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Execution - Tracing. Sase Aggregate Ltd. v. Langdon
In Sase Aggregate Ltd. v. Langdon (Ont CA, 2023) the Court of Appeal considered the law of 'tracing', and the effect of a failure to trace funds fully:[56] As the point of departure, I note that the application judge’s statement about the nature of tracing is correct. In the Supreme Court’s decision in B.M.P., the court describes tracing as follows, at para. 75:Tracing is an identification process. The common law rule is that the claimant must demonstrate that the assets being sought in the hands of the recipient are either the very assets in which the claimant asserts a proprietary right or a substitute for them. ....
[67] With respect to the allegation that Ms. Langdon benefited when the funds were deposited into Account 613 and then transferred into Joint Account 82, the evidence was that Ms. Langdon had nothing to do with Account 613, and rarely used Joint Account 82. Even if she could, in theory, have benefited from the deposit of monies into Joint Account 82, the evidence was that the monies were transferred from that account to an unknown destination. Notably, there was no evidence linking her to such transfers. Further, in view of the claims Sase was making and the remedy it was seeking – a constructive trust over the proceeds of sale of the Wagg Rd. Property – the benefit had to relate to the property itself. That is, Sase was required to show that its money had ended up in the property. And any benefit or enrichment was required to be a tangible benefit: “without a benefit which has ‘enriched’ the defendant and which can be restored to the donor in specie or by money, no recovery lies for unjust enrichment”: Peel (Regional Municipality) v. Canada; Peel (Regional Municipality v. Ontario, 1992 CanLII 21 (SCC), [1992] 3 S.C.R. 762, at p. 789.
[68] This is also an answer to Sase’s second submission. While no doubt it is concerning to Sase that Ms. Langdon’s financial circumstances seem to have greatly improved after the fraud commenced, she provided evidence that was accepted by the application judge that there were legitimate sources of money available to her and that she used those other sources to acquire and renovate the Wagg Rd. Property. Whether Ms. Langdon benefited from her husband’s fraud was an issue to be determined in the context of Sase’s claims and the remedy it was seeking. Specifically, the question before the application judge was not whether Ms. Langdon benefited in some way from the fraud but whether Sase had demonstrated that she had benefited in that Sase funds were used to buy and renovate the Wagg Rd. Property. Given gaps in the evidence, it is still an open question where the stolen funds went. . Citadel General Assurance Co. v. Lloyds Bank Canada
In Citadel General Assurance Co. v. Lloyds Bank Canada (SCC, 1997) the Supreme Court of Canada considered 'tracing assets':57 I make one additional point regarding the nature of the Bank’s liability in the present case. As already established, recipient liability is restitution-based. The imposition of liability as a constructive trustee on the basis of “knowing receipt” is a restitutionary remedy and should not be confused with the right to trace assets at common law or in equity. The principles relating to tracing at law and in equity were thus set out by the English Court of Appeal in Agip (Africa) Ltd., supra, at pp. 463-64 and 466:Tracing at law does not depend upon the establishment of an initial fiduciary relationship. Liability depends upon receipt by the defendant of the plaintiff’s money and the extent of the liability depends on the amount received. Since liability depends upon receipt the fact that a recipient has not retained the asset is irrelevant. For the same reason dishonesty or lack of inquiry on the part of the recipient are irrelevant. Identification in the defendant’s hands of the plaintiff’s asset is, however, necessary. It must be shown that the money received by the defendant was the money of the plaintiff. Further, the very limited common law remedies make it difficult to follow at law into mixed funds.
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Both common law and equity accepted the right of the true owner to trace his property into the hands of others while it was in an identifiable form. The common law treated property as identified if it had not been mixed with other property. Equity, on the other hand, will follow money into a mixed fund and charge the fund. 58 In my view, a distinction should be made between the imposition of liability in “knowing receipt” cases and the availability of tracing orders at common law and in equity. Liability at common law is strict, flowing from the fact of receipt. Liability in “knowing receipt” cases is not strict; it depends not only on the fact of enrichment (i.e. receipt of trust property) but also on the unjust nature of that enrichment (i.e. the stranger’s knowledge of the breach of trust). A tracing order at common law, unlike a restitutionary remedy, is only available in respect of funds which have not lost their identity by becoming part of a mixed fund. Further, the imposition of liability as a constructive trustee is wider than a tracing order in equity. The former is not limited to the defence of purchaser without notice and “does not depend upon the recipient still having the property or its traceable proceeds”; see In re Montagu’s Settlement Trusts, supra, at p. 276.
59 Despite these distinctions, there appears to be a common thread running through both “knowing receipt” and tracing cases. That is, constructive knowledge will suffice as the basis for imposing liability on the recipient of misdirected trust funds. Notwithstanding this, it is neither necessary nor desirable to confuse the traditional rules of tracing with the restitutionary principles now applicable to “knowing receipt” cases. This does not mean, however, that a restitutionary remedy and a tracing order are mutually exclusive. Where more than one remedy is available on the facts, the plaintiff should be able to choose the one that is most advantageous. In the present case, the plaintiff did not seek a tracing order. It is therefore unnecessary for me to decide whether such a remedy would have been available on the facts of the present appeal, and I have not explored the issue. . B.M.P. Global Distribution Inc. v. Bank of Nova Scotia
In B.M.P. Global Distribution Inc. v. Bank of Nova Scotia (SCC, 2009) the Supreme Court of Canada considers principles applicable to the tracing of funds:4.4 Right to Claim the Amounts in BMP’s Account and to Trace Funds in the Related Accounts
[75] Tracing is an identification process. The common law rule is that the claimant must demonstrate that the assets being sought in the hands of the recipient are either the very assets in which the claimant asserts a proprietary right or a substitute for them.
[76] In the instant case, RBC’s funds were first transferred through the clearing system to BNS in its capacity as collecting bank — and thus as agent — for BMP. BNS then made the entry in BMP’s account to reflect the receipt of the funds from RBC. Finally, BMP made withdrawals from its account by way of transfers or cheques for deposit in the related accounts and, in the case of the transactions involving the $300,000 cheque, back to its own account. What is at issue here is a non-specific fund.
[77] Under ordinary circumstances, an agent cannot be sued in the principal’s stead. However, as stated by Lord Goff and Jones in The Law of Restitution, at p. 847, citing British American Continental Bank v. British Bank for Foreign Trade, [1926] 1 K.B. 328 (C.A.),where the agent has paid the money over to his principal but has received it back again so that his position is as it was before he paid it over, he must make restitution. Save for the $100 added to the bank draft, there is no issue of identification of the money in BMP’s account. The unchallenged evidence is that it comes from the funds received from RBC. BNS, as agent, received the funds from RBC and, after crediting them to its principal, BMP, received them back under the banking contract. Having received the funds back, BNS had to make restitution to RBC. Therefore, BNS has a valid defence against BMP (see Bavins, Junr. & Sims v. London and South Western Bank, Ltd., [1900] 1 Q.B. 270 (C.A.)). BNS’s status with respect to the funds in the related accounts is different. BNS was not acting as agent of the holders of the related accounts. A review of the rules on tracing will therefore be helpful.
[78] It has been accepted that the English case of Agip (Africa) Ltd. v. Jackson, [1992] 4 All E.R. 451 (C.A.) (aff’g [1992] 4 All E.R. 385 (Ch.)), has been accepted as setting out rules with respect to tracing of money: Citadel General Assurance Co. v. Lloyds Bank Canada, 1997 CanLII 334 (SCC), [1997] 3 S.C.R. 805.
[79] According to the Court of Appeal in Agip, tracing at law is permitted where a person has received money rightfully claimed by the claimant. Liability is based on mere receipt, and the extent of liability will depend on the amount received (Agip (C.A.), at pp. 463‑64; Agip (Ch.), at p. 399; Banque Belge pour l’Étranger v. Hambrouck, [1921] 1 K.B. 321 (C.A.)). It is sometimes said that funds cannot be traced to bank accounts at common law. This view overstates the rule and fails to take into account the fact that, as an evidentiary process, tracing is possible if identification is possible (see D. R. Klinck, “‘Two Distincts, Division None’: Tracing Money into (and out of) Mixed Accounts” (1988), 2 B.F.L.R. 147, at p. 148, and L. D. Smith, The Law of Tracing (1997), at pp. 183 ff.). Indeed, no statement that tracing is impossible can be found in the case that is most often cited in support of the theory that funds cannot be traced to bank accounts at common law. If Lord Ellenborough C.J.’s comment in Taylor v. Plumer (1815), 3 M. & S. 562, 34 E.R. 721, is read in its entirety, it is clear that tracing is impossible only when the means of ascertainment fail:It makes no difference in reason or law into what other form, different from the original, the change may have been made, whether it be into that of promissory notes for the security of the money which was produced by the sale of the goods of the principal, as in Scott v. Surman, Willes, 400, or into other merchandize, as in Whitecomb v. Jacob, Salk. 160, for the product of or substitute for the original thing still follows the nature of the thing itself, as long as it can be ascertained to be such, and the right only ceases when the means of ascertainment fail, which is the case when the subject is turned into money, and mixed and confounded in a general mass of the same description. The difficulty which arises in such a case is a difficulty of fact and not of law, and the dictum that money has no ear‑mark must be understood in the same way; i.e. as predicated only of an undivided and undistinguishable mass of current money. [Emphasis added; p. 726.] [80] That it is possible at common law to trace money to bank accounts is illustrated by the cases of Hambrouck and Agip. In Hambrouck, a man named Hambrouck had fraudulently procured cheques drawn on the Banque Belge pour l’Étranger. He endorsed the cheques and deposited them in his account at Farrow’s Bank. The cheques were cleared through the banking system and credited to Hambrouck’s account. “In substance no other funds were paid into the account than the proceeds of these forged cheques” (Atkin L.J., at p. 331 (emphasis added)). Hambrouck then paid money out of that bank account to a Ms. Spanoghe, with whom he was living. A deposit was made in Ms. Spanoghe’s account at the London Joint City and Midland Bank and, according to Atkin L.J., “[n]o other sums were at any time placed to that deposit account” (p. 332). On the basis of those facts, Bankes and Atkin L.JJ. were both of the opinion that the funds could be traced at common law to Ms. Spanoghe’s account (pp. 328 and 335-36). Two points drawn from that case are important for our purposes: neither the fact that a cheque is cleared through the banking system before being deposited in the payee’s account nor the fact that the payee has mixed the funds with other funds is sufficient to bar recovery at common law.
[81] To fully understand the parallel between Hambrouck and Agip, it is important to follow the sequence of events in the latter case. In Agip, the Banque du Sud (“BdS”) in Tunis received a payment order of $518,822.92 in favour of Baker Oil. BdS instructed Citibank to debit its account and credit an account at Lloyds Bank. Lloyds Bank credited Baker Oil’s account before receiving the funds from Citibank, thereby assuming the delivery risk. The next day, pursuant to instructions from accountants Jackson & Co., who controlled Baker Oil on behalf of their clients, Lloyds Bank transferred the funds to Jackson & Co.’s account. At the time the credit was entered in Baker Oil’s account, there was no other money in the account; however, the balance of Jackson & Co.’s account was US$7,911.80 before the transfer. The Court of Appeal agreed with the trial judge that the mixing of the funds with the amount already in Jackson & Co.’s account was of no consequence and did not preclude tracing (pp. 465‑66). In first instance, Millett J., as he then was, had stated in Agip, at p. 399:A fortiori it can be no defence for [Jackson, a partner of Jackson & Co.] to show that he has so mixed it with his own money that he cannot tell whether he still has it or not. Mixing by the defendant himself must, therefore, be distinguished from mixing by a prior recipient. The former is irrelevant, but the latter will destroy the claim for it will prevent proof that the money received by the defendant was the money paid by the plaintiff. [Emphasis added.] [82] In Agip, the time when the funds the plaintiff sought to trace ceased to be identifiable was when Lloyds Bank made the transfer to Jackson & Co.’s account before receiving the funds from Citibank: even though Lloyds Bank later recouped them, the funds used to make the payment belonged to Lloyds, and BdS’s funds had to be traced through the clearing system. On that issue, the Court of Appeal also agreed with Millett J. and quoted him (at p. 466):Unless Lloyds Bank’s correspondent bank in New York was also Citibank, this involves tracing the money [BdS’s funds] through the accounts of Citibank and Lloyd’s Bank’s correspondent bank with the Federal Reserve Bank, where it must have been mixed with other money. The money with which Lloyds Bank was reimbursed cannot therefore, without recourse to equity, be identified as being that of the Banque du Sud. [83] What distinguishes Agip from Hambrouck is that Lloyds Bank, having assumed the delivery risk, paid with its own money. This broke the link between the funds it paid and the funds it received from Citibank. If passage through the clearing system could on its own eliminate any possibility of identifying the money, tracing at common law would long ago have become totally obsolete and the dictum of the Court of Appeal in Agip that mixing in Jackson & Co.’s account was of no consequence would be of little use. I cannot accept that the result in Hambrouck can be explained by an oversight that occurred because the interruption caused by passage through the clearing system was not argued: P. J. Millett, “Tracing the Proceeds of Fraud” (1991), 107 L.Q. Rev. 71, at p. 74, fn. 7. When, as in Agip, the chain is broken by one of the intervening parties paying from its own funds, identification of the claimant’s funds is no longer possible. However, the clearing system should be a neutral factor: P. Birks, “Overview: Tracing, Claiming and Defences”, in P. Birks, ed., Laundering and Tracing (2003), 289, at pp. 302-5. Indeed, I prefer to assess the traceability of the asset after the clearing process and not see that process as a systematic break in the chain of possession of the funds. Just as the collecting bank receives the funds as the payee’s agent, the clearing system is only a payment process. Paying through the clearing system amounts to no more than channelling the funds.
[84] In Hambrouck, the funds received through the clearing system by Farrow’s Bank, acting as the collecting bank, from the Banque Belge pour l’Étranger had not lost their “identity”. In the same way, the funds in the case at bar have not lost theirs. BNS, acting as the collecting bank, received the funds from RBC through the clearing system and credited them to BMP. The asset traced by RBC is simply its own. It is not the chose in action or the account holders’s personal claim against BNS: R. M. Goode, “The Right to Trace and its Impact in Commercial Transactions — I” (1976), 92 L.Q. Rev. 360, at p. 380. The transactions that followed were all conducted by the recipient and persons related to it who received the money from BMP. Moreover, the fact that some of the accounts had prior balances is not a bar to recovery. Not only were the balances not substantial — only one of the accounts contained over $100 — but the withdrawals by the holders significantly exceeded the balances. It is also worth noting that BNS was both the drawee and the payees’ banker in all the transactions at issue, namely the transfers and payments from BMP’s account and to the related accounts. There was no hiatus like the one in Agip, and the holders of the related accounts were not third parties who had given consideration or changed their positions.
[85] In my view, Taylor, Agip and Hambrouck show that it is possible at common law to trace funds into bank accounts if it is possible to identify the funds. (See also Goode, at pp. 378, 390-91 and 395.) According to Agip and Hambrouck, mixing by the recipient is not a bar to recovery. I do not see those cases as exceptions to a common law rule against tracing in mixed funds. Rather, I accept the view advanced by Lord Millett in Foskett v. McKeown, [2001] 1 A.C. 102 (H.L.), at p. 132, that the rules for tracing money are the same as those for tracing into physical mixtures. This view is also supported by Professor L. D. Smith in his treatise The Law of Tracing, at pp. 74 and 194 ff. For our purposes, there is no need to review all the rules applicable to physical mixtures (Lawrie v. Rathbun (1876), 38 U.C.Q.B. 255; Carter v. Long & Bisby (1896), 1896 CanLII 18 (SCC), 26 S.C.R. 430, at pp. 434-35; J. Ulph, “Retaining Proprietary Rights at Common Law Through Mixtures and Changes”, [2001] L.M.C.L.Q. 449). Suffice it to say that, as between innocent contributors, contributions are followed first to amounts they have withdrawn. In the case at bar, since the withdrawals of all those who received funds far exceeded their contributions, RBC can trace its own contribution to the balances remaining in the accounts.
[86] As Atkin L.J. mentioned in Hambrouck, the question to be asked is whether the money deposited in those accounts was “the product of, or substitute for, the original thing” (p. 335). In the instant case, the identification process is quite simple. I will not go back over the issue of the funds in BMP’s account: there was no relevant movement of funds. Regarding the funds in the related accounts when BNS acted on BMP’s instructions and transferred money to the accounts of 636651 B.C. Ltd., Backman (chequing and savings accounts) and Hashka, the transferred funds were clearly related to the forged cheque BNS had mistakenly credited to BMP’s account. The moneys used for the transfers came from BMP’s account. The link is made with the funds RBC had used to pay the forged cheque.
[87] One issue that was raised is whether certification of the cheques would be a bar to tracing. When a cheque is certified, the certification does not affect the nature of the funds. In discussing the effect of certification in Rattray Publications, at p. 505, Finlayson J.A. stated that certification of a cheque, like acceptance, is irrevocable; see also Centrac Inc. v. Canadian Imperial Bank of Commerce (1994), 1994 CanLII 932 (ON CA), 21 O.R. (3d) 161 (C.A.). As a matter of law, to hold that certification is irrevocable would contribute to the acceptability of certified cheques as substitutes for cash and would also reflect the prevailing perception in the business world that it is irrevocable. However, BNS’s intention in the instant case was not to revoke the certification. In fact, the certified cheques had already been honoured. As Maddaugh and McCamus point out:The fact that the drawee bank cannot resist payment on a cheque it has certified does not necessarily insulate the payee, however, from a subsequent restitutionary claim by the paying bank. [p. 10-57] [88] In Rattray Publications, Finlayson J.A. stated that “where a drawee bank honours a cheque notwithstanding a valid countermand and the effect is to satisfy a just debt, the bank may [debit the customer’s account and] successfully defend an action by [the] customer/drawer for reimbursement” (p. 509). Further, where a payment does not satisfy a just debt, the bank “may have an action in restitution against the holder of a certified cheque” (ibid.). Indeed, if a bank has certified a cheque, it cannot deny the authenticity of the drawer’s signature and the sufficiency of the funds. However, certification does not affect the traceability of the underlying funds.
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