Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce

Iacobucci J. -- In the main, this appeal raises issues concerning the tort of conversion with respect to cheques, the meaning of fictitious or non-existing persons in s. 20(5) of the Bills of Exchange Act , R.S.C., 1985, c. B-4 (the "Act "), and the defence of a holder in due course under s. 165(3) of the Act .

The appellants Boma Manufacturing Ltd. and Panabo Sales Ltd. are associated companies in the business of manufacturing and marketing small souvenir items. The only shareholders and officers of the companies are Boris Mange and Ursula Mange.

The appellants' bookkeeper Donna Alm committed fraud against the companies by way of issuing a long series of fraudulent cheques. These cheques were honoured by her bank, the respondent Canadian Imperial Bank of Commerce (“CIBC”) over the course of five years. The appellants brought an action in negligence, and in the alternative, conversion, against their bank, the Royal Bank of Canada, and against the respondent.

Donna Alm had been working for the appellants since 1967. Her responsibilities included preparing the payroll, handling accounts receivable and payable, preparing cheques and reconciling bank statements. She was never an officer, director or shareholder of the companies. She was, however, a duly authorized signing officer on the bank accounts maintained by the companies, along with Boris and Ursula Mange. Cheques drawn on these accounts required only one authorized signature. It was understood that Alm was to sign cheques only when the others were unavailable to do so, and only with respect to legitimate obligations of the companies.

Donna Alm's sole supervisor was Boris Mange. He would occasionally look at the cheque register and monthly bank statements. However, no routine, internal or independent audits were ever undertaken prior to discovery of the fraud.

Between 1982 and 1987, Donna Alm operated three bank accounts at a CIBC branch in North Vancouver, as follows:

(a)a chequing account in the name of Donna Alm's first husband, John R. Alm;

(b)a joint chequing account in the name of Donna and John R. Alm; after February 10, 1987, this account became a joint account for Donna Alm and her second husband Lou Hilford;

(c)a chequing account in the name of Donna Alm; this account also became joint with Lou Hilford after February 10, 1987.

Between December 8, 1982 and May 6, 1987, Alm used the appellants' pre-printed cheque forms to create some 155 cheques totalling $91,289.54, payable to a number of persons connected with the appellants, including Boris Mange, Ursula Mange, several employees, and one of the subcontractors, Van Sang Lam. The cheques payable to Lam were, with one exception, made to "J. Lam" or "J. R. Lam", the initials and the last name mimicking the name of Donna Alm's first husband. Alm signed 146 of the cheques on behalf of the appellants, and fraudulently obtained Boris Mange's signature on the other nine. Alm deposited all the cheques into one of her accounts at the CIBC.

The appellants had entered into a verification agreement with the Royal Bank in connection with their accounts, which excepted "any payments made on forged or unauthorized endorsements". The fraudulently negotiated cancelled cheques were sent to the appellants, and most of them were removed and destroyed by Alm. Her conduct was not discovered until May 11, 1987, through a new assistant bookkeeper. Alm was immediately dismissed.

In April 1988, written notice with respect to some $74,000 worth of cheques was given to the Royal Bank and to the CIBC. A complete listing of the fraudulent cheques was provided to the Royal Bank and the CIBC in May of 1989, following a police investigation.

The CIBC's policy with respect to a customer wishing to deposit a third party cheque to her account was to require that the cheque be endorsed by the payee. If there was no endorsement by the payee, the teller was to return the cheque to the customer. However, 107 of the cheques payable to "J. Lam" or "J. R. Lam" were accepted by the CIBC for deposit in one or the other of the three accounts without endorsement. The tellers apparently assumed that the payee was "J. Alm" or "J. R. Alm", Donna Alm’s first husband, and so accepted the cheques without endorsement, contrary to policy. Donna Alm was a longstanding customer of the CIBC branch in question, and was considered to be reliable. The tellers also assumed, given the large number of transactions involving the appellants' cheques signed by Donna Alm, that Donna Alm owned the appellant companies. Some of the Lam cheques, and all of the cheques payable to other third parties, bore the forged endorsement of the payee, the forgeries having been perpetrated by Donna Alm.

The appellants were successful at trial, and the Royal Bank was ordered to pay $5,390.12, and the CIBC was ordered to pay $91,289.54: (1993), 81 B.C.L.R. (2d) 197, [1993] 7 W.W.R. 368. CIBC appealed the decision before a five-member panel. A majority of the Court of Appeal allowed the appeal, reducing the judgment so as to reflect only the amount of the nine cheques bearing Boris Mange's signature: (1994), 99 B.C.L.R. (2d) 201, 120 D.L.R. (4th) 250, [1995] 2 W.W.R. 435, 52 B.C.A.C. 161, 86 W.A.C. 161, 19 B.L.R. (2d) 166. A minority of two would have also held the CIBC liable for the amount of the 103 cheques signed by Donna Alm that were not endorsed.

Bills of Exchange Act , R.S.C., 1985, c. B-4

2.In this Act ,

. . .

"bearer" means the person in possession of a bill or note that is payable to bearer;

. . .

"delivery" means transfer of possession, actual or constructive, from one person to another;

"endorsement" means an endorsement completed by delivery;

"holder" means the payee or endorsee of a bill or note who is in possession of it, or the bearer thereof;

20. . . .

(2)A negotiable bill may be payable either to order or to bearer.

(3) A bill is payable to bearer that is expressed to be so payable, or on which the only or last endorsement is an endorsement in blank.

(4) Where a bill is not payable to bearer, the payee must be named or otherwise indicated therein with reasonable certainty.

(5) Where the payee is a fictitious or non-existing person, the bill may be treated as payable to bearer.

39. (1) As between immediate parties and as regards a remote party, other than a holder in due course, the delivery of a bill

(a) in order to be effectual must be made either by or under the authority of the party drawing, accepting or endorsing, as the case may be. . . .

(2) Where the bill is in the hands of a holder in due course, a valid delivery of the bill by all parties prior to him, so as to make them liable to him, is conclusively presumed.

48. (1) Subject to this Act , where a signature on a bill is forged, or placed thereon without the authority of the person whose signature it purports to be, the forged or unauthorized signature is wholly inoperative, and no right to retain the bill or to give a discharge therefor or to enforce payment thereof against any party thereto can be acquired through or under that signature, unless the party against whom it is sought to retain or enforce payment of the bill is precluded from setting up the forgery or want of authority.

49. (1) Where a bill bearing a forged or an unauthorized endorsement is paid in good faith and in the ordinary course of business by or on behalf of the drawee or acceptor, the person by whom or on whose behalf the payment is made has the right to recover the amount paid from the person to whom it was paid or from any endorser who has endorsed the bill subsequent to the forged or unauthorized endorsement if notice of the endorsement being a forged or an unauthorized endorsement is given to each such subsequent endorser within the time and in the manner mentioned in this section.

55. (1) A holder in due course is a holder who has taken a bill, complete and regular on the face of it, under the following conditions, namely,

(a) that he became the holder of it before it was overdue and without notice that it had been previously dishonoured, if such was the fact; and

(b) that he took the bill in good faith and for value, and that at the time the bill was negotiated to him he had no notice of any defect in the title of the person who negotiated it.

59. (1) A bill is negotiated when it is transferred from one person to another in such a manner as to constitute the transferee the holder of the bill.

(2) A bill payable to bearer is negotiated by delivery.

(3) A bill payable to order is negotiated by the endorsement of the holder.

73. The rights and powers of the holder of a bill are as follows:

(a) he may sue on the bill in his own name;

(b) where he is a holder in due course, he holds the bill free from any defect of title of prior parties, as well as from mere personal defences available to prior parties among themselves, and may enforce payment against all parties liable on the bill;

(c) where his title is defective, if he negotiates the bill to a holder in due course, that holder obtains a good and complete title to the bill; and

(d) where his title is defective, if he obtains payment of the bill, the person who pays him in due course gets a valid discharge for the bill.

165. . . .

(3) Where a cheque is delivered to a bank for deposit to the credit of a person and the bank credits him with the amount of the cheque, the bank acquires all the rights and powers of a holder in due course of the cheque.

Macdonald J. first examined ss. 48(1) , 48(3) and 49 of the Bills of Exchange Act . He noted that all the cheques involved in this case had been properly issued, as they had all been signed either by Alm or by Mange, both of whom were authorized signing officers.

After considering the claim against the Royal Bank (not in issue in the instant appeal), Macdonald J. turned to the claims against the CIBC. The appellants claimed in negligence, conversion, and under the provisions of the Act itself. The negligence claim was dismissed, Macdonald J. finding that the CIBC owed no duty of care to the appellants. He also stated that the negligent failure of the appellants to detect Alm's fraudulent conduct far outweighed any negligent conduct on the respondent's part.

Macdonald J. found the respondent to be prima facie liable for conversion. Accordingly, he considered whether any of the following defences raised by the respondent could defeat the conversion claim: (a) the "worthless paper" defence; (b) the s. 165(3) defence; (c) the "fictitious payee" defence; and (d) the "inadequate notice" defence.

With respect to the worthless paper defence, the trial judge noted that where the signature of the maker of the cheque is forged, the cheques are "worthless", and incapable of conversion. However, in this case, Donna Alm and Boris Mange were authorized signing officers. Accordingly, the cheques in question were not worthless paper.

With respect to the second defence, s. 165(3), Macdonald J. concluded as follows (at p. 207):

Where the endorsement is forged, or where the collecting bank neglects to require an endorsement by the payee and its own customer, that result would completely negative the effect of s. 48 of the Act . I accept the response of the [appellants] that "delivery" in s. 165(3) in these circumstances requires the authority of the drawer under s. 39(1) (a) of the Act , and that Donna Alm had no such authority. I reject the submission of C.I.B.C. that her authority to sign cheques on behalf of the [appellants] carried with it the authority to deliver the same. In my view, any such authority to deliver is limited to cheques properly drawn payable to creditors of the [appellants].

With regard to those cheques with forged endorsements, there can be no argument that Donna Alm had any authority from the named payees.

I reject the defence to conversion based on s. 165(3).

As a third defence, the CIBC submitted that the cheques in question had been made out to "fictitious payees", within the meaning of s. 20(5) of the Act . Accordingly, the respondent would be able to treat the cheques as payable to bearer, rather than payable to order, and negotiation of the cheques would not require endorsement, but only delivery. Macdonald J. found a complete answer to this issue in Number 10 Management Ltd. v. Royal Bank of Canada (1976), 69 D.L.R. (3d) 99, at p. 102, wherein the Manitoba Court of Appeal found that a collecting bank guarantees the endorsement of all properly issued bills of exchange, and that where the bank pays out money on a forged endorsement, the bank will be liable. Macdonald J. found this approach to be consistent with the scheme of the Act . He stated that as the drawer of a cheque owes no duty to its own bank to verify monthly statements, in the absence of a verification agreement, then it certainly cannot owe any such duty to a collecting bank. He also noted that under s. 48(1) of the Act , a forged endorsement is wholly inoperative and gives no right either to retain the bill or enforce payment thereof. Macdonald J. agreed with the appellants that the fictitious payee defence is largely irrelevant to an action against a collecting bank for conversion, because in his view (at p. 208):

... a bearer cheque can be converted by a person not authorized to deliver it. Where the C.I.B.C. can be regarded as an agent for its dishonest customer to collect, as would appear to be the case under its practice set out in the Agreed Statement of Facts, it is responsible to the drawer for her conversion.

He concluded that, even if the cheques in question were payable to "fictitious persons" within the meaning of s. 20(5), and the CIBC was entitled to treat them as bearer cheques, the cheques were not "delivered" or "negotiated" and the CIBC did not acquire title to them. Accordingly, the CIBC had no right to obtain payment for the cheques from the appellants' bank accounts.

With respect to the last defence raised, Macdonald J. was of the view that notice had been provided within a reasonable time in this case.

The trial judge ultimately concluded that it was on the third ground advanced by the appellants that the claim should succeed, that is, under s. 49(1) of the Act . Under this section, where a cheque bearing a forged endorsement is paid, there is a right of recovery against any subsequent endorser. In his view, this section makes the CIBC "the guarantor of the validity of the payee’s endorsement on the cheques in issue here" (p. 208), as stated in Number 10 Management. As for the cheques that were not endorsed, the trial judge stated that they had not been delivered within the meaning of s. 59(2). He also noted that the situation between the plaintiff and a collecting bank should be different from the situation between the plaintiff and its own bank (at pp. 208-9):

The drawee bank is entitled to rely upon a person whom the drawer has authorized to conduct banking business on its behalf. There is no such connection between the drawer and the collecting bank, which is dependent upon its own customer for protection.

The system requires the collecting bank to verify the endorsement ahead of its own, and it must rely on its own customer in that regard by ensuring that sufficient funds remain in the customer's account until the cheque has cleared or count on that customer to cover any cheque not honoured by the drawee bank.

For these reasons, the CIBC's negligence in failing to obtain an endorsement on the "Lam" cheques was a bar to the CIBC's reliance upon any estoppel arising from the negligence of the appellants.

The trial judge ordered judgment against the Royal Bank for $5,390.12, and judgment against the CIBC for the whole of the $91,289.54 claimed.

Southin J.A. emphasized the following four facts, which in her view were critical to the resolution of the appeal: (1) the cheques involved were the drawers' cheques, rather than forgeries thereof; (2) Alm, the signatory of the 146 cheques, intended both to validate the cheques for the bank upon which they were drawn and to receive the proceeds; (3) Mange, the signatory of the nine cheques, intended to validate them for the Royal Bank, but did not intend that anyone other than the named payee should receive the proceeds; and (4), of the 155 cheques, 107 were collected by the CIBC, although they were payable to a third party and had not been endorsed.

Southin J.A. concluded that the crux of the action in conversion was that the recipient of the proceeds, Donna Alm, was not the person intended to receive the funds. In this regard, it was important to determine whether it was the company's or the signatory's intention that was of relevance. Southin J.A. concluded that Alm, an authorized signing agent, had the power to bind her principal, and accordingly, it was Alm's intention that should prevail. Consequently, Southin J.A. was of the view that the action in relation to the 146 cheques that Alm had signed could not succeed, as there had been no misdirection of these cheques; Alm intended all along that they be directed to herself. The action in conversion could only succeed with respect to the nine cheques that Mange had signed, as they had truly been diverted from their intended recipient.

With respect to the application of s. 20(5) to the nine cheques signed by Mange, Southin J.A. noted that whether someone is "fictitious or non-existing" within the meaning of s. 20(5) of the Act must "depend on the intention of the drawer of the cheque, not the intention of the person who fills in the cheque" (p. 217). The intention of the drawer in this case, that is, the appellants, was that the payees receive payment. Accordingly, the payees were not fictitious persons, and the cheques could not be treated as payable to bearer.

Southin J.A. rejected the s. 165(3) defence raised by the CIBC. She stated that she was not "persuaded that Parliament intended, by s. 165(3), to give a bank an independent title to a cheque payable to A and intended by the drawer to be paid to A which was deposited to the account of B without any endorsement by A or with an endorsement by A which is forged" (p. 218). Accordingly, Southin J.A. held that the appellants were entitled to recover from the CIBC on the nine cheques signed by Mange. The award given at trial was reduced to the amount of the nine cheques.

2. Hutcheon J.A. (dissenting in part)

Hutcheon J.A. agreed with Southin J.A.'s disposition, "save as to 103 of the 107 cheques on which there was no signature purporting to be an endorsement of the payee" (p. 220). In his view, the cheques accepted by the CIBC without any endorsement were patently irregular on their face. He stated that in order for the provisions of s. 20(5) to be of application, the person claiming to enforce payment of the cheque must be its lawful holder. A holder, pursuant to s. 2 of the Act , is "the payee or endorsee of a bill or note . . . or the bearer thereof", and a bearer is a "person in possession of a bill or note that is payable to bearer". He concluded as follows (at p. 222):