In the recent decision of Raza Kayani LLP v. Toronto-Dominion Bank, the Ontario Court of Appeal addressed the scope of the "fictitious payee" defence available to banks and other financial institutions under Canada's Bills of Exchange Act. The decision has important implications for entities seeking to recover against financial institutions in cheque fraud cases.
The plaintiffs were a law firm and another individual lawyer who fell victim to essentially identical counterfeit cheque scams. The plaintiffs were each retained by a purported purchaser in connection with a commercial transaction involving a vendor known as Nithiyakalyaani Jewellers. As part of the closing of each transaction, the plaintiffs were provided with counterfeit certified cheques representing the purchase funds, which they deposited into their trust accounts. The plaintiffs then provided a trust cheque and a bank draft (the "instruments") payable to "Nithiyakalyaani Jewellers" to a representative of the purported vendor.
The fraudsters' use of the name "Nithiyakalyaani Jewellers" was a form of corporate identity theft. There had been a valid Ontario corporation, Nithiyakalyaani Jewellers Ltd., which had previously carried on business at the address used by the fraudsters, but which no longer did so as of the time of the fraud. One of the plaintiffs had even performed a Canada411 search on "Nithiyakalyaani Jewellers" to satisfy himself that the entity existed and was located at the address provided.
An individual, Shaik, had opened an account in the name of Nithiyakalyaani Jewellers with TD Bank. Shaik provided TD Bank with an Ontario Master Business Licence indicating that he had registered "Nithiyakalyaani Jewellers" as a sole proprietorship. The instruments were deposited into this account. By the time the plaintiffs learned that the certified cheques were counterfeit, the fraudsters and the money were long gone.
The plaintiffs alleged that TD Bank, as collecting bank, was liable in conversion because it credited the instruments to someone other than the intended payee. As conversion is a strict liability tort, TD Bank had no defence, other than the statutory defence afforded to collecting banks by subsection 20(5) of the Bills of Exchange Act. This provides that where a named payee is a fictitious or non-existing person, a cheque may be treated as payable to bearer (i.e., whoever presents the cheque to the collecting bank) and the bank will have no liability for negotiating it on the bearer's instructions.
The law in this area is not always easy to apply. If the payee is not the name of any real person known to the drawer, but is merely that of a creature of the imagination, the payee is non-existing, and is probably also fictitious. However, if the payee is the name of a real person, intended by the drawer to receive payment, the payee is neither fictitious nor non-existing, even if the drawer has been induced to draw the instrument by a fraudster's representation that there is a transaction in respect of which the payee is entitled to the sum mentioned in the instrument.
TD Bank contended that "Nithiyakalyaani Jewellers" was a fictitious and non-existing entity – a figment of the fraudsters' imaginations. As such, TD Bank validly negotiated the instruments and was not liable.
Relying on the Court of Appeal's 2012 decision in Rouge Valley Health System, the plaintiffs countered that a payee will not be found to be non-existing if the payee name is similar to the name of an actual person, such that the drawer of an instrument might plausibly maintain that it believed it was paying a real entity. This is sometimes referred to as the "plausibility doctrine."
The trial judge had held that the plaintiffs believed that an entity called Nithiyakalyaani Jewellers (with or without the "Ltd.") existed, and that it was located at the address where Nithiyakalyaani Jewellers Ltd. had previously operated. On this basis, she held that Nithiyakalyaani Jewellers Ltd. was the entity the plaintiffs intended to pay. Consequently, the payee was neither fictitious, nor non-existing, and TD Bank had no defence under subs. 20(5).
The Court of Appeal disagreed, holding that the plausibility doctrine still requires that the drawer of the instrument must have knowledge of the payee, i.e., the name must be similar to the name of an actual person or entity with which the drawer has previously done business. Here, the plaintiffs acknowledged that they had had no prior dealings with Nithiyakalyaani Jewellers Ltd., and that they had not turned their minds to the incorporation status of Nithiyakalyaani Jewellers when they drew the instruments.
Consequently, the Court of Appeal held that the plaintiffs could not establish that "Nithiyakalyaani Jewellers" was the name of a real entity, intended by the plaintiffs to receive payment. As such, subs. 20(5) applied to afford TD Bank with a defence to the conversion claim.
The Court of Appeal appears to have narrowly applied the plausibility doctrine in Raza Kayani. The Court's decision demonstrates the need for careful analysis of the factual context under which a drawer has been induced to prepare and part with a cheque. Where a drawer can adduce evidence demonstrating that the drawer thought it was paying an entity with which it some prior relationship, the drawer may be able to recover in conversion against the collecting bank.
Raza Kayani LLP v. Toronto-Dominion Bank, 2014 ONCA 862
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