot
    therefore apportion liability on the basis of a drawers contributory negligence.

[27]

In
    his majority reasons in
Boma
at para. 80, Iacobucci J. discussed the
    benefits of the current bills of exchange system and the seeming unfairness and
    arbitrariness of excluding any notion of fault from the determination of
    liability under that system:

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 consequence of
    fraud.

[28]

That
    any alleged negligence by Teva gives the banks no relief, is evident from
    previous proceedings between these parties. The banks had tried to avoid
    liability in conversion by asserting Tevas negligence. Scotiabank sought to
    amend its statement of defence to plead estoppel by negligence. Both banks
    asserted a counterclaim for damages for negligence. This court rejected both pleas,
    in
Teva Canada Limited v. Bank of Montreal et al
., 2012 ONCA 486, at
    paras. 19 and 20:

In
Boma
, the court recognized that there is a tension
    between the laws need for certainty and equitys need to achieve objectively
    fair results.  In the case of bills of exchange, courts of law and equity over
    several hundred years have determined that certainty is the predominant value
    and that the operation of an efficient banking market requires strict adherence
    to objective rules for the allocation of risk.

We are of the view that if one applies the line of reasoning
    set out by the court in
Boma
to the circumstances in this case, it is
    not tenable that a court would recognize the new duty of care urged by Scotia
    Bank, nor would it recognize the availability of a defence of estoppel by
    negligence which Bank of Nova Scotia seeks to plead.  Doing so would change the
    allocation of risk and affect the certainty with which participants in the
    banking system now conduct banking transactions.

[29]

Still,
    though the tort of conversion is a strict liability tort, it is not an absolute
    liability tort. Section 20(5) of the
BEA
gives a collecting bank a
    statutory defence to an action for conversion.

(3)

Cheques payable to order and bearer,
    and s. 20(5) of the
BEA

[30]

In
    most cheque transactions, the drawer issues a cheque on its bank account, which
    instructs its bank, the drawee, to pay the stated amount of the cheque to the
    payee. 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.

[31]

Under
    s. 20(2) of the
BEA
, a cheque may be payable either to order or to
    bearer. The distinction is important. A bank may validly negotiate a cheque
    payable to order only if the cheque is both delivered and validly 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.

[32]

Ordinarily,
    if a cheque is made payable to a specific payee, as are the 63 cheques in issue
    on this appeal, then it is payable to order. And if a bank, even innocently,
    credits the account of someone not authorized to deal with the cheque, as did
    the banks here, then the bank is
prima facie
liable in conversion. But
    s. 20(5) of the
BEA
provides both a collecting bank and a drawing bank
    with a valid defence to a conversion action. Section 20(5) states:

Fictitious payee

(5) Where the payee is a fictitious or non-existing
    person, the bill may be treated as payable to bearer.

[33]

In
    other words, a cheque payable to a specific payee that is either non-existing
    or fictitious, is treated by statute as payable to bearer, not to order. A
    collecting bank may validly negotiate such a cheque on mere delivery. So if the
    two appellant banks can show that McConachies 63 fraudulent cheques were
    payable to non-existing or fictitious payees, they have a valid defence to
    Tevas conversion action. That is so because the bearer of the cheque is deemed
    to be the rightful payee, and the bank is thus not liable for negotiating the
    cheque.

[34]

The
    purpose of s. 20(5) is to protect the bank from fraud on the drawer, committed
    by a third party, including an insider in the drawers organization. The
    section allocates the loss to the drawer, who typically is better positioned to
    discover the fraud or insure against it. See
Rouge Valley Health System v.
    TD Canada Trust
, 2012 ONCA 17, at para. 11; Benjamin Geva, Conversion of
    unissued cheques and the fictitious or non-existing payee 
Boma v. CIBC

    28 CBLJ #2 177, at 195.

(4)

Falconbridges
    four propositions

[35]

For
    determining whether a payee is non-existing or fictitious, Iacobucci J. in
Boma
,
    approved, with a significant modification, four propositions taken from the
    late Dean John D. Falconbridges influential book,
Banking and Bills of
    Exchange, 6th Ed.
(Toronto: Canada Law Book, 1956) at 468-9. I will
    discuss the modification separately below.  The four propositions are the
    following:

(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.



[36]

As
    is evident from the propositions themselves, a payee can be:

·

Both non-existing and fictitious,

·

Non-existing but not fictitious, or;

·

Fictitious but not non-existing.

[37]    Falconbridge also drew an important
    distinction between non-existing and fictitious payees:

·

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

·

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

[38]    In this appeal, Scotiabank and TD contend that
    all six payees designated by McConachie fall under Falconbridges first
    proposition: PCE Pharmacare and Pharma Team System were non-existing; and all
    six payees are fictitious. Thus the banks have a valid defence to Tevas action
    for conversion.

[39]    Teva, on the other hand, contends that all six
    payees fall under Falconbridges fourth proposition. Thus the banks have no
    defence to its action for conversion, and this appeal should be dismissed. To
    come under Falconbridges fourth proposition, two requirements must be met:

·

Each payee must be a real person, that is, not non-existing;

·

Each payee must be intended by Teva to receive payment and thus
    not fictitious.

[40]    As I will discuss, these two requirements give
    rise to the s. 20(5) issues on this appeal.

(5)

Bomas
modification
    to the non-existing payee defence

[41]

The non-existing payee
    defence under Falconbridges first proposition was modified by Iacobucci J. in
Boma
.

He appeared to treat non-existing and fictitious payees interchangeably.
    And, instead of adhering to Falconbridges explanation of non-existing as a
    question of objective fact, Iacobucci J. imported the notion of plausibility
    into the question whether a payee is non-existing. The effect of his
    modification is that even if a payee is, in fact, a creature of the fraudsters
    imagination, the payee may still not be non-existing if the drawer had a
    plausible and honest, though mistaken, belief that the payee was a real
    creditor of the drawers business.
[2]


[42]

Boma
itself shows the impact of this modification to the non-existing payee defence.
    In
Boma
, Donna Alm, a bookkeeper, defrauded her employer, two family
    owned companies, of over $90,000. The companies were controlled by a husband
    and wife, Mr. and Mrs. Mange. Alm was not an officer, director or shareholder
    of the companies. But she was an authorized signing officer on the companies
    bank account with the Royal Bank of Canada. Over the course of five years, she
    fraudulent prepared 155 cheques made payable to various payees, and
    appropriated the proceeds by collecting them through her account with the
    collecting bank, the CIBC.

[43]

Of
    the 155 cheques, 114 were made payable to an imaginary person, either a J.
    Lam or a J.R. Lam. As an objective fact, the payees of these 114 cheques
    were non-existing and would fall under Falconbridges first proposition, as
    LaForest J. held in his dissenting reasons. But Iacobucci J. held that the
    payees came under Falconbridges fourth proposition because Mr. Mange honestly
    believed the cheques were made out to a real person who had business dealings with
    his companies, a Mr. Lam. Iacobucci J. explained his reasoning at paras. 60-61
    of his judgment:

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 Lam's
    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 judge's 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.

[44]

In
    The Law of Banking and Payment in Canada (Aurora: Canada Law Book, 2008)
    Bradley Crawford summarized the effect of Iacobucci J.s modification to
    Falconbridges first proposition:

[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.

[45]

Thus,
    where the evidence establishes this honest but mistaken belief, what was under
    Falconbridges first proposition, a non-existing payee, becomes a real payee.
    If the drawer intended this real entity to receive payment, the payee is not
    fictitious either, bringing it within the parametres of Falconbridges fourth
    proposition and leaving the collecting banks liable for the loss.

D.

The Issues under section 20(5) of
    the
BEA

[46]

In
    this appeal, Scotiabank and TD contend that all six payees designated by
    McConachie fall under Falconbridges first proposition. PCE Pharmacare and
    Pharma Team System were non-existing. The other four payees (Medical Pharmacies
    Group, Pharmachoice, London Drugs and Pharma Ed Advantage Inc.), though not
    non-existing, were fictitious because Teva formed no intention that payments be
    made to those payees. No signing officer or directing mind of the company
    turned their minds to the cheques and no one examined them. The cheques were
    mechanically processed without proper internal approvals. In the absence of any
    evidence that Teva actually intended to make the payments to the named (real)
    payees, the payees are fictitious, the cheques are deemed payable to bearer and
    the banks are not liable for negotiating the cheques.

[47]

Teva, on the other hand, contends that all six payees fall
    under Falconbridges fourth proposition. It relies on the modification to
    Falconbridges first proposition in
Boma
to bring the cheques payable to
    the two non-existing entities within the scope of Falconbridges fourth
    proposition. Teva argues that all six payees were real and not fictitious
    because Teva intended that the cheques drawn would discharge legitimate
    obligations to existing Teva customers, or suppliers to customers. Thus, the
    banks have no defence to its action for conversion, and this appeal should be
    dismissed.

(1)

Did the motion judge err by failing
    to hold that the banks had a valid defence under s. 20(5) of the
BEA
for
    the payees PCE Pharmacare and Pharma Team System because both were
    non-existing?

[48]

PCE
    Pharmacare and Pharma Team System were, in fact, non-existing. They were
    invented by McConachie and were creatures of his imagination. Teva has conceded
    as much. Thus, seemingly, these two payees fall under Falconbridges first
    proposition.

[49]

But,
    Teva fairly submits that simply because PCE Pharmacare and Pharma Team System
    did not in fact exist, is not decisive in the light of
Bomas
modification to the non-existing payee defence under Falconbridges first
    proposition. It submits that though both PCE Pharmacare and Pharma Team System
    were invented by McConachie, their names were similar to the names of
    legitimate customers of Teva, PCE Management Inc. and Pharma Systems. Thus,
    Teva argues it plausibly believed these imaginary entities were real persons
    with a connection to its business. Under the modification in
Boma
to
    the non-existing payee defence, they were real persons, not non-existing.

[50]

I
    do not agree with Tevas submission. It seems to me that to satisfy
Bomas
modification to the non-existing payee defence, Teva has to meet two
    requirements, and though it perhaps meets the first, it does not meet the
    second:

·

The name of the imaginary payee is sufficiently similar to the name
    of one of Tevas legitimate customers that Teva could plausibly, though
    mistakenly, maintain it was writing a cheque to a real person, a real creditor
    of its business: contrast
Westboro Flooring and Décor Inc. v. Bank of Nova
    Scotia
, [2004] 71 O.R. (3d) 723 (C.A.), at para. 25 and
Rouge Valley
,
supra
, at paras. 34-35.

·

At the time each cheque was drawn, Teva considered the name of
    the payee on the cheque and, because of the similarity in name, had an honest,
    though mistaken, belief that the named payee was a real customer or service
    provider. See
Rouge Valley
,
supra
, at paras. 34-38 and 40;
Kayani
    v. Toronto Dominion Bank
,

2014 ONCA 862
,
at paras. 39-42.

[51]

I
    accept that the made-up entity Pharma Team System has a name sufficiently
    similar to the name of Tevas real customer Pharma Systems that one might
    plausibly confuse the two. The same might be said of PCE Pharmacare and PCE
    Management Inc., though less obviously so. Indeed, the motion judge at para. 34
    of his endorsement found that the payees could plausibly be understood to be
    real entities and customers of the plaintiff. I would not interfere with this
    finding and so I accept that Teva meets the first requirement of the
    modification in
Boma
to the non-existing payee defence.

[52]

But
    the motion judge made no finding on the second requirement, and therefore erred
    because Teva led no evidence to show it met this requirement. On the evidence,
    those who were in positions of authority at Teva (and who arguably, could
    represent the drawers belief), could not have come to the honest but
    mistaken belief that the named payees Pharma Team System and PCE Pharmacare
    referred to Tevas real customers Pharma Systems and PCE Management Inc.

[53]

No
    one in a position of authority ever looked at any of the requisitions or the
    cheques. Clerks processed the cheques and mechanically applied signing
    officers signatures. The evidence does not even demonstrate that the clerks
    themselves turned their minds to the names on the requisitions or the cheques,
    or that they were misled by the similar names. Instead, the evidence reflects
    that no one gave the names on the requisitions or the cheques any thought at
    all. No officer or other responsible person at Teva considered the identity of
    the payees on the fraudulent cheques and formed an honest, though mistaken
    belief, that the named payees were legitimate customers or service providers.

[54]

By
    contrast, in
Boma
, Mr. Mange at least considered the identity of the
    payees on nine of the fraudulent cheques, and formed an honest, though mistaken
    belief that they were payable to legitimate customers of his companies.  And, it
    can be inferred from the reasons of Iacobucci J. that because Mr. Mange had viewed
    and formulated a mistaken belief that each of the names on the nine fraudulent
    cheques he authorized corresponded to one of his real customers, he would have
    formulated the same mistaken belief in the names had he viewed them on all 114
    cheques payable to the non-existing entities J.R. Lam or J. Lam. I draw
    this inference because Iacobucci J. goes on to treat the payees on all the
    cheques as real, and then considers all the cheques in his analysis of the
    fictitious payee defence.

[55]

This
    courts decision in
Westboro Flooring
is consistent with
Boma
,
    and markedly different from the case before us. In
Westboro Flooring
, the
    fraudster Duarte prepared 36 cheques payable to an imaginary payee with a very
    similar name to a real Westboro customer and presented the cheques to a signing
    officer for authorization. In holding that the banks did not have a defence
    under s. 20(5) of the
BEA
, this court concluded, at para. 25, that
    because Westboro had an existing supplier referred to by a very similar name,
    the signing officers, seeing this very similar name, plausibly believed they
    were paying a legitimate supplier and the error was one of misnomer and did
    not make the payee non-existing under the Falconbridge criteria.



[56]

Here,
    in summary, there is no evidence of anyone, other than McConachie, turning a
    mind to the names of the payees on the cheques at the time they were drawn.
    Tevas argument that PCE Pharmacare and Pharma Team Systems were payees under
    Falconbridges fourth proposition must fail for the same reason the drawers
    identical argument in
Rouge Valley
failed:

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.

[57]

In
    my opinion, the motion judge erred in failing to hold that both PCE Pharmacare
    and Pharma Team System were non-existing payees under Falconbridges first
    proposition, even as modified in
Boma
. The banks were entitled to treat
    the cheques to those two payees as payable to bearer. Correspondingly, Tevas
    conversion action on those cheques must fail.

(2)

Did the motion judge err in failing to hold that the banks had a
    valid defence under s. 20(5) of the
BEA
because the payees were
    fictitious?

[58]

Fictitiousness
    matters under s. 20(5) of the
BEA
and under Falconbridges fourth
    proposition only where the payees are real persons. In this case four of the
    payees  Pharmachoice, London Drugs, Pharma-Ed Advantage Inc.
[3]
and Medical Pharmacies Group  are real persons. They are or were Tevas
    customers or service providers.

[59]

Under
    Falconbridges propositions, whether these payees are fictitious depends upon
    the intention of the creator of the instrument, that is the drawer of a .
    cheque . But whose intent should the court look to? In
Boma
at para.
    40, Iacobucci J. said that the relevant intent for determining whether a payee
    is fictitious, is the intent of the drawer itself, not the intent of the actual
    creator of the instrument.
[4]
Where the drawer is a corporation, the intent of its directing mind or at least
    the intent of one of its responsible officers, is determinative.

[60]

Thus,
    it is Tevas intent or the intent of its directing mind, not McConachies
    intent that governs
[5]
.
    And the relevant time for determining Tevas intent is the time when the
    cheques were drawn, not afterwards. See
Kayani,
supra, at

para. 41.

[61]

So,
    if the payees are real persons intended by Teva to receive payment, then these
    payees are not fictitious, and the banks are liable for the loss. Conversely,
    if Teva has drawn cheques to order, not intending that the payees receive
    payment, then Teva is liable. In
Boma
, at para. 46, Iacobucci J.
    discussed the rationale for the fictitious payee defence:

The policy underlying the fictitious person rule seems to be
    that if a drawer has drawn a cheque payable to order, not intending that the
    payee receive payment, the drawer loses, by his or her conduct, the right to
    the protections afforded to a bill payable to order.

[62]

Although
    the motion judge found that the payees were not fictitious, he made no finding
    on Tevas intent, and at para. 28 of his endorsement he said incorrectly that
    the issue as to whether the drawer is a fictitious person is a question of
    fact. Because of this error and the absence of any finding on Tevas intent,
    the motion judges finding that the payees were not fictitious is not entitled
    to any deference on appeal.

[63]

Teva
    submits that the payees were not fictitious because it had the necessary intent
    to pay the named payees. Teva rests its argument on four planks: the affidavit
    evidence of Schmid shows Tevas intent; Tevas intent can be presumed; a
    general corporate intent should be inferred; and the case law uniformly
    supports its position.

[64]

The
    banks submit that the evidence establishes that Teva formed no intention at all
    for any cheques. They say that Schmids affidavit evidence is undermined by his
    evidence on cross-examination; that if a presumption of intent exists, it has
    been rebutted by the evidence; that a general corporate intent cannot be
    inferred as Teva consistently made CE payments contrary to its own approval
    policies; and that the cases Teva relies on are distinguishable on their facts.
    I agree substantially with the banks submission. The evidence does not support
    Tevas claim that it intended to pay the named payees.

[65]

Schmids
    evidence
. Schmid baldly asserted, at
    para. 10 of his affidavit filed on the motions, that []
at the
    time [Teva] issued the Fraudulent Cheques, [Teva] believed each of these
    cheques was to satisfy a legitimate obligation owed by [Teva] to a legitimate
    [Teva] customer or service provider. But Teva led no evidence to support this
    assertion and it did not stand up to cross-examination.

[66]

When
    he was cross-examined, Schmid admitted no cheque was legitimate; each cheque was
    defective on its face; in each case where the approval of one or more officers was
    required, none was obtained; and in each case McConachie approved the
    requisitions though he had no authority to do so; and finally, although the
    accounts payable department knew that McConachie had no authority to approve
    these transactions, the cheques were nonetheless issued. In the light of his admissions
    on cross-examination, Schmids evidence does not assist Teva in demonstrating
    the drawers intent to make legitimate payments to the payees.

[67]

Presumption
    of intent
.  Teva relies on
Boma
in arguing that Tevas intent to
    pay legitimate creditors should be presumed. Teva finds support for this
    argument at para. 57 of
Iacobucci J.s
    reasons
:

The validity of the cheques is not challenged; therefore, it
    must be presumed that the drawer intended the payees to receive the proceeds of
    the cheques.  Clearly, the appellants had no intention of transferring over
    $90,000 to Alm, rather than the payees, for no reason and via the circuitous
    route of third party cheques.

[68]

Standing
    alone, this paragraph does appear to lend some support to Tevas position. But
    this paragraph must be read in conjunction with the rest of Justice Iacobuccis
    analysis. For he goes on at para. 60 to consider and rely on Mr. Manges honest
    belief that the cheques were being made out for an existing obligation to a
    real person known to the companies. Having found that Mr. Mange formed an
    honest but mistaken belief about the legitimacy of the named payees, Iacobucci
    J. concluded that Mr. Mange also formulated the intent to pay the persons he
    mistakenly believed to be legitimate payees. Justice Iacobucci was not merely
    presuming Bomas intent; he found its intent in the evidence.

[69]

In
    the case before us, Teva has put forward no such evidence. To the extent it can
    rely on a presumption that it intended the payees to receive the proceeds of the
    fraudulent cheques, that presumption has been rebutted by the evidence of its
    undeniable, indeed admitted failure to follow its own approval process. Instead,
    Teva allowed every cheque to be requisitioned and approved solely by McConachie
    and then issued by one of its technicians without any scrutiny whatsoever.

[70]

Inference
    of corporate intent
.  Teva also argues that even if its intent to pay
    legitimate creditors cannot be presumed, it should be inferred. Teva contends
    that we should focus on the intent of the section of the overall enterprise to
    which it had delegated the drawing of cheques, its accounts payable department
    in Quebec. There, Teva employees who prepared the cheques knew they had been
    requisitioned and were payable to customers or service providers recognized by
    its accounting system. Teva did not intend to be robbed by these employees, and
    the employees issued the cheques intending to satisfy legitimate obligations.

[71]

Again,
    Teva draws support for its argument from the majority reasons in
Boma
.
    As in the case before us, all 155 cheques in
Boma
were written on the
    drawers pre-printed cheque forms. Alm used these pre-printed forms to create
    all the cheques, but she signed only 146 of them. She induced Mr. Mange to sign
    the other nine. Again, Iacobucci J. did not distinguish between the cheques
    signed by Mr. Mange and the cheques signed by Alm,
[6]
nor did he distinguish between the cheques payable to existing employees and
    the cheques payable to imaginary persons. He treated them all the same. He
    found that the fictitious payee defence did not apply to any of them.

[72]

Teva
    contends that implicitly, if not expressly, Iacobucci J. was inferring a
    general corporate intent to pay legitimate creditors from Mr. Manges specific
    knowledge of the nine cheques he was induced to sign. Without that inference of
    intent, the collecting bank in
Boma
, CIBC, would have had a good
    defence for all but the nine cheques signed by Mr. Mange - that is, a good
    defence for all the cheques signed by Alm.

[73]

I
    agree that the majoritys reasons seem to infer a general corporate intent to
    pay legitimate creditors from Mr. Manges specific knowledge of the nine
    cheques. However, on the evidence in this case, the same inference is not
    available.

[74]

In
Boma
, there was a basis in the evidence to conclude that Mr. Mange
    honestly but mistakenly believed the imaginary payees were legitimate and that
    he intended to make legitimate payments to these payees. Mr. Mange looked at
    nine cheques, Alm had authority to sign cheques, and she and Mr. Mange agreed
    that she could use her signing authority to sign cheques to pay legitimate
    company obligations when both he and his wife were unavailable.  See
Boma
    v. CIBC
(1995), 120 D.L.R. (4
th
) 250 (B.C.C.A.), at paras.
    8-17. Mr. Manges evidence regarding the nine cheques he did consider and his
    belief regarding these cheques, taken together with Alms role and authority
    within the companies, leads to the reasonable inference that Mr. Mange, as the
    companys directing mind, intended only to make payments to his legitimate
    customers.

[75]

Here,
    by contrast, there is no evidence from which a corporate intent could be
    inferred. Neither Tevas directing mind nor any of its responsible officers
    scrutinized or even looked at any of the fraudulent cheques. Its sensible
    cheque approval policies were not followed. Instead, the only person within
    Tevas organization who considered the identity of the payees on the cheques
    and the legitimacy of the payments was an employee who had no signing
    authority, and no authority even to requisition cheques or approve CE payments.
    On these unchallenged facts, no inference of a corporate intent to pay
    legitimate creditors should be drawn. To hold otherwise would render the
    fictitious payee defence under s. 20(5) of the
BEA
meaningless.

[76]

The
    case law
.  In addition to
Boma
, Teva relies in particular on two
    cases, which it argues support its position: the earlier Supreme Court of
    Canada decision in
Royal Bank of Canada v. Concrete Column Clamps
,
supra
,
    and the decision of Lederman J. in
Metroland Printing, Publishing and
    Distribution Ltd. v. Canadian Imperial Bank of Commerce
, [2001] O.J. No.
    1695 (Sup. Ct.), which was upheld by this court at (2002), 158 O.A.C. 11, with
    leave to appeal to the Supreme Court of Canada dismissed (2003), 180 O.A.C. 400
    (Note). But both cases differ from the case before us in important ways.

[77]

In
Concrete Column
, a payroll clerk, whose duty was to prepare salary
    cheques, perpetrated a fraud by preparing numerous cheques payable either to
    unknown persons or former employees who were not owed any wages. The clerk had
    the cheques signed by an authorized signing officer of the company, who did not
    know the employees personally, but who mechanically placed his signature on the
    cheques. The clerk then took the cheques to the companys bank, and by forging
    endorsements, obtained the proceeds.

[78]

In
    the companys action against the bank, the trial judge held that the cheques
    payable to the unknown persons were payable to fictitious persons and the bank
    was not liable for negotiating them. But he also held that the bank was liable
    for the cheques payable to the former employees, even though they were not owed
    any money. The trial judges decision was upheld by the Quebec Court of Appeal
    and by a majority in the Supreme Court of Canada.

[79]

The
    important distinction in
Concrete Column
is that for the cheques
    payable to former employees, the majority in the Supreme Court implicitly held
    that the intent of the signing officer was the intent of the company or drawer,
    even though the signing officer did not appear to be a directing mind of the
    company. By contrast, in the case before us, the intent of the technicians who
    prepared the cheques and mechanically applied signatures of Tevas signing
    officers could not be equated with Tevas intent. Nor could any intent of the
    signing officers be equated with Tevas intent as they never applied their
    signatures to the cheques or even saw them.

[80]

In
Metroland Printing
, which the motion judge relied on, an accounts
    payable supervisor defrauded her employer by causing the companys computer
    system to produce cheques with legitimate signatures but for non-existing
    obligations. The supervisor was to enter into the companys computer system the
    names of truck drivers who supplied services to the company, but instead she
    reversed the order of the drivers first and last names. She then stole the
    cheques that had been computer-generated and negotiated them.

[81]

In
    an action against the collecting banks for conversion, Lederman J., relying on
Boma
,
    found that the payees were neither non-existing nor fictitious. In doing so he
    made an important finding on the intention of the drawer, which differentiates
    that case from the one before us. At paras. 42-43 of his reasons he said:

The next question which must then be answered is what was the
    intention of the drawer of the cheques. Here, the plaintiff honestly expected
    that the cheques in question were being created in respect of valid obligations
    and being paid out to real individuals, i.e. the plaintiffs truck drivers. The
    fact that the names were created in reverse does not necessarily mean that
    these individuals were non-existing or fictitious. Rather, as the names on the
    cheques were essentially the same names as those of real drivers employed by
    the plaintiff, it follows that the plaintiff would have honestly believed that
    these cheques satisfied actual obligations. As a result, the defence of
    fictitious payee would not apply.

It is true that in the case at bar, as in
Boma
, the
    cheques were made out to non-existing persons, and neither Latiff nor Alm ever
    intended that the payees indicated on the cheques receive the cheques.
    Nonetheless, the plaintiff Metroland, the real drawer of the cheque, did
    believe that the cheques were being made out for existing obligations to real
    persons. As a result, following
Boma
, these payees are not fictitious,
    and subsection 20(5) of the
BEA
would not apply.

[82]

That
    finding was supportable because the cheques were generated in accordance with
    the companys usual practice. Here, by contrast, McConachie circumvented Tevas
    practice and Teva allowed him to do so.

[83]

For
    these reasons, the case law Teva relies on is distinguishable and does not
    support its position.

[84]

In
    saying that in this case no corporate intent should be found, I make two final
    points. First, I do not suggest that every cheque issued by a company must be
    scrutinized and approved by the signatory of the cheque. Of course now many
    companies, like Teva, use pre-printed cheques and have the signature of their
    authorized officers stamped on or applied mechanically. In large companies it
    might be impractical to expect every individual cheque, no matter how small the
    amount, to be scrutinized by the companys directing mind. But if these
    companies do not put in place and follow a policy for approving the issuance of
    their cheques, and if they are then defrauded by an employee within their
    organization, their action for conversion risks being met with a successful
    fictitious payee defence.


[85]

Conversely,
    had Teva followed its own approval policies and mistakenly approved the
    fraudulent cheques obtained by McConachie, I would have inferred a corporate
    intent to pay real creditors for legitimate obligations. Had those in a
    responsible position reviewed and mistakenly approved even some of the cheques
    (as in the case of
Boma
), Teva would have had a basis to argue that its
    intent should be inferred. But that is not the evidence in this case.

[86]

Second,
    my conclusion does not depend on an allocation of fault. It is not Tevas
    negligence for which it is being found liable, but rather its lack of corporate
    knowledge and therefore the absence of any evidence from which one could
    reasonably infer it intended to pay real creditors of its business for
    legitimate debts.

[87]

I
    conclude that Teva has failed to show it intended the four payees who are or
    were its customers or the two non-existing payees to receive the proceeds of
    the cheques. All these payees were fictitious and the banks were entitled to
    treat all the cheques as payable to bearer. Tevas conversion action must
    therefore fail.

E.

Conclusion

[88]

I
    would hold that the payees PCE Pharmacare and Pharma Team System were
    non-existing and that, even if they were deemed real, all six payees were
    fictitious. Therefore, under s. 20(5) of the
Bills of Exchange Act
,
    the banks have a valid defence to Tevas conversion action. I would allow the
    banks appeals, set aside the judgment of the motion judge, and dismiss Tevas
    action. The banks are entitled to their costs of the appeals, which I would fix
    in the agreed amount of $30,000, inclusive of disbursements and applicable
    taxes for each bank.

Released: February 2, 2016 (J.L)

John Laskin J.A.

I agree. K.M. Weiler J.A.

I agree. E.A. Cronk J.A.





[1]
2002, S.O. 2002, c. 24, Sch. B



[2]
This modification has been criticized. See the persuasive dissenting reasons of
    LaForest J. in
Boma
;
Geva
,
supra
and Crawford and Falconbridge, Banking
    and Bills of Exchange (Toronto: Canada Law Book, 1986) s. 4902.3(i) at p. 1254.



[3]
I accept Tevas position that Pharma-Ed Advantage Inc. simply changed its name
    to Majestic Waters Enterprises Inc. in March of 2004 but Teva continued to do
    business with, and issued legitimate cheques payable to Pharm-Ed Advantage
    Inc. after the name change.



[4]
Unless the person who signed the cheque is also the companys directing mind.
    See
Fok Cheong Shing Investments Ltd. v.
    Bank of Nova Scotia
, [1982] 2 S.C.R. 488. This aspect of the majority
    judgment in
Boma
has also been
    criticized. Again, see
Geva
,
supra
and LaForest J.s dissenting
    reasons in
Boma
. The basis of the
    criticism is that the majoritys view does not take account of the law of
    agency or vicarious liability in tort. See also Laskin C.J.C.s dissent in
Royal Bank of Canada v. Concrete Column Clamps
    Ltd.
, [1977] 2 S.C.R. 456.



[5]
If McConachies intent governed, or, in
Boma
,
    if Alms intent governed, then the payees would have been named by pretence,
    and would be fictitious under Falconbridges third proposition. In his dissent
    in
Boma
, LaForest J. so held for
    the 38 cheques signed by Alm and payable to existing employees.



[6]
LaForest J. did in his dissent. He ultimately concluded that the banks were
    liable for converting only three cheques  those payable to existing employees
    and signed by Mr. Mange.


