Companies victimized by cheque fraud from within their own ranks
often turn to their banks for recovery. A bank that pays out a
cheque to a recipient unintended by the cheque's drawer can be
liable to the drawer for conversion. Conversion is a strict
liability tort with few defences. The Ontario Court of Appeal,
however, recently reviewed one defence that is available to banks
in circumstances of fraud under the Bills of Exchange Act
Rouge Valley Health System v TD Canada
Trust1 concerned a cheque fraud scheme perpetrated
by a mid-level employee of Rouge Valley Health System ("Rouge
Valley"), an acute care community hospital. With the aid of an
outside accomplice, the employee approved payment of over 70 fake
invoices rendered by a made-up entity called Scarborough-York
Mobile Rehabilitation which bore the logo, but not the name, of a
community agency familiar to Rouge Valley. The rogue employee made
cheques out to S.M.R. His accomplice deposited the cheques into a
bank account at TD Canada Trust ("TD") in the name of SMR
and Associates, the accomplice's sole proprietorship. Rouge
Valley lost close to $700,000.00 through the scheme.
Summary judgment decision
Rouge Valley sued TD for conversion. The bank moved for summary
judgment, arguing that section 20(5) of the Act offered a complete
defence. Section 20(5) of the Act provides that, "where the
payee is a fictitious or non-existing person, the bill may be
treated as payable to the bearer." A cheque payable to bearer
can be honoured on delivery. The motions judge reviewed the history
of the tort of conversion of a cheque in Canada, and the defence
under the Act. He concluded that "S.M.R." was both
fictitious and non-existing such that section 20(5) of the Act
applied. The motions judge dismissed Rouge Valley's claim.
The Court of Appeal decision
On appeal, Rouge Valley argued that the motions judge erred in
finding that S.M.R. was non-existing for the purposes of the Act.
In the Supreme Court of Canada's decision in Boma
Manufacturing Ltd v Canadian Imperial Bank of
Commerce,2 Mr. Justice Iacobucci ruled that where
the named payee on a cheque was a non-existent person, but the
drawer honestly thought the cheque was being made out to a real
person known to him or her, the payee could be considered
"plausibly real" and the bank would therefore be liable
in conversion if it allowed some other person to negotiate the
cheque. Rouge Valley argued that since Scarborough – York
Mobile Rehabilitation and S.M.R. were plausibly real entities (the
fake invoices did, after all, exhibit a logo of an agency familiar
to Rouge Valley), the section 20(5) defence did not apply and the
bank was liable for conversion.
The Court of Appeal held that the notion of plausibility did not
apply in this case. It was limited to cases where the payee named
on the cheque was factually non-existent, but had a name similar to
the name of an actual person with whom the drawer had done
In this case, Rouge Valley had never conducted business with an
entity that had a similar name to S.M.R. or Scarborough –
York Mobile Rehabilitation. While the invoices bore the logo of a
real agency, that agency did not have a business relationship with
Rouge Valley. The Court of Appeal further noted that the only
person at Rouge Valley who actually considered the payments to
S.M.R. at all, was the person perpetrating the fraud. No one at
Rouge Valley could be said to honestly belief that the cheques were
being paid to satisfy a real debt, to a real person. The appeal was
A cautionary tale
There are many cases referred to in the Court of Appeal's
decision in Rouge Valley. Those cases demonstrate that
where a cheque fraud is perpetrated on an innocent business and an
innocent bank, the bank is often left holding the bag. The
particular facts in Rouge Valley allowed the bank to rely
on a statutory defence. However, a bank cannot possibly know the
names of all potential creditors of all of the drawers of all of
the cheques a bank negotiates, and therefore, whether the name on a
cheque could be plausibly real. The availability of section 20(5)
of the Act as a defence, therefore, really comes down to luck of
the draw, after the fact. Practically speaking, the only way for a
bank to insure it avoids liability in these situations may be to
insist that cheques it negotiates bear a payee's name that
matches identically with the name on the account into which the
funds are being deposited.
1 2012 ONCA 17.
2  3 SCR 727.
The foregoing provides only an overview. Readers are
cautioned against making any decisions based on this material
alone. Rather, a qualified lawyer should be consulted.
It's not often that our little blog intersects with such titanic struggles as the U.S. presidential race – and by using the term "titanic" I certainly don't mean to suggest that anything disastrous is in the future.
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