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Conversion

. Teva Canada Ltd. v. TD Canada Trust

In Teva Canada Ltd. v. TD Canada Trust (SCC, 2017) 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.
. Teva Canada Limited v. Bank of Montreal

In Teva Canada Limited v. Bank of Montreal (Ont CA, 2016) the Court of Appeal made the following useful observations on the tort of conversion, here in the context of fraudulent cheques and the Bills of Exchange Act:
(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 owner’s right of possession. In Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce, 1996 CanLII 149 (SCC), [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 drawer’s negligence cannot provide a bank with a defence to a conversion action, and a court cannot therefore apportion liability on the basis of a drawer’s 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 Teva’s 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 (CanLII), at paras. 19 and 20:
In Boma, the court recognized that there is a tension between the law’s need for certainty and equity’s 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.
. Kayani v. Toronto-Dominion Bank

In Kayani v. Toronto-Dominion Bank (Ont CA, 2014) the Court of Appeal set out the elements of the tort of conversion. The context was a lawsuit against a bank by solicitors who were subject of a fraud scheme whereby they were duped into writing trust cheques to the fraudster, cheques which the bank then honoured. The primary issue was whether the bank could avail itself of a statutory Bills of Exchange Act defence:
[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 owner’s right of possession”: Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce, 1996 CanLII 149 (SCC), [1996] 3 S.C.R. 727, at para. 31; 373409 Alberta Ltd. (Receiver of) v. Bank of Montreal, 2002 SCC 81 (CanLII), [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 owner’s 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 another’s chattel in manner authorized by the rightful owner is consistent with the right of possession, and does not qualify as wrongful interference.
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