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Bank liability
When a bank deposits a cheque into
the account of an entity that is not
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Crime
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payee is determined to be fictitious or
non-existing, the bank will not be
held liable for conversion, and the
victims of the fraud will not be entitled to recover from the bank. (See:
Bills of Exchange Act, s.20(5).)
Fortunately for victims of fraud, if
the payee is the name of a real person
who was intended by the drawer to
receive payment, the payee is neither
fictitious nor non-existing and the
bank will be liable. This principle
applies even if the drawer has been
induced to draw the bill by the fraud
of some other person who has made
false representations about the payees
entitlement to the amount of the bill.
Kayani case
The fictitious or non-existing person
defence to conversion was recently
considered by the Ontario Court of
Appeal in Raza Kayani LLP v.
Toronto-Dominion Bank (Kayani).
The Court heard two separate but
related actions concerning instruments (cheques and a bank draft)
made payable to Nithiyakalyaani
Jewellers.
Unfortunately for the plaintiffs,
Nithiyakalyaani Jewellers was a registered sole proprietorship that had
been created by a fraudster to be
intentionally similar to Nithiyakalyaani Jewellers Ltd., an entirely different incorporated company that was
owned by strangers to the transactions at issue.
Everyone agreed that the plaintiffs
were victims of fraud. The issue was
whether the collecting bank should
bear the financial consequences of
that fraud. The bank denied liability,
claiming that Nithiyakalyaani Jewellers was a fictitious or non-existing
person.
Trial judgment
The trial judge found the defendant
bank liable for conversion, holding
that the bank could not rely on the fictitious or non-existing person exceptions. The Court found that whether a
Appeal decision
The Court of Appeal disagreed. It
held that the payee was not the name
of any real person known to the
drawers at the time they drew the
instruments. The payee was, therefore, non-existing and the bank was
not liable.
Knowledge review
A determination of whether a cheque
is payable to a non-existing person
requires a review of the payor s
knowledge of the payee at the time
the instruments were drawn. In the
Kayani case, the plaintiffs admitted
that, at the time the instruments were
drawn, they had no dealings with, no
prior business relationship with and
no knowledge of the payee (with or
without a Ltd. suffix). The plaintiffs did not know whether the payee
was a sole proprietorship or an incorporated entity.
Actual knowledge
To succeed against the non-existing
payee exception, the payor must have
knowledge of the payee, at least in
the sense of awareness of the payee
and who he or she is. The victims in
Kayani did not have actual knowledge of the intended payee at the
time the funds were deposited.
Rather, they simply named the
payee as they were directed by the
fraudster. The Court held that the
victims could not have believed they
were paying a company of which
they had no actual knowledge.
In the course of completing the
transaction, one of the victims had
Significance
Cheque fraud cases involving determinations of liability are highly dependent on the facts and circumstances of
the specific case. However, the Court
of Appeals decision in Kayani indicates that victims may benefit from
taking certain precautions, including
obtaining actual knowledge about their
intended cheque payees.
Companies should be diligent in
determining the nature of entities
named as payees on the cheques that
they issue. Investigation is warranted
before cheques are made payable to
entities with whom a payor has not
previously dealt, even if based on
directions and representations from a
trusted third party.
It is unlikely to be sufficient to
simply know the name of a payee: if
the payee is a company, a payor should
clarify the precise type of business
enterprise; check the address; and
obtain verification documents and
registered corporate searches.
If the payee is an individual, the
payor should verify the individuals
full name. Finally, the payor should
consider retaining records of any
searches conducted (or other measures taken) to substantiate the identities of payees, in case of litigation.
REFERENCES: Raza Kayani LLP v.
Toronto-Dominion Bank, 2014
ONCA 862, 2014 CarswellOnt 16810
(Ont. C.A.), at para 11; Raza Kayani
LLP v. The Toronto-Dominion Bank,
2013 ONSC 7967, 2013 CarswellOnt
18666 (Ont. S.C.J.), at paras. 70, 37,
41, 44; Bills of Exchange Act, RSC
1985, c B-4, s.20(5); Rouge Valley
Health System v. TD Canada Trust,
2012 ONCA 17, 2012 CarswellOnt
255 (Ont. C.A.), at paras. 22-23.
A Carswell Publication
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