Forged endorsement and cheques

Yesterday’s Court of Appeal decision in Kholsa v. Korea Exchange Bank of Canada , 2009 ONCA 467 is important for counsel who may become involved, without fault, in a fraudulent mortgage transactions.

 

The respondent is a lawyer who acted for the purchaser in a real estate transaction in which a fraudster purported to sell to the purchaser the property owned by Paul Reviczky.  On closing, the respondent delivered to the fraudster a cheque drawn on his trust account at the Royal Bank of Canada and payable to Paul Reviczky.  The fraudster, after forging the endorsement of Paul Reviczky on the cheque, deposited it in the appellant bank where the fraudster had opened an account in the name of Aron Paul Reviczky.  The fraudster then withdrew the funds from the appellant bank. 

 

When the fraud came to light, the respondent sued the appellant bank to recover the amount of the cheque.  He was granted summary judgment and the appellant bank appealed, arguing that the respondent, as a lawyer involved in the fraudulent transaction, was, with due diligence, in a better position to detect and prevent the fraud than the appellant bank, even though the respondent knew nothing of the fraud and even if he was not negligent.  The Court of Appeal made it clear that argument would not work:

 

 

[5]               First, this case is governed by Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce (1996), 140 D.L.R. (4^th) 463.  In that case, the Supreme Court of Canada made clear that where a bank receives a cheque on which the payee’s endorsement has been forged and then collects it and pays out the proceeds to someone not rightfully entitled to possession of it, the collecting bank converts the cheque and is liable in tort to the drawer.  That is exactly what happened in this case.

 

[6]               Moreover, at paragraphs 34 and 35 of Boma, the court makes clear that the tort of conversion is one of strict liability.  Thus, neither contributory negligence by the drawer nor his or her relative ability to discover the fraud are relevant. This reflects the policy of certainty that underpins the relevant provisions of the Bills of Exchange Act, R.S.C. 1985, c.B-4 (the Act).

 

[7]               Nor can the appellant come within the protection of s. 165(3) of the Act, which protects holders in due course.  Here the appellant received the cheque from the fraudster, who was not entitled to it.  The cheque was therefore not “delivered” as required by the section and the appellant therefore did not become a holder in due course.  See Boma, supra, at paragraphs 75 and 81.

 

[8]               The appellant’s argument that it is entitled to take advantage of the “fictitious payee” protection provided by s. 20(5) of the Act must also fail.  Here the respondent clearly intended Paul Reviczky, as the true owner of the property, to be the payee.  The payee was therefore not fictitious within the meaning of that section.  See Boma, supra, at paragraph 46.

 

[9]               Finally, the defence of preclusion is not available to the appellant. Preclusion provides a very narrow defence that a bank can set up against its customer.  See Nesbitt Burns Inc. v. Canada Trust Co. Mortgage (2000), 131 O.A.C. 85 ( C.A. ) at paragraph 28.  Here the respondent was not the appellant’s customer.