Bank on the Hook for Fraudulent Cheque Scheme


Those found guilty of involvement in fraudulent cheque schemes can be required under the Criminal Code to pay restitution to any one who has sustained loss as a result of the commission of the offence.  But an order in hand is a long way from the actual recuperation of the pecuniary loss incurred as a result of the offender’s criminal conduct, and large losses often remain unsatisfied.  

Thus, the answer to the question: which innocent party — the defrauded company/person (the drawer of the cheque) or the collecting banks (the drawee) — should bear the loss resulting from a fraudulent cheque scheme can have significant implications.

Banks will not be happy, as their involvement may subject them to legal liability under the tort of conversion.

As held in Teva Canada Ltd. v. TD Canada Trust, 2017 SCC 51, the tort of conversion involves the wrongful interference with the goods of another. Where a collecting bank pays out on a forged endorsement, it will be liable for conversion. Conversion is a strict liability tort. As a result, a bank may be held liable whether or not it was negligent. Any alleged contributory negligence on the part of the drawer is, as a result, irrelevant.

Teva Canada Ltd. v. TD Canada Trust, at paras. 3,4.

However, liability for conversion can be avoided where the payee is a fictitious [FN1] or non-existing person [FN2].

Section. 20(5) of the Bills of Exchange Act, R.S.C., 1985, c. B-4.

According to the majority of the Supreme Court of Canada, that legal rule is additionally supported by sound public policy: banks are well-situated to handle the losses arising from fraudulent cheques, allowing those losses to be distributed among users, rather than by potentially bankrupting individuals or small businesses which are the victims of fraud [FN3].


 [FN1] A payee is fictitious when the drawer does not intend to pay the payee.  Intent to pay may be presumed or attributed.
[FN2] A payee is non-existing if the payee is neither a legitimate payee of the drawer nor a payee who could reasonably be mistaken for a legitimate payee of the drawer.
[FN3] However, the minority justices took the view that it is contrary to public policy to make bank customers (to whom the costs of fraud are indirectly passed) the de facto insurers against cheque fraud.  As the drawer company (and not the drawee bank) is in the best position to implement procedures to deter fraud, the risk of loss should rest with it (at paras. 132, 133).


Stuart O’Connell, O’Connell Law Group, www.leadersinlaw.ca

Comments

Post a Comment

Popular posts from this blog

Warrantless Drug Searches (Section 11(7) of the CDSA)

Were there exigent circumstances? Did the exigent circumstances render it impracticable to obtain a warrant? Section 11(7)   of the Controlled Drugs and Substances Act states: (7) A peace officer may exercise any of the powers described in subsection (1), (5) or (6) without a warrant if the conditions for obtaining a warrant exist but by reason of exigent circumstances it would be impracticable to obtain one. Subsection (1)   of s. 11 empowers a peace officer to conduct a warranted search of a place for, inter alia , a controlled substance and to seize it. Section 11(7), therefore, empowers a peace officer to conduct a warrantless search for a controlled substance, so long as conditions for obtaining a warrant existed and exigent circumstances made it impracticable for the officer to obtain a warrant. For a warrantless entry into a residence to satisfy section 11(7) , the Crown must show that the entry was compelled by urgency, calling for immediate police action to prese
Read more

Arrested at Home: Feeney Warrants

At common law, where the police had reasonable grounds to arrest a suspect and reasonable grounds to believe a suspect was in a private dwelling-house, they were entitled to enter and arrest the suspect, with or without an arrest warrant, if proper announcement was made. See R. v. Landry , 1986 CanLII 48 (SCC), [1986] 1 S.C.R. 145 , and Eccles v. Bourque et al. , 1974 CanLII 191 (SCC), [1975] 2 S.C.R. 739 ). However, in the 1997 decision of R. v. Feeney , the Supreme Court of Canada ruled that the common law violated s. 8 of the Canadian Charter of Rights and Freedoms and that generally, warrantless arrests within private dwellings were prohibited.  Absent exigent circumstances or cases of hot pursuit, an entry warrant would be required to enter a dwelling house to make an arrest.    R. v. Feeney , 1997 CanLII 342 (SCC), at paras. 44-51.  Parliament responded by enacting sections 529-529.5 of the Criminal Code , which, among other things, creates two distinct authorizatio
Read more

Night time Execution of a Search Warrant

Warrants Authorized under the Criminal Code The Criminal Code requires that if a warrant is to be executed at night (after 9:00 p.m., see Criminal Code , s. 2), the night time execution must be justified under the terms of s. 488 of the Criminal Code .    Section 488 of the Criminal Code is not made applicable to warrants and telewarrants issued under the authority of section 11 of the CDSA, which may be executed “at any time”.  R. v. Shivrattan, 2017 ONCA 23; R. v. Saunders , 2003 NLCA 63, 181 C.C.C. (3d) 268, at paras. 27, 31-32, affirmed on other grounds, 2004 SCC 70, [2004] 3 S.C.R. 505; R. v. Dueck , 2005 BCCA 448, 200 C.C.C. (3d) 378, at paras. 17-21; and R. v. Newell , [2007] O.J. No. 2348, at para. 47 (Ont. S.C.). Warrants Authorized under the Controlled Drugs and Substances Act Unlike warrants issued under the Criminal Code , there is no statutory presumption that warrants issued under s. 11 of the CDSA are to be executed before 9:00 p.m. unless night t
Read more