



COURT OF APPEAL FOR ONTARIO

CITATION: Kayani v. Toronto-Dominion Bank, 2014 ONCA 862

DATE: 20141203

DOCKET: C58265, C58266

Hoy A.C.J.O., Epstein and Hourigan JJ.A.

BETWEEN

Raza Kayani LLP

Plaintiff/Respondent

and

The
    Toronto-Dominion Bank
, Amaras Gem and Jewel

and
    Nithiyakalyaani Jewellers

Defendants/
Appellant

AND

BETWEEN

Jack Sheldon Zwicker

Plaintiff/Respondent

and

The Toronto-Dominion
    Bank

Defendant/Appellant

Martin Greenglass, for the appellant

Martin Sclisizzi, for the respondents

Heard:  November 5, 2014

On appeal from the judgment of Justice Susan Greer of the
    Superior Court of Justice, dated December 27, 2013, with reasons reported at
    2013 ONSC 7967.

Hourigan J.A.:

Introduction

[1]

The
    appellant, The Toronto Dominion Bank appeals the judgment of the trial judge
    awarding damages for conversion to the respondents, Raza Kayani LLP and Jack
    Sheldon Zwicker.

[2]

The respondents
    commenced separate actions against the Bank. However, given the similar facts
    and legal issues between the two cases, the actions were heard together at
    trial and the appeals were also heard together in this court.

[3]

For
    the following reasons, I conclude that the trial

judge erred in law in finding that the Bank was
    liable in conversion to the respondents. I would allow the appeal, except as it
    relates to the counterclaim, and set aside the judgment below on the main
    action.

Facts

[4]

Both
    actions arose out of a fraud perpetrated against the respondents, who are lawyers. 
    The scheme worked as follows.

[5]

The
    respondents were each retained to act on a rush commercial transaction on
    behalf of a purchaser and a finance company that was providing funding for the
    transaction. In each transaction, the vendor was identified as Nithiyakalyaani
    Jewellers, with an address of 1487 Gerrard Street East in Toronto.

[6]

On
    the eve of the closing, the finance company provided each respondent with a
    counterfeit certified cheque to be deposited into their respective trust
    accounts for the purpose of funding the transaction. The finance company
    directed the respondents in writing to issue a trust cheque or obtain a bank
    draft made payable to Nithiyakalyaani Jewellers for the amount of the
    transaction.

[7]

Mr.
    Zwicker and Kayani respectively released a trust cheque and a bank draft (the
    instruments) payable to Nithiyakalyaani Jewellers to their purchaser client,
    on the understanding that the client would hand deliver it to the vendor as
    payment for the goods being purchased.

[8]

The
    instruments were deposited into an account the Bank maintained under the name
    Nithiyakalyaani Jewellers. The account had been opened by an individual named
    Alaudeen Shaik, who provided the Bank with a Master Business Licence issued by
    the Province of Ontario, indicating that he had registered, as a sole
    proprietorship, the name Nithiyakalyaani Jewellers.

[9]

In
    essence, the fraud consisted of inducing the respondents to issue a trust
    cheque or obtain a bank draft on the strength of a counterfeit cheque deposited
    into their trust accounts. As part of the scheme, the fraudsters had
    appropriated the descriptive portion of the name and address of a corporation
    that had previously carried on business but was no longer doing so at the date of
    the fraud. That company was Nithiyakalyaani Jewellers Ltd., as opposed to the
    named payee, Nithiyakalyaani Jewellers.

[10]

The respondents sued the
    Bank in negligence and conversion. At trial, the case proceeded only on the
    conversion allegation. The Bank counterclaimed for monies held in accounts
    maintained by its co-defendants, Nithiyakalyaani Jewellers and Amaras Gem and
    Jewel.

Decision of the Trial Judge

[11]

The trial judge
    was satisfied that the Bank committed the tort of conversion. She noted that
    the tort is one of strict liability and that it was no defence that the Bank exercised
    the appropriate degree of care in negotiating the instruments or that the
    respondents may have been negligent in the manner in which they handled the
    transactions.

[12]

The focus of the trial
    judges analysis was whether the Bank could avail itself of the defence in s.
    20(5) of the
Bills
of Exchange Act
, R.S.C. 1985, c. B-4, (the
    Act) which provides that where the payee is a fictitious or non-existing
    person, the bill may be treated as payable to the bearer.  Pursuant to s.
    20(2) of the Act, where an instrument is payable to the bearer, a bank may
    validly negotiate the instrument delivered to the bank, and the bank has no
    liability for its negotiation.

[13]

The trial judge found
    that the payee was not fictitious as both Mr. Zwicker and Kayani made their instruments
    payable to Nithiyakalyaani Jewellers, which they believed was an existing
    entity, and which was an existing entity at the time the instruments were
    negotiated.

[14]

The trial judge went
    on to rely upon
Rouge Valley Health System v. TD Canada Trust
, 2012
    ONCA 17, 108 O.R. (3d) 241, for the proposition that a payee will not be found
    to be non-existing if the payee name is similar to the name of an actual person,
    such that the drawer of an instrument might plausibly maintain that it believed
    it was paying a real entity.

[15]

The trial judge found
    that Mr. Zwicker and Kayani honestly believed that the instruments were being
    made out for an existing obligation to a real company, despite the fact that
    the name of the payee was not precisely accurate as it did not include the abbreviation
    Ltd.. They were fraudulently induced to believe these were real transactions.
    The trial judge concluded, therefore, that the defence in s. 20(5) of the Act
    was not available to TD, making it liable for damages in conversion.

Positions of the Parties

[16]

The appellant submits
    that the trial judge made five significant errors.

[17]

First, the trial judge
    erred in failing to find that the payee was non-existing pursuant to s. 20(5)
    of the Act. The appellant submits that the payee must be non-existing because
    the respondents had no knowledge of Nithiyakalyaani Jewellers Ltd. at the time
    the instruments were created.

[18]

Second, the trial
    judge erred in failing to find that a bank is entitled to assume the drawer of
    an instrument intended that the named payee receive the proceeds of the instrument.
    The Bank cannot be faulted for effecting payment to an entity that is a licensed
    business and whose name matches the name of the payee.

[19]

Third, the trial judge
    erred in failing to find that the payee was fictitious pursuant to s. 20(5) of
    the Act. Since the respondent lawyers followed their clients directions, the
    client (i.e. the fraudster) was the true maker of the instruments. Accordingly,
    it is the clients intention  that the instruments be paid to Nithiyakalyaani
    Jewellers  that governs.

[20]

Fourth, the trial
    judge erred in failing to find that an essential element of the tort of
    conversion was not established, namely, that the Bank dealt with the
    plaintiffs chattel in a manner inconsistent with the respondents right of
    possession. Here, the Bank did as the respondents asked and, therefore, acted
    in a manner consistent with the respondents right of possession.

[21]

Fifth, in her judgment
    on the counterclaim, which was made on consent, the trial judge improperly
    allocated the damages as between Mr. Zwicker and Kayani.

[22]

The respondents take
    the position that the trial judge made no error in concluding that the elements
    of the tort of conversion had been established and that the payee was neither
    non-existing nor fictitious.

[23]

The respondents submit
    that the Bank, as the collecting financial institution, is liable for
    conversion if it credited the instruments to someone other than the intended
    payee. Therefore, the issue is who the respondents, as the drawers of the
    instruments, intended to pay.

[24]

According to the respondents,
    the trial judge made clear findings of fact on this issue, which are subject to
    review on the standard of palpable and overriding error. In particular, she
    found that the respondents believed an entity called Nithiyakalyaani Jewellers (with
    or without Ltd.) existed at the address where Nithiyakalyaani Jewellers Ltd.
    had previously operated. On this basis, the respondents submit that it can be
    inferred that Nithiyakalyaani Jewellers Ltd. was the entity the respondents
    intended to pay.

[25]

Further, the
    respondents submit that the trial judge correctly concluded that the payee was
    not fictitious, as both Mr. Zwicker and Kayani believed the payee was an
    existing entity.

[26]

As for the
    counterclaim, the respondents submit that the trial judge simply made a technical
    error that is of no consequence, and therefore, the appeal of the judgment with
    respect to the counterclaim should be dismissed.

Analysis

(i)      Legal Principles

[27]

The tort of conversion
    involves a wrongful interference with the goods of another, such as taking,
    using or destroying these goods in a manner inconsistent with the owners right
    of possession:
Boma Manufacturing Ltd. v. Canadian Imperial Bank of
    Commerce
, [1996] 3 S.C.R. 727, at para. 31;
373409 Alberta Ltd.
    (Receiver of) v. Bank of Montreal
, 2002 SCC 81, [2002] 4 S.C.R. 312, at
    para. 8.

[28]

An authorized interference
    is not wrongful and, therefore, cannot amount to conversion. As Major J. stated
    in
373409 Alberta Ltd.
, at para. 9,

An owners right of possession includes the right to authorize
    others to deal with his or her chattel in any manner specified. As a result,
    dealing with anothers chattel in manner authorized by the rightful owner is
    consistent with the right of possession, and does not qualify as wrongful
    interference.

[29]

Section 20(5) of the
    Act protects a bank from fraud committed by a third party on the drawer of an
    instrument. Pursuant to that section, an instrument payable to a payee that is
    either non-existing or fictitious may be treated as payable to the bearer and
    not to order. The bearer is deemed to be the rightful payee and, consequently,
    the bank is not liable for negotiating the instrument:
Rouge Valley
, at
    para. 10.

[30]

Given that the tort is
    one of strict liability, banks sued in conversion frequently rely upon the defence
    available in s. 20(5). Not surprisingly, the critical issue in such cases is
    whether a payee is non-existing or fictitious. Justice Laskin summarized the
    case law on this point in
Rouge Valley
,

at paras. 22-23
:

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. Falconbridge's
Banking and Bills of Exchange
,
    6th ed. (Toronto: Canada Law Book, 1956), at pp. 468-69. 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.

Two important principles structure these
    propositions:

* Whether the payee is non-existing is a simple question of
    fact not depending on anyone's 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.

[31]

Justice Laskin then explained,
    at para. 26, that Iacobucci J.s reasons in
Boma
imported the notion of
    plausibility as a modification to or gloss on the four propositions. He
    elaborated on the plausibility doctrine, at para. 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 drawer's 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.


(ii)    Non-existing
    Payee

[32]

The trial judge
    concluded, at para. 72, that in my view this case comes surely within
    Falconbridges fourth proposition.  Both Mr. Zwicker and Kayani saw their
    transactions as legitimate.  I have found that the tort of conversion
    applies.

[33]

In my view, the trial
    judge erred in failing to find that the payee of the instruments was a
    non-existing person and thus concluding that this case comes within Falconbridges
    fourth proposition. I reach this conclusion for the following reasons.

[34]

With respect, the
    trial judge did not conduct a proper analysis of the respondents knowledge of Nithiyakalyaani
    Jewellers Ltd. at the time the instruments were drawn.

[35]

In an agreed statement
    of facts filed at trial, both Mr. Zwicker and Junaid Kayani, the principal of
    Kayani, admitted that, prior to the matters in issue, they had no dealings with
    and no knowledge of Nithiyakalyaani Jewellers Ltd. or Nithiyakalyaani Jewellers.

[36]

Mr. Zwicker conducted
    a Canada 411 search prior to closing but all he knew as a result of that search
    was that there was a business with that name at the address, whether incorporated
    or not. He did not keep a copy of the search.  According to Mr. Zwicker, he
    did not direct his mind to whether it was a limited company and, at the time of
    preparing the instrument, it was not significant to him whether the payee was
    incorporated.

[37]

Mr. Kayani candidly
    testified that, Im not going to say that my cheque was intended to be paid to
    Nithiyakalyaani Limited. My cheque was clearly payable to Nithiyakalyaani
    Jewellers and upon instruction of the financing corporation. He went on to
    state that, at the time of drawing the instrument, he did not know whether Nithiyakalyaani
    Jewellers was a sole proprietorship or an incorporated entity.

[38]

Mr. Kayani also
    testified that he relied upon the invoice provided to him by the finance
    company to support his assertion that his bank draft should have gone to Nithiyakalyaani
    Jewellers Ltd. However, the name on that invoice was Nithiyakalyaani Jewellers
    and not Nithiyakalyaani Jewellers Ltd.

[39]

Based on this
    evidence, the respondents could not possibly establish that the payee is the
    name of a real person, intended by the drawer to receive payment, as required
    to bring themselves within Falconbridges fourth proposition.

[40]

As Laskin C.J. noted in
Royal Bank of Canada v.
Concrete Column Clamps (1961) Ltd.
, [1977]
    2 S.C.R. 456, at p. 472, in Falconbridges fourth proposition, the drawer of
    the instrument must have knowledge of the payee, at least in the sense of the
    awareness of the payee and who he is.

[41]

There is no evidence
    that the respondents knew of the existence of Nithiyakalyaani Jewellers Ltd. at
    the time the instruments were drafted. At its highest, the evidence establishes
    that the respondents knew of an entity they believed operated at the address
    listed on the invoice and in the Canada 411 directory. Neither respondent
    testified that they had actual knowledge of Nithiyakalyaani Jewellers Ltd.
    until after the fraud was discovered.

[42]

The respondents submit
    that the intended payee was Nithiyakalyaani Jewellers Ltd. However, this was
    not the name of the payee on the respondents instruments. The trial judge
    appears to have relied on the plausibility doctrine to find that the payee was
    not non-existing, although she makes no explicit statement to that effect. Under
    that doctrine, an incorrectly named payee will not be found to be non-existing if
    it could plausibly be identified by the drawer of the instrument as being a
    real creditor.

[43]

However, resort to the
    plausibility doctrine does not negate the requirement that the drawer must have
    knowledge of the payee. Justice Laskin described the knowledge requirement in
Rouge
    Valley
, at para. 34:

[T]he gloss on Falconbridge based
    on the notion of plausibility is limited to cases where the payee named on the
    cheque is factually non-existing, 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. [Emphasis added.]

[44]

Here, the respondents
    had no previous business relationship with Nithiyakalyaani Jewellers Ltd. Therefore,
    it cannot be said that when they prepared the instruments naming Nithiyakalyaani
    Jewellers as the payee, they plausibly believed they were paying Nithiyakalyaani
    Jewellers Ltd. How could they when they did not even know that company existed
    until after the fraud was discovered?

[45]

This situation is
    factually distinct from that in
Boma
, where the drawer had an existing
    business relationship with a party with a name similar to the payee and had
    actually considered the name of the payee when the instruments were drawn.

[46]

The respondents have
    not pointed to a single case where the plausibility doctrine or Falconbridges
    fourth proposition has been found to apply where the drawer of the instrument discovered
    the existence of the proper payee only after the fraud had been disclosed.

[47]

For these reasons, I
    conclude that the trial judge erred in finding that this case fits within Falconbridges
    fourth proposition. The payee is not the name of any real person known to the
    respondents at the time they drew the instruments. The payee is, therefore, non-existing.
    Accordingly, this case fits within Falconbridges first proposition and the
    defence in s. 20(5) of the Act is available to the Bank.

[48]

Given my finding that Nithiyakalyaani
    Jewellers is a non-existing entity, it is unnecessary to consider the other
    arguments raised by the Bank regarding the trial judges reasons on the main
    action. It is also unnecessary to consider the Banks counterclaim, as it is only
    relevant in the event the main appeal was dismissed.

Disposition

[49]

I would allow the
    appeal on the main action, set aside the judgment and dismiss the actions
    against the Bank.

[50]

The parties agreed
    that, if the appeal is allowed, the Bank is entitled to $18,749.31 for the
    costs of the appeal and to costs of the trial in the same amount fixed by the
    trial judge in favour of the respondents: $47,500 for each action.  I would fix
    costs in accordance with this agreement.

Released: December 3, 2014 AH

C.
    William Hourigan J.A.

I
    agree Alexandra Hoy A.C.J.O.

I
    agree Gloria Epstein J.A.


