Who is liable when an employee misappropriates company funds? Although auditors are regularly sued for this, they are not the only target.
In Airmax Industries v. Banque de Montréal1, the Quebec Superior Court held that the Bank, far from being protected from liability by its contract, had been grossly negligent. The Bank was therefore required to indemnify a customer whose accounting clerk had misappropriated corporate funds for her personal use.
Over a period of 3-4 years, the employee had directed the Bank to use 54 cheques payable to Airmax to pay off corporate credit card charges, rather than simply depositing them into Airmax's bank account. Those credit card charges were in fact not for legitimate corporate expenses, but for the employee's personal expenses.
By the time the suit by the company against the Bank went to trial, the employee had been found criminally responsible and had declared personal bankruptcy.
The cheques in question were clearly stamped for deposit to the credit of the company's account only. Nevertheless, the employee persuaded the teller to ignore that indication and apply the cheques to the credit card account, despite the fact that the employee in question was not one of the three signing officers who were entitled to draw cheques. In fact, the bank branch at which the fraud occurred was not where the company had its principal account – that branch was only used for deposits, not for payments (unless there were exceptional circumstances, such as dealing with bounced cheques or errors). The company did not detect the problem because the same employee charged with depositing incoming cheques booked equivalent sales credits, which she was charged with doing when goods were returned. As long as she kept the amounts and frequency of her thefts relatively low and stable, there was nothing alarming in a regular 3-4% credit note level. It was assumed that when she misappropriated a larger cheque, she simply set up a number of smaller credits to account for the missing money.
The credit cards had been issued to various Airmax employees, but were seldom used. The fraudster intercepted the credit card statements when they arrived and paid the balance off promptly. The judge noted that the type of expenses (food, clothing, hairdresser) could not reasonably have been for company expenses
The fraudulent employee came to the branch 3-4 times a week for a year prior to committing the fraud, thus creating a belief by the teller that she was an owner or the controller of the company who was entitled to transact as she wished. The teller admitted that when she was first asked to apply a cheque payable to Airmax to a credit card balance, she hesitated, since she knew that such a transaction required the signature of a signing officer, but she was persuaded by the fraudster's explanation that they were all out of town and that the credit card had to be paid. The teller testified that she was, after all, paying a company debt with a cheque payable to the company. She did this another 50 times without seeking further confirmation.
The Court found it difficult to accept that the teller could repeat this procedure, which she never did for any other customer, and which was contrary to the bank's internal rules on deposits. Relying on a case involving a forged endorsement, the Court concluded that the Bank had been negligent because its employee had not verified the authority of the Airmax employee, having known that she was not a signing officer, that the branch in question was only to be used for deposits and that she was breaching the Bank's own rules. Having done so 50 times elevated this to gross negligence.
The Bank asserted, unsuccessfully, that the claim was time barred, on the theory that Airmax should have discovered the fraud earlier. The Court rejected this argument, holding that the Bank's own negligence contributed to the company's inability to detect the fraud.
Similarly, the "verification of account" sections of the Bank's contract were of no assistance. Those clauses provided that the client has 30 days from receipt of its statement to quarrel with the amounts charged to the account. As these clauses are written and imposed by the Bank, they are to be read restrictively. As the scheme used did not involve cheques drawn on or charges to the account, there was nothing for the company to question. In any event, as the Bank had committed gross negligence, the exoneration clause would not apply.
The Court held that Airmax was not particularly diligent, but that the Bank's negligence was far greater. In fact, had the Bank not been negligent, the company's internal controls would have been sufficient to prevent the fraud. While the company's failure to follow up on its credit cards provided the opportunity, the Bank's negligence was the cause of the loss.
Footnotes
1 2012 QCCS 4466. No leave for appeal was filed.
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