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Torts - Conversion - Cheque Fraud

Teva Canada Ltd. v. TD Canada Trust (SCC, 2017)

In this case the Supreme Court of Canada engages in an interesting and extended historical review of the allocation of liability between innocent parties to a third party's cheque fraud scheme, focussing on the tort of conversion and the role of the federal Bills of Exchange Act:
[3] The tort of conversion involves the wrongful interference with the goods of another. Where a collecting bank pays out on a forged endorsement, it will be liable for conversion. Conversion is a strict liability tort. As a result, a bank may be held liable whether or not it was negligent. Any alleged contributory negligence on the part of the drawer is, as a result, also irrelevant.

[4] Liability for conversion can be avoided if a bank can bring itself within s. 20(5) of the Act, which states:
Fictitious payee

(5) Where the payee is a fictitious or non-existing person, the bill may be treated as payable to bearer.
[5] This Court explained the implications of s. 20(5) in Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce, 1996 CanLII 149 (SCC), [1996] 3 S.C.R. 727, as follows:
[Section 20(5)] provides that, where the payee is a fictitious or non-existing person, the bill may be treated as payable to bearer. The significance of a cheque that is payable to bearer, rather than to order, is that it can be negotiated by simple “delivery” to the bank; endorsement is not required. The presence or absence of a legitimate or forged endorsement is irrelevant to a bearer cheque. A bank becomes the lawful holder of a bearer cheque simply through delivery. By contrast, in order for a bank to become the lawful holder of a cheque that is payable to order, not only must the cheque be delivered to effect negotiation, but the cheque must also be endorsed. If the cheques in question were payable to fictitious persons, and could accordingly be treated as bearer cheques, the bank would become a “holder in due course” pursuant to s. 73 of the Act despite the forged endorsements and the missing endorsements; to repeat, negotiation of a bearer cheque is achieved simply by delivery. [para. 45]
[6] In other words, when a bank transfers funds to an “improper” recipient, it is liable under the strict liability tort of conversion unless a statutory defence succeeds. And the statutory defence in s. 20(5) operates by rendering the impugned cheque “payable to bearer”, such that mere delivery — without endorsement — effects negotiation. The cheque would otherwise be “payable to order”, require an endorsement, and, without such endorsement, be wrongly converted by the bank.

[7] This Court has also, in multiple decisions, provided what is, in essence, a two-step framework which outlines what a bank must prove to demonstrate that a payee is fictitious or non-existing. Step one — the subjective fictitious payee inquiry — asks whether the drawer intends to pay the payee. If the bank proves that the drawer lacked such intent, then the payee is fictitious, the analysis ends and the drawer is liable. If the bank does not prove that the drawer lacked such intent, then the payee is not fictitious, and the analysis proceeds to step two. Step two — the objective non-existing payee inquiry — asks if the payee is either (1) a legitimate payee of the drawer; or (2) a payee who could reasonably be mistaken for a legitimate payee of the drawer. If neither of these is satisfied, then the payee does not exist, and the drawer is liable. If either is satisfied, then the payee exists, and the bank is liable.

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