COURT OF APPEAL FOR ONTARIO

CITATION: Roth Estate v. Juschka, 2016 ONCA 92

DATE: 20160202

DOCKET: C57506

Feldman, Hourigan and Benotto JJ.A.

BETWEEN

Marlene Florence Roth, Estate Trustee of the
    Estate of Harold Peter Roth, Deceased and Marlene Roth

Plaintiffs

and

Roy Juschka, Cynthia
    Juschka and Roth-Juschka Holdings Ltd.

Defendants (Appellants)

and

Allan D. Brock

Third Party (Respondent)

Thomas J. Corbett, for the appellants

James D. Virtue and Dagmara Wozniak, for the respondent

Heard: June 4, 2015

On appeal from the judgment of Justice C. Stephen Glithero
    of the Superior Court of Justice, dated July 15, 2013, with reasons reported at
    2013 ONSC 4437.

Feldman J.A.:

[1]

The respondent is a lawyer who acted for both sides in a family share
    purchase transaction that included the provision of a promissory note. In the
    action against them on the note, the appellants brought a third party claim
    against the lawyer for negligence and breach of fiduciary duty. At trial, the
    action on the note was successful, while the third party claim was dismissed.

[2]

Following that judgment, the
    parties to the main action settled for a lesser sum. This appeal is solely
    against the dismissal of the third party claim. The appellants seek
    indemnification for the amount they paid to settle the judgment on the note.
    For the reasons that follow, I would allow the appeal and hold the respondent lawyer
    liable to the appellants for negligence and breach of fiduciary duty.

FACTS

[3]

Harold Roth is a central figure in the events underpinning this
    litigation. As he died in 2008, the evidence at trial of what transpired came
    from his wife, his daughter, his son-in-law, the respondent, and two
    accountants who had involvement at the relevant time.

[4]

Mr. Roth had experience in the grocery store business. He wanted to take
    advantage of an opportunity to take over a grocery store in Corunna, Ontario
    with his daughter and son-in-law, Cynthia and Roy Juschka, who lived with him and
    his wife, Marlene Roth. Mr. Roth wanted to acquire the Corunna grocery store
    and operate it with his wife, daughter and son-in-law, while teaching them the
    business.

[5]

Mr. Roth proposed that he and the Juschkas each put in $10,000 of
    equity, and he would loan an additional $40,000. This would allow the family to
    make a down payment on the store in Corunna. The Roths and Juschkas proceeded
    to acquire the store in 1985. Their initial arrangement was that the profits
    from the store operation would be split 51% to the Roths and 49% to the
    Juschkas. Later that year, they incorporated Roth-Juschka Holdings Ltd. Harold
    Roth received 51% of the shares and Roy and Cynthia Juschka received 49%. There
    is nothing in the record to suggest that the parties ever had a shareholders
    agreement to address issues such as a buy-sell arrangement.

[6]

The respondent acted for all four parties on the incorporation. While
    the respondent did other legal work for the Roths and the Juschkas over the
    years, he had an ongoing relationship with Harold Roth, who would consult him
    from time to time as his lawyer.

[7]

The store became very successful. Initially, Harold Roth ran the store,
    teaching Roy and Cynthia Juschka. Marlene Roth worked there full-time for the
    first two years only, and thereafter only sporadically. Cynthia Juschka began
    to work only part-time at some point, in order to stay home to look after their
    children. She came back full-time after 1993. By 1988, Harold Roth had begun to
    cut back his involvement.

[8]

In 1992, Harold Roth was advised that he needed surgery for stage-four
    bladder cancer. That diagnosis caused him to take steps to deal with succession
    planning for the disposition of his shares in the company as well as to provide
    ongoing income for himself and his wife for the rest of their lives. He wanted
    his shares to go to Roy and Cynthia Juschka, but he was concerned about
    interference from other family members if the shares were left as part of his
    estate.

[9]

Mr. Roth approached his accountants to obtain tax and accounting advice
    about how to accomplish his wishes. He also sought advice from his lawyer, the
    respondent Allan Brock. Mr. Brock was first approached by Mr. Roth in the late
    fall of 1991 about amending his will to leave his shares to the Juschkas and
    not to his other daughter. His concern arose from difficulties in the
    relationship between Mrs. Roth and Mrs. Juschka and between himself and his
    other daughter. Mr. Brock recalled advising about family law obligations that Mr.
    Roth had to Mrs. Roth and her entitlement to support.

[10]

Mr.
    Brock did not hear from Mr. Roth again until February 1992 when Mr. Roth
    visited his office. Mr. Roth brought a letter from his accountant that  proposed
    a deferred share purchase structure. The deal involved transfer of the Roths
    shares to the Juschkas upon payment of a promissory note in the amount of the
    fair market value of the Roths 51% interest. It assumed a market value of
    $570,000 for the shares, based on a 1989 valuation of the company. In the event
    that the Roths died before the note was paid in full, it would be forgiven in
    their wills.

[11]

Later
    in February, there was a meeting in Mr. Brocks office with Harold Roth, the
    two accountants and Roy Juschka, who arrived late and stood behind the others. The
    plan had evolved again. Mr. Brock said that he and one of the accountants
    explained to Mr. Juschka what had transpired before he arrived. The trial judge
    described the evidence as follows:

The new arrangement had now become a share transfer to the
    Juschkas, but an income stream would continue to the Roths.  The figure was to
    be $408,000.00 for Mr. Roths shares, which Mr. Roth thought to be low, but
    wasnt concerned in a major way because he was to continue to receive his
    income, and the note was to be forgiven by will. Mr. Brock testified that the
    promissory note was to justify to Revenue Canada that there was a reasonable
    price being paid for the shares and it was in Mr. Roths interest to have the
    value of the shares at a low figure so as to attract less tax.  The note was to
    be forgiven when the Roths died.  His evidence is that at the meeting it was
    discussed that the purpose of the new arrangement was to freeze the value of
    the estate, to provide an income stream to the Roths and to get the shares into
    the hands of the Juschkas.

[12]

Following
    that meeting, there was continued work on the numbers for the transaction. It
    wasnt until early summer that year that Mr. Roth instructed Mr. Brock that he
    was proceeding with the new arrangement and asked him to draft the documents to
    implement it. Mr. Brock prepared draft documents, which he sent to both Mr.
    Roth and Mr. Juschka.

[13]

The
    final documents consisted of the share-purchase agreement between the Roths as
    vendors and the Juschkas as purchasers; two consulting agreements, one for
    Harold Roth and one for Marlene Roth; and a promissory note from the Juschkas
    to Harold Roth. Mr. Brock testified that these four documents were
    inextricably linked together.

[14]

The
    consulting agreements provided for ongoing consulting fees to be paid to each
    of the Roths by the company, reflecting a 50% entitlement to the profits of the
    store (25% each), with the entitlement reducing somewhat over time. The
    consulting agreements were guaranteed by the Juschkas. By that time neither of
    the Roths was working in or providing any service to the business. The
    consulting agreements were a way to have the Roths continue to receive their
    income stream from the store.

[15]

The
    promissory note read as follows:

The Payors, Roy Juschka and Cynthia Juschka promise to pay to
    the Payee, Harold Roth, the sum of $408,000.00 on demand, in forty years being
    April 30, 2032 bearing interest at the preferred lending rate from time to time
    of the Royal Bank of Canada, calculated annually, not in advance on the
    anniversary date of the said note commencing on May 1, 1993 and yearly
    thereafter. The interest rate chargeable can be reduced at the holders
    discretion upon the anniversary date heretofore stated. The note shall also
    become due and payable upon demand in the event of the sale of Bluewater Food
    Market or upon the transfer of shares in Roth-Juschka Holdings Ltd. Such that
    Cynthia Juschka owns or controls the voting rights to less than fifty percent
    (50%) of the outstanding voting shares in the said Roth-Juschka Holdings Ltd.

[16]

The
    promissory note representing the purchase price for the shares was for $408,000
    plus annual interest at the Royal Bank preferred rate, reducible at the option
    of the Roths as holder. The consulting agreements provided that any interest
    paid on the note would reduce the amounts of the consulting payments. Both Mr.
    Roth and Mr. Brock believed that the amount of the note was too low. However,
    Mr. Brock explained in his evidence his belief that the only significance of the
    chosen value was to be high enough to satisfy Revenue Canada that it reflected
    the market value of the shares. Otherwise, it was not important because the
    note was to be forgiven on the death of the Roths.

[17]

The
    note contained two conditions where it would become due on demand: if the
    grocery store was sold, or if Cynthia Juschkas voting share interest fell
    below 50%.  The reason the note contained the two conditions where the note would
    become payable on demand was because Mr. Roth felt that if the Juschkas sold
    the business or if his daughter were no longer a full partner in the business,
    then he wanted to be able to receive immediate payment on the note. The note
    contained no provision that it would be forgiven by the Roths in their wills.

[18]

Mr.
    Brock testified that all four parties were familiar with the documents and knew
    what the arrangement was. He said he had discussed with the parties that the
    note could not contain a clause saying it would be forgiven on death, because
    that would diminish the value that was being paid for the shares and undermine
    the position with Revenue Canada that the transfer was at arms length and for
    fair value.
[1]

[19]

Mr.
    Brocks evidence, which the trial judge accepted, was that he reviewed the
    documents with all four of the parties and he explained to each of them that
    the promissory note was to be forgiven in the Roths wills. He pointed out to
    Roy and Cynthia Juschka that there was no guarantee that the note would
    actually be forgiven because a will can be changed. But the Juschkas just
    laughed and said they were not concerned that the Roths would not do as they
    had discussed.

[20]

While
    the Juschkas testified that they understood when they signed the documents that
    the payments under the consulting agreements would be applied to reduce the
    balance of the promissory note, the trial judge rejected their evidence. He
    found that the Juschkas understood in 1992 that the payments under the
    consulting agreements were independent of the obligation to pay the principal
    owing on the promissory note.

[21]

It
    was Mr. Brocks evidence that although he was acting for all four parties, the
    entire deal was being directed by Harold Roth.

[22]

Nevertheless,
    at no time did Mr. Brock put his mind to the question of independent legal
    advice for the Juschkas. This was because he believed the share sale was, in
    effect, a gift of shares from the Roths and that the Juschkas were obtaining a
    substantial benefit from the arrangement. His evidence on this issue was very
    clear:

Because there wasnt in my mind any conflict between the
    parties. There was a situation where a benefit was being given to a son-in-law
    and daughter by their father, a substantial benefit. There was a change going
    on where the father and mother, Mr. and Mrs. Roths income [as] a percentage of
    the flow of profits from the corporations was being reduced immediately and
    then thereafter it was going to be reduced even more in increments and the
    Juschkas were going to receive all of the Roths shares in the operating
    company for nothing, that is they were going to be gifted basically on death. A
    value was placed on it to freeze it so that they would initially automatically
    get all of the increase in value in those shares.

On death of their parents, of Cindys parents, they would get
    the shares fully paid and in the interim they would be paying less of the
    profits of the corporation to their parents than what their parents were
    entitled to before the agreement was entered into. So it didnt seem to me
    there was any conflict. They were getting a huge benefit for nothing.

[23]

Shortly
    after the signing meeting, the respondent drew new wills for Harold and Marlene
    Roth where each forgave the note if the other had predeceased.

[24]

Following
    the 1992 share transfer, the Juschkas paid the Roths the amounts called for in
    the consulting agreements until 2002. The Roths performed no services to the
    business in that time. In 2002, the Juschkas reduced the payments because of
    financial difficulties at the store. The Juschkas came to see Mr. Brock because
    Harold Roth had threatened to call the note. Mr. Brock explained that they were
    obliged to carry on with the payments under the consulting agreement but they
    need not worry about the note because it would be forgiven in the Roths wills.

[25]

By
    late 2007, the Roths had received $1.7 million under the consulting
    arrangements. The Juschkas had expanded the store but were now in debt to
    Sobeys, which had helped them finance the expansion. Sobeys required that the
    Juschkas stop making the consulting payments to the Roths. The Juschkas had to
    decide whether to declare bankruptcy or sell the store to Sobeys and work on a
    salary. They chose to sell to Sobeys. Mr. Brocks advice then was for them to
    sit down with the Roths and explain that now that the business was sold, the
    company was not earning profits and therefore no consulting fees were owing.

[26]

However,
    Mr. Roth died in 2008 and Mrs. Roth elected to demand payment of the note
    because of the sale of the business by the Juschkas. That demand eventually
    resulted in the action against the Juschkas and the company.

Findings by the trial judge

[27]

The
    trial judge made findings in the main action that were important to the
    determination of the third party claim:

·

The Juschkas understood when they signed the documents in 1992
    that the payments under the consulting agreements would not be applied to the
    note.

·

There was an agreement between the Roths and the Juschkas that
    the Roths would forgive the note in their wills.

·

Mr. Brock advised the Juschkas that there was a risk that the
    Roths would not live up to that obligation.

·

The 1992 share purchase was very advantageous to the Juschkas. They
    were receiving the Roths 51% of the shares in the store without any cost
    because the note was to be forgiven and the income stream that the Roths were already
    entitled to indefinitely was being reduced.

·

The Roths received $1.7 million from the Juschkas under the
    consulting agreements from 1992 to 2007.

[28]

With
    respect to  the claim against the respondent for breach of fiduciary duty and
    negligence, the trial judge also found:

·

The parties were amicable and there were no conflicting positions
    between them.

·

There was little potential for a collision of interests.

·

A problem only arose when the Juschkas tried to renege on their
    agreement.

·

Mr. Brock was sensitive to the risks to the Juschkas.

·

The Juschkas were well-served by the 1992 agreement.

·

Mr. Brock acted within the standard of care which was reasonable
    care, skill and knowledge.

·

While it may have been unwise of Mr. Brock to act for everyone,
    he did not fall below the standard of care in doing so.

·

Had they gone to another lawyer for independent legal advice, the
    Juschkas would have signed the 1992 documents because they were anxious to take
    advantage of the opportunity that Mr. Roth was affording them.

·

There was no other advice that another lawyer could have given
    the Juschkas in respect of the 1992 transaction.

·

The only advice a lawyer could have given the Juschkas regarding
    the note was not to sign it if they did not want to risk having to pay it.

·

The Juschkas would not have heeded that advice nor would it have
    been in their interests to do so.

·

The Juschkas loss was not caused by Mr. Brock.

ISSUES

[29]

I
    would frame the issues on this appeal as follows:

1)

Did
    the respondent breach his fiduciary duty to the appellants by acting for all
    parties where there was a conflict of interests and by failing to send them for
    independent legal advice?

2)

Did the respondent
    fall below the standard of care by implementing the instructions of Harold Roth
    and failing to assess and advise the appellants of the significance of the
    liabilities they were undertaking and whether the arrangement was in their best
    interests?

[30]

The
    appellants submitted that the trial judge made palpable and overriding errors
    of fact in three areas, and that those errors undermined his conclusion on their
    third party claim. I discuss two of those areas  the potential impact of
    independent legal advice and the impact of the transaction on the Juschkas  in
    my analysis of the issues. In light of my conclusions, there is no need to
    address the third area raised by the appellants, which is the trial judges
    treatment of the evidence of the appellants expert witness.

ANALYSIS

Fiduciary duty

[31]

A
    solicitor acting for a client owes the client a fiduciary duty to act in the
    best interests of that client. The proposition comes from the House of Lords
    decision in
Boardman et al. v. Phipps
, [1966] 3 All E.R. 721 at 756, where
    the lawyers conflict was between his duty to his client and his own
    self-interest. In this courts 1982 decision in
Davey v. Woolley
(1982), 35 O.R. (2d) 599, (leave to appeal to S.C.C. refused (1982) 37 O.R.
    (2d) 499n), Justice Bertha Wilson explained that the rule also applies where
    the conflicting interests are between clients. At p. 602 she stated:

A solicitor is in a fiduciary relationship to his client and
    must avoid situations where he has or potentially may develop a conflict of
    interests. This is not confined to situations where his clients interests and
    his own are in conflict although it of course covers that situation. It also
    precludes him from acting for two clients adverse in interest unless, having
    been fully informed of the conflict and understanding its implications, they
    have agreed in advance to his doing so. The underlying premise in both these
    situations is that, human nature being what it is, the solicitor cannot give
    his exclusive, undivided attention to the interests of his client if he is torn
    between his clients interests and his own or his client's interests and those
    of another client to whom he owes the self-same duty of loyalty, dedication and
    good faith. [Citation omitted.]

[32]

In
Woolley
, the court addressed the argument that in rural areas,
    solicitors commonly act for both sides in real estate transactions where there
    is full disclosure and both parties consent. The court responded, at p. 602:

This may well be true although even in the case of a so-called simple
    real estate deal, I doubt that it is good practice. In any event the solicitor
    unquestionably assumes a dual role at his own risk, the onus being on him in
    any lawsuit that ensues to establish that the client has had the best
    professional assistance which, if he had been engaged in a transaction with a
    third party, he could possibly have afforded: see
London Loan &
    Savings Co. of Canada et al. v. Brickenden
, [1933] S.C.R. 257 at 262 [affirmed
    [1934] 3 D.L.R. 465 (P.C.)].

[33]

More
    recently, in
Waxman v. Waxman
(2004), 44 B.L.R. (3d) 165 (C.A), (leave
    to appeal refused [2005] 1 S.C.R. xvii (note)), this court held that [o]rdinarily
    a lawyer should not act on both sides of a transaction where the interests of
    one client potentially conflict with the interests of the other.  If there
    are some simple or routine transactions where a lawyer can act for both
    parties, the share sale is not one of them (para. 646).

[34]

In
    this case, the respondent acted for all parties on what turned out to be a
    share sale transaction. He did so without ever considering whether there was a
    conflict of interest or a potential conflict because he believed that the
    effect of the transaction was essentially a gift by Harold Roth of his 51%
    interest in Roth-Juschka Holdings Ltd. to the Juschkas. Having perceived no
    potential conflict, he did not undertake the most basic obligations of a lawyer
    to his client: to raise the problem of acting for both sides, to explain the
    potential conflict, to obtain consent to act for both sides or to recommend
    independent legal advice:
Waxman
, at para. 647.

[35]

The
    trial judge agreed with the respondents view of the transaction: that it was
    very beneficial to the Juschkas and therefore there was no potential conflict
    of interest. With respect to the trial judge, these findings are based on a
    misapprehension of the evidence with respect to the effect of the transaction
    and an error of law.

[36]

The
    transaction was not wholly beneficial to the Juschkas and there was a
    significant potential conflict of interest between the two sets of clients.
    That the parties were amicable at the time of the transaction will normally be
    the case where a lawyer is asked to act for both sides. However, that fact is wholly
    irrelevant to whether their interests in the transaction had the potential to
    conflict.

[37]

The
    purpose of the transaction, as conceived by Harold Roth, was to transfer his
    shares to the Juschkas in a tax-efficient manner while retaining a significant
    income stream for himself and his wife during their lifetimes. Although he
    expressed to the respondent that his wish was to benefit the Juschkas by
    allowing them to become full owners of the grocery business without
    interference from other family members, the ultimate transaction was in no way a
    gift of shares. The Juschkas guaranteed the Roths a significant income stream
    for life, while the terms of the promissory note ensured that until the deaths
    of both Harold and Marlene Roth, the Roths would be able to enforce it.

[38]

The
    transaction was structured as a share sale for which the Roths were to receive
    two forms of compensation from the Juschkas:

1)

a promissory note from
    the Juschkas personally for $408,000, which accrued interest annually at the
    current rate; and

2)

two consulting
    agreements that obligated the company and the Juschkas to pay the Roths significant
    annual remuneration for life, based initially on 50% of the profits of the
    company and reducing somewhat over time.

[39]

A
    significant part of the deal was not documented: as found by the trial judge, the
    promissory note was to be forgiven upon the deaths of the Roths.

[40]

It
    is unclear exactly what the respondent understood was the effect of not
    documenting this condition of the agreement. In his view, the intent of the
    transaction was not a sale but a gift accomplished through the vehicle of the
    share transfer, the consulting contracts and the forgiveness of the note in the
    will. He testified that the amount of the note was only important from a tax
    point of view. It wasnt really important in my analysis of what the clients
    wishes were.

[41]

However,
    the evidence also suggests that perhaps the respondent believed the requirement
    to forgive was not enforceable, since he advised the Juschkas that because the
    obligation was undocumented, they would have to trust that the Roths actually
    would forgive the note in their wills and not make a change to that provision.

[42]

It
    is also difficult to understand the respondents position that the obligation
    to forgive the note could not be documented. The purpose of the note was to
    document the value of the shares being sold by Harold Roth and to freeze that
    value for tax purposes. The respondent testified that the accountants had
    advised that if the note provided that it was to be forgiven, it would not be
    worth its face value. The respondent believed that the face value of the note
    could not be undermined in the eyes of Revenue Canada. If the suggestion is
    that the intent was to mislead Revenue Canada about the true value being paid
    for the shares, that would be totally improper.

[43]

Regardless,
    the fact that the respondent suggested that a term in the transaction that was
    critical to the interests of one client, the Juschkas, remain undocumented and
    perhaps unenforceable by them in order to protect the interests  of the other
    client, Mr. Roth, reveals an actual conflict of interest.

[44]

Even
    more significant was the failure of the respondent to understand and explain the
    full business effect of the transaction on the interests of the Juschkas: see
Waxman
,
    at para. 648. Although the trial judge found that the respondent did fully
    explain all the documents and the transaction, it is clear that the respondent himself
    did not completely understand the significance and potential consequences of
    the transaction for the Juschkas.

[45]

Prior
    to the share sale, the Juschkas owned 49% of the company and the Roths owned
    51%. As majority shareholders, the Roths could have insisted that the Juschkas
    continue to be the only workers at the store and still share the profits 51% to
    49% with the Roths, while they made no further contribution. However, had the
    Juschkas decided at some point that they were no longer content with that
    arrangement, or that they wanted to sell the store, they had potential remedies.
    Those included negotiation with the Roths for the purchase of their shares,
    with the leverage that the Juschkas were the sole workforce that created the
    profitability of the company; or court action, such as seeking an oppression
    remedy or the wind-up of the company.

[46]

By
    contrast, in the 1992 share purchase deal, the Juschkas bound themselves
    contractually to pay the Roths consulting fees for life, representing a
    significant percentage of the profits of the company. They also signed a
    promissory note for $408,000 on the understanding that the note would never be
    enforced because it was going to be forgiven. However, the note also contains
    two conditions that allowed the holders to make demand on the note before it
    was forgiven: 1) if the grocery store was sold, or 2) if Cynthia Juschka became
    a less than 50% owner of the shares of the company.

[47]

There
    is no mention in the evidence of any explanation by the respondent to the
    Juschkas of the potential consequences of these conditions at the time of the
    share sale. The note was a 40-year note due in 2032. From a business point of
    view, it was highly likely that the Juschkas might have decided to sell their
    lucrative grocery business at some point and retire before 2032, or they might have
    been forced to sell for some other reason, which is exactly what occurred.

[48]

Roy
    Juschka testified that his understanding was that if he sold the business
    before the note was paid down in full by the consulting payments, he would owe
    the unpaid portion of the note. But the trial judge found that was not the deal
    or the effect of the documents. He accepted the respondents understanding of
    the transaction that the principal of the note and consulting payments were
    separate obligations. On the basis of that structure, the advice the respondent
    gave was wholly deficient.

[49]

As
    Wilson J.A. found in
Davey v. Woolley
, this was where the Juschkas
    were at risk and needed legal advice. While agreeing that a solicitor is not
    obliged to give business advice, Wilson J.A. held that although legal advice
    and business advice frequently coalesce in a commercial transaction of this
    kind, I believe that solicitors are generally sensitive to the distinction and
    view it as an important part of their responsibility to build into the
    transaction the maximum legal protection they can for their client (at pp.
    601-602).

[50]

In
    my view, it is clear that following the share purchase transaction, the
    Juschkas were not in a financially better position than before and certainly
    had not received a gift. Legally, they were now contractually obligated to pay
    close to the same percentage of profits to the Roths that they were only
de
    facto
obliged to pay before, and they were bound by a promissory note to
    pay $408,000 plus interest in certain eventualities: a sale of the business, a
    reduction in Cynthias ownership interest, or if the Roths did not actually maintain
    the provision in their wills for forgiveness of the note. In addition, they
    personally guaranteed the payments under the consulting agreements and personally
    owed the promissory note, expanding their potential legal liability beyond the
    assets of the company.

[51]

The
    trial judge equated this case with
Upper Valley Dodge Chrysler v. Cronier
    Estate
(2005), 10 B.L.R. (4th) 201 (Ont. C.A.), where this court affirmed
    the decision of the trial judge that found no breach where the parties came to
    the lawyer to document a simple transaction that they had already agreed to.
    The court found that the borrower would have gone through with the loan even
    had he received independent legal advice.

[52]

In
    my view, that case is distinguishable on the facts and has no application. This
    transaction had its genesis in estate planning for Harold Roth. Roy Juschka went
    along with the plan, presented as it was as a great opportunity for him. It was
    not a negotiated deal that both clients were bringing to one lawyer just to document.
    Furthermore, Mr. Juschka testified that he understood that the consulting
    payments would be credited against the promissory note. Although that testimony
    was rejected by the trial judge, such an arrangement would have made much more
    commercial sense for Roy Juschka and would have been consistent with the advice
    he was receiving that the deal was beneficial to him.

[53]

Had
    the Juschkas obtained independent legal advice, the lawyer would have exposed
    the pitfalls in the deal and suggested alternative responses that the Juschkas
    could have presented before they agreed to be bound. In my view, it was a
    palpable and overriding error for the trial judge to find that the Juschkas
    would have signed the documentation whether they had gone to another lawyer or
    not. There was no evidence to support that conclusion.

[54]

In
    my view it is clear that at the time of the 1992 transaction, there was a
    significant potential conflict of interest between the two sets of clients of
    the respondent which precluded him from acting for both. By doing so, he was in
    a clear conflict of interest and breached his fiduciary duty to the Juschkas to
    act in their best interests.

Standard of Care

[55]

The
    respondent was also required to bring reasonable care, skill and knowledge to
    the performance of the services he undertook to perform:
Central Trust Co. v.
    Rafuse
, [1986] 2 S.C.R. 147 at 208. In my view, the respondent also fell
    below the standard of care in the performance of his services for the Juschkas.

[56]

He
    failed to understand and explain the meaning and effect of the promissory note,
    and the fact that, between the consulting agreement and the promissory note, the
    Juschkas could potentially pay an amount for the Roths 51% of the shares that
    was far in excess of their value. He also failed to warn the Juschkas of the
    risks of the transaction:
Fasken Campbell Godfrey v. Seven-Up Canada Inc.
(2000), 47 O.R. (3d) 15 (C.A.) at paras. 38-42, (leave to appeal refused [2000]
    S.C.C.A. No. 143).

RESULT

[57]

The
    Juschkas became liable to double-pay for the Roths 51% of the shares by paying
    them $1.7 million in consulting fees plus the amount of the promissory note.
    They were represented in the transaction by the same lawyer who acted for the
    Roths and they were not advised of the potential conflict nor sent for
    independent legal advice. The respondent failed to assess and advise them of
    the significance of the liabilities they were undertaking.

[58]

They
    are seeking damages in the amount of $200,000, which is the amount they agreed
    to pay Mrs. Roth on the note as a settlement of the judgment awarded by the
    trial judge. I would award the appellants damages in that amount, together with
    prejudgment interest and costs fixed at $35,000, inclusive of disbursements and
    HST.

Released: KF FEB 2 2016

K. Feldman J.A.

I agree. C.W.
    Hourigan J.A.

I agree. M.L.
    Benotto J.A.

[1]
This evidence appears at odds with the agreement itself which provides that the
    parties agreed that they were not dealing at arms length and that the purchase
    price would therefore be subject to review by Revenue Canada. In addition, the
    agreement provides for the shares in Roth-Juschka Holdings Ltd to be held by
    the Roths as security for payment of the promissory note. This provision
    appears to be inconsistent with the term of the note that provides that if the
    store is sold (if it is a share sale) or if Cynthia Juschkas share interest
    falls below 50%, the note becomes due on demand.


COURT OF APPEAL FOR ONTARIO

CITATION: Spylo v. Spylo, 2016 ONCA 151

DATE: 20160225

DOCKET: C59435

MacPherson, van Rensburg and Miller JJ.A.

BETWEEN

Andrew
    Spylo
,
Annemarie Nittel
and Katherine
    Duncan

Plaintiffs (
Appellants
)

and

Gordon Spylo, personally and as Estate Trustee
    for Mike Spylo and as Estate Trustee for Antoinette Spylo and Bonnie Spylo

Defendants (Respondents)

Brendan Donovan, for the appellants

Jamie Spotswood, for the respondents

Heard: February 22, 2016

On appeal from the judgment of Justice A. Duncan Grace of
    the Superior Court of Justice, dated September 4, 2014.

ENDORSEMENT

[1]

The appellants, Andrew Spylo and Annemarie Nittel, appeal from the
    judgment of Grace J. of the Superior Court of Justice. Justice Grace dismissed
    the appellants claim against the respondent Gordon Spylo both in his personal
    capacity and in his capacity as estate trustee for the estates of Andrews and
    Gordons parents, Michael and Antoinette Spylo.

[2]

This appeal arises from a dispute between siblings over the estates of
    their parents who died in 1985 (Michael) and 1986 (Antoinette). The son Gordon
    was named as estate trustee and Gordon and the daughter Katherine were
    beneficiaries. The son Andrew was left nothing in both parents wills.

[3]

Andrew claimed that there was a secret trust created in his favour by
    the estate trustee Gordon and acquiesced in by his sister Katherine. He also
    claimed that he was entitled to the surplus proceeds from the sale of a
    property in Waterloo because Gordon held that property in trust for Andrew and
    Annemarie.

[4]

The trial judge rejected these claims. The appellants appeal on three
    grounds.

[5]

First, the appellants contend that the trial judge erred by finding that
    there was no secret trust in Andrews favour. They rely in particular on the
    evidence relating to the T3 tax forms showing monies paid to Andrew from each
    estate. The forms, enclosed in a letter to Katherine, were never provided to
    Andrew. Andrew says that these establish the existence of a trust in his
    favour.

[6]

We do not accept this submission. Gordon and Andrew represented
    themselves at their trial. The result was a huge gap in documentary evidence
    and, often, very confusing testimony. The trial judge did his best in this difficult
    context. Ultimately, he concluded:

In my view, the T3s have nothing to do with the alleged secret
    trust. They relate to a dispute that arose after Mike died in 1985. They were
    created to address issues that arose in relation to the Castlefield property
    after Gordon acquired it in 1986.

[7]

The trial judge reached this conclusion after a careful review of the
    conflicting evidence, including the testimony of Gordon and Andrew. There is
    nothing in the evidence nor in the trial judges assessment of Andrews
    credibility, and his rejection of Andrews evidence on certain points, that
    would lead us to the required label of palpable and overriding error for the
    above conclusion.

[8]

Second, the appellants submit that the trial judge erred by concluding
    that Gordon did not hold the Castlefield property in trust for Andrew after
    Gordon purchased it from Andrew.

[9]

At trial, Andrew produced one document to support the existence of this
    trust. He could not produce the original of the document and the trial judge
    drew an adverse inference against him. Gordon testified that although his
    handwriting appeared to be on the document, it was not authentic. Importantly,
    Andrew testified that Gordon gave him the document, which was dated May 15,
    1986, in Waterloo that day. However, Gordon signed an entirely different
    document, and swore it before a Commissioner in Timmins on May 15, 1986. In
    these circumstances, we cannot conclude that the trial judge committed a
    palpable and overriding error by concluding, I do not believe Andrews
    evidence concerning the creation and execution of the trust document.

[10]

Third,
    the appellants submit that a single intervention by the trial judge during
    Andrews testimony relating to other judgments against him crossed the line
    and destroyed the image of judicial impartiality.

[11]

We
    disagree. The appellants conceded that all of the other interventions by the
    trial judge in the several days of trial with self-represented litigants were
    beyond reproach and even quite helpful. In that context, the single brief
    question and comment about other judgments against Andrew do not reach the high
    threshold required for a finding of reasonable apprehension of bias.

[12]

The
    appeal is dismissed. The respondents are entitled to their costs of the appeal
    fixed at $18,000, inclusive of disbursements and HST.

J.C. MacPherson J.A.

K. van Rensburg J.A.

B.W. Miller J.A.


COURT OF APPEAL FOR ONTARIO

CITATION: Teva Canada Limited v. Bank of Montreal, 2016 ONCA
    94

DATE: 20160202

DOCKET: C58546

Weiler, Laskin and Cronk JJ.A.

BETWEEN

Teva Canada Limited

Plaintiff (Respondent)

and

Bank of Montreal, Canadian Imperial Bank of
    Commerce,
TD Canada Trust and Bank of Nova Scotia

Defendants (
Appellants
)

AND BETWEEN

Bank of Nova Scotia

Plaintiff by Counterclaim

and

Teva Canada Limited, Neil Kennedy McConachie, Renzo
    G. Tittarelli and Florindo Costanzo

Defendants by Counterclaim

Frank J. McLaughlin, Jeffrey E. Feiner, for the
    appellant TD Canada Trust

Martin Sclisizzi and Heather Pessione, for the appellant
    Scotiabank

Colby Linthwaite and Sean Cumming, for the respondent
    Teva Canada Limited

Heard: May 14 and 15, 2015

On appeal from the order of Justice Kevin W. Whitaker of
    the Superior Court of Justice, dated February 19, 2014.

Laskin
    J.A.:

A.

Overview

[1]

The appellants TD Canada Trust and Bank of Nova Scotia and the
    respondent Teva Canada Limited, a manufacturer of generic pharmaceuticals, were
    the innocent victims of fraud of over 5 million dollars, perpetrated by Neil
    McConachie, a former employee in Tevas finance department. The general
    question on this appeal is did the motion judge err in determining that the
    banks should bear the loss for the fraud. The principal issues raised by the
    parties concern the application of two sections of the
Bills of Exchange
    Act
, R.S.C. 1985 c. B.4 (
BEA
) that create statutory defences for
    the banks in certain circumstances: s. 20(5), which deals with fictitious and
    non-existing payees, and s. 165(3), which deals with holders in due course.

[2]

Between 2003 and 2006, McConachie requisitioned numerous cheques payable
    to six entities he designated. Two of the entities had names he invented; the
    other four were current or former customers of Teva. None of the entities was
    owed any money by Teva. The cheques were issued by Tevas accounts payable
    department and given to McConachie, even though he had no authority either to
    requisition cheques or approve payments to customers and Tevas own internal
    approval policies had been ignored.

[3]

McConachie and several accomplices opened accounts in the names of the
    six entities and deposited 63 cheques, which the banks negotiated, into these
    accounts. When the fraud was discovered in 2006, McConachie was fired.

[4]

Teva then sued the banks for damages for conversion  for the
    misappropriation of its property. As neither McConachie nor his accomplices
    were lawfully entitled to the cheques, the banks were
prima facie
liable to Teva for converting them. The banks, however, put forward three
    defences:

·

The cheques were payable to non-existing or fictitious payees,
    and thus under s. 20(5) of the
BEA
, the banks were lawfully entitled to
    negotiate them.

·

The banks became holders in due course of the cheques under s.
    165(3) of the
BEA
, and therefore were not liable to Teva in conversion.

·

For 17 of the cheques, Tevas claim was barred by the
Limitations
    Act
[1]
,
    as the banks negotiated those cheques more than two years before Teva issued
    its statement of claim.

[5]

Each party then brought motions for summary judgment, which were heard
    by the motion judge over two days in October 2014. In a short endorsement, the
    motion judge rejected the banks defences and granted Teva judgment in the
    amount of $5,483,249.40. The banks cross-motions were dismissed. On their
    appeals, the banks argue that the motion judges reasons are inadequate, that
    he erred in failing to give effect to the banks defences, and that he erred in
    his award of prejudgment interest in favour of Teva.

[6]

The banks appeals give rise to these six issues:

(1)

Are the motion judges reasons so deficient that his decision is not
    entitled to deference, and the standard of review is thus correctness?

(2)

Did the motion judge err by failing to hold that the banks had a valid
    defence under s. 20(5) of the
BEA
for two of the payees because they
    were non-existing?

(3)

Did the motion judge err by failing to hold that the banks had a valid
    defence under s. 20(5) of the
BEA
because all six payees were
    fictitious?

(4)

Did the motion judge err by failing to hold that the banks were holders
    in due course of the cheques under s. 165(3) of the
BEA
, and therefore
    not liable to Teva in conversion?

(5)

Did the motion judge err by failing to hold that the banks
Limitations
    Act
defence raised a genuine issue requiring a trial?

(6)

Did the motion judge err by failing to exercise his discretion properly
    in his award of prejudgment interest?

[7]

I would answer yes to the questions raised by the second and third
    issues and for those reasons, would allow the banks appeals. It is thus
    unnecessary to consider the other two defences raised by the banks, or the
    motion judges award of prejudgment interest, or the adequacy of his reasons.

B.

The Fraud

(1)

McConachies employment at Teva

[8]

McConachie worked in Tevas finance department in Toronto from August
    2002 until July 2006, when he was fired. In 2005, he was made finance manager.
    He was never an officer or director at Teva, and he never had authority to sign
    cheques. He reported to Tevas controller, and later to its chief financial
    officer, Michael Schmid.

(2)

McConachie uses Tevas rebate program to perpetrate his fraud

(a)

The Program

[9]

During the time McConachie worked at Teva, the company maintained a
    rebate program it called the Continuing Education (CE) Program. The CE Program
    was designed to encourage Tevas customers and service providers to buy its
    products.

[10]

The
    prices of pharmaceuticals are tightly controlled by provincial drug
    formularies. But typically a pharmacist, for example, has a choice of products
    to sell to consumers. Under the CE Program, Teva would refund its customers
    the pharmacists in my example  part of the formulary purchase price as an
    inducement to buy Tevas products. Teva paid tens of millions of dollars under
    its CE Program until Ontario banned the practice, shortly after McConachies
    fraud was uncovered.

[11]

McConachie
    was responsible for administering Tevas CE Program. The Program was to work as
    follows: McConachie would prepare or print a CE form and cheque requisition,
    and send it to Tevas accounts payable department in Mirabel Quebec; the
    department was to process the form and requisition; one technician was supposed
    to ensure that the requisition corresponded to a customer account number and
    that the requisition for payment had been approved; another technician was to
    enter particulars of the request into Tevas accounting system; once a week a
    batch of cheques would be prepared, and signed by the mechanical application of
    the signature of two authorized signing officers; the cheques would then be sent
    back to McConachie for distribution to the appropriate account manager, and
    ultimately to Tevas customers and service providers.

(b)

Tevas approval policies for CE payments

[12]

Before
    June 2005, Teva had no express policy for the approval of payments under its CE
    Program. Any sales employee could prepare a cheque requisition for any amount
    and forward it to McConachie, who would then send it on to the accounts payable
    department. The sales employees signature on the requisition form provided the
    necessary approval. Importantly, however, McConachie was not authorized either
    to requisition or approve cheques for CE payments.

[13]

In
    June 2005, Teva implemented an electronic system for payments and an express
    policy requiring approval for CE payments. McConachie was involved in the
    implementation of the electronic system and obtained administrative rights in
    the system. For larger amounts, the approval for CE payments had to be given by
    designated corporate officers. If the requested cheque was for over $50,000,
    Tevas chief financial officer had to approve the payment. If the requested
    cheque was for over $100,000, both the chief financial officer and the
    vice-president of sales and marketing had to approve the payment. Once the
    necessary approval was obtained and recorded in Tevas electronic system,
    McConachie was to review the form and forward it to the accounts payable
    department for processing.

(c)

Teva ignored its approval policies

[14]

McConachie
    exploited his administrative role and Tevas failure to follow its own approval
    policies to perpetrate his fraud. All the fraudulent cheques deposited in the
    two banks were requisitioned and approved solely by McConachie, though he had
    no authority to approve CE payments for any amount.

[15]

Before
    June 2005, McConachie sent cheque requisitions in paper form even though these
    requisitions did not have a sales persons signature. After June 2005
    McConachie, using the administrative rights he retained in the electronic
    system, created CE forms requesting CE payments to the entities he designated.
    Of the 40 cheques McConachie requisitioned after June 2005, 36 were for more
    than $50,000, and of those, seven were for more than $100,000. Not a single
    cheque he fraudulently requisitioned was approved either by the chief financial
    officer or the vice-president of sales and marketing of Teva. Although all
    these cheque requisitions lacked the required officer approval, Tevas accounts
    payable department generated cheques based on McConachies fraudulent forms,
    applied a mechanical signature to the cheques and sent the cheques to him. In
    total, McConachie requisitioned and received 63 fraudulent cheques in the
    amount of $5,483,249.40, which he and five accomplices later deposited in
    accounts at the two banks.

[16]

Schmid,
    Tevas former chief financial officer, and the only Teva employee to give
    evidence on the motions, admitted on cross-examination that all the forms were
    not approved in accordance with the proper policy, and that, though the
    accounts payable department knew that McConachie had no authority to approve
    these payments, they nevertheless issued cheques. In short, Tevas failure to
    follow its own approval policies allowed McConachie to carry out this fraud.

(3)

McConachie designates six entities
    as payees of the fraudulent cheques, and deposits the cheques in TD and
    Scotiabank accounts in the names of these entities

[17]

McConachie
    designated six entities to be payees of his fraudulent cheques: (1) PCE
    Pharmacare, (2) Pharma Team System, (3) Phamachoice, (4) London Drugs, (5)
    Pharma Ed Advantage Inc., and (6) Medical Pharmacies Group. McConachie invented
    the names of the first two entities, PCE Pharmacare and Pharma Team System.
    They were imaginary entities. The other four entities were legitimate Teva customers
    or service providers. Three were existing customers at the time of the fraud;
    the other was a former customer. Although Teva had made legitimate payments to
    each of these four entities, none of the cheques McConachie requisitioned and
    obtained was for a legitimate debt owed by Teva.

(a)

The Scotiabank accounts and cheques

[18]

McConachie
    and his accomplices opened three small business accounts at Scotiabank, each
    under the name of a sole proprietorship registered under Ontarios
Business
    Names Act
, R.S.O. 1990 c. B. 17. The name on each account corresponded to
    the names of three of McConachies designated payees: PCE Pharmacare,
    Pharmachoice and London Drugs.

[19]

Into
    these three accounts, McConachie and his accomplices deposited 43 cheques, in
    the total amount of $3,949,481. The main payee was PCE Pharmacare, one of the
    two entities that was a creature of McConachies imagination. 31 cheques
    amounting to $2,853,002 were payable to PCE Pharmacare and deposited into a
    business account at Scotiabank with the name Neil McConachie operating as PCE
    Pharmacare.

(b)

The TD accounts and cheques

[20]

McConachie
    and his accomplices opened four small business accounts at TD, again under
    registered sole proprietorships, this time with names corresponding to four of
    McConachies designated payees: PCE Pharmacare, Pharma Team System, Pharma Ed
    Advantage, and Medical Pharmacies Group.

[21]

Into
    these accounts, McConachie and his accomplices deposited 20 cheques totalling
    $1,533,768.43. Seven of the cheques for over $1.2 million were payable to PCE
    Pharmacare and Pharma Team System, the two imaginary entities.

(4)

Discovery
    of the fraud

[22]

In
    July 2006, Scotiabank notified Teva about a suspicious cheque payable to
    Overwaitea Food Group. Teva investigated the cheque, and eventually uncovered
    McConachies fraud. Teva has accepted that the banks were innocent dupes of
    McConachies fraudulent scheme.

C.

The statutory AND legal context for
    the issues under section 20(5) of the
BEA

(1)

Terminology

[23]

In
    this section I will use what I believe is accepted banking terminology.

·

Collecting Bank is the bank in which a cheque is deposited,     in
    this case Scotiabank and TD;

·

Drawer is the person on whose account a cheque is drawn,     in
    this case Teva;

·

Drawee or Drawing Bank is the bank on which a cheque is    drawn
    and is directed to pay the cheque, in this case Tevas       bank;

·

Payee is the person to whom the cheque is payable;

·

Bearer is a person delivering a cheque to a bank.

(2)

The tort of conversion

[24]

Conversion
    is the wilful interference with the goods of another  that is taking, using or
    destroying these goods in a manner inconsistent with the owners right of
    possession.  In
Boma Manufacturing Ltd. v. Canadian Imperial Bank of
    Commerce
, [1996] 3 S.C.R. 727, which remains the principal authority on
    the
BEA
issues in this appeal, Iacobucci J., in his majority reasons,
    described at para. 83 the tort of conversion in the banking context:

A bank converts an instrument, including a cheque, by dealing
    with it under the direction of one not authorized, by collecting it and making
    the proceeds available to someone other than the person rightfully entitled to
    possession. It should be noted that the tort of conversion is one of strict
    liability.

[25]

Boma
also confirmed that the drawer of a cheque (Teva) has an action in conversion
    against a collecting bank (Scotiabank or TD). A collecting bank is liable in
    conversion if it credits the account of someone not authorized to deal with the
    cheque. As McConachie and his accomplices were not lawfully in possession of
    the 63 cheques and deposited them into accounts they controlled, the two banks
    are
prima facie
liable to Teva for converting its cheques.

[26]

As
    Iacobucci J. also noted in the above passage, conversion is a strict liability
    tort. That the banks committed these wrongful acts, as they did, innocently and
    in good faith, affords them no defence. Equally, a drawers negligence cannot
    provide a bank with a defence to a conversion action, and a court cannot
    therefore apportion liability on the basis of a drawers contributory negligence.

[27]

In
    his majority reasons in
Boma
at para. 80, Iacobucci J. discussed the
    benefits of the current bills of exchange system and the seeming unfairness and
    arbitrariness of excluding any notion of fault from the determination of
    liability under that system:

To some, the allocation of risk in the bills of exchange system
    may seem arbitrary, but in my view a necessary and coherent rationale sustains
    this allocation.  With respect to forged endorsements, for example, no party in
    particular is in any better position to detect the fraud than any other.  It is
    a risk that all parties must bear, including collecting banks.  It is a price
    that must be paid if one wishes to enjoy the significant benefits of the bills
    of exchange scheme, not the least of which is, from the bank's perspective, the
    facilitation of huge numbers of financial dealings conducted rapidly, and
    without overwhelming transaction costs.  While the banks are accorded the
    important advantage of holder in due course status in many situations, it would
    not be appropriate, as the respondent would have it, to exempt any party,
    including collecting banks, from all exposure to the risk and consequence of
    fraud.

[28]

That
    any alleged negligence by Teva gives the banks no relief, is evident from
    previous proceedings between these parties. The banks had tried to avoid
    liability in conversion by asserting Tevas negligence. Scotiabank sought to
    amend its statement of defence to plead estoppel by negligence. Both banks
    asserted a counterclaim for damages for negligence. This court rejected both pleas,
    in
Teva Canada Limited v. Bank of Montreal et al
., 2012 ONCA 486, at
    paras. 19 and 20:

In
Boma
, the court recognized that there is a tension
    between the laws need for certainty and equitys need to achieve objectively
    fair results.  In the case of bills of exchange, courts of law and equity over
    several hundred years have determined that certainty is the predominant value
    and that the operation of an efficient banking market requires strict adherence
    to objective rules for the allocation of risk.

We are of the view that if one applies the line of reasoning
    set out by the court in
Boma
to the circumstances in this case, it is
    not tenable that a court would recognize the new duty of care urged by Scotia
    Bank, nor would it recognize the availability of a defence of estoppel by
    negligence which Bank of Nova Scotia seeks to plead.  Doing so would change the
    allocation of risk and affect the certainty with which participants in the
    banking system now conduct banking transactions.

[29]

Still,
    though the tort of conversion is a strict liability tort, it is not an absolute
    liability tort. Section 20(5) of the
BEA
gives a collecting bank a
    statutory defence to an action for conversion.

(3)

Cheques payable to order and bearer,
    and s. 20(5) of the
BEA

[30]

In
    most cheque transactions, the drawer issues a cheque on its bank account, which
    instructs its bank, the drawee, to pay the stated amount of the cheque to the
    payee. The payee deposits the cheque at its own bank, the collecting bank,
    which collects the money from the drawing bank and credits the payees account.

[31]

Under
    s. 20(2) of the
BEA
, a cheque may be payable either to order or to
    bearer. The distinction is important. A bank may validly negotiate a cheque
    payable to order only if the cheque is both delivered and validly endorsed. In
    contrast, a bank may validly negotiate a cheque payable to bearer, if the
    cheque is simply delivered to the bank. Even if a bearer cheque has a forged or
    missing endorsement, the bank can negotiate it on delivery.

[32]

Ordinarily,
    if a cheque is made payable to a specific payee, as are the 63 cheques in issue
    on this appeal, then it is payable to order. And if a bank, even innocently,
    credits the account of someone not authorized to deal with the cheque, as did
    the banks here, then the bank is
prima facie
liable in conversion. But
    s. 20(5) of the
BEA
provides both a collecting bank and a drawing bank
    with a valid defence to a conversion action. Section 20(5) states:

Fictitious payee

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

[33]

In
    other words, a cheque payable to a specific payee that is either non-existing
    or fictitious, is treated by statute as payable to bearer, not to order. A
    collecting bank may validly negotiate such a cheque on mere delivery. So if the
    two appellant banks can show that McConachies 63 fraudulent cheques were
    payable to non-existing or fictitious payees, they have a valid defence to
    Tevas conversion action. That is so because the bearer of the cheque is deemed
    to be the rightful payee, and the bank is thus not liable for negotiating the
    cheque.

[34]

The
    purpose of s. 20(5) is to protect the bank from fraud on the drawer, committed
    by a third party, including an insider in the drawers organization. The
    section allocates the loss to the drawer, who typically is better positioned to
    discover the fraud or insure against it. See
Rouge Valley Health System v.
    TD Canada Trust
, 2012 ONCA 17, at para. 11; Benjamin Geva, Conversion of
    unissued cheques and the fictitious or non-existing payee
Boma v. CIBC

    28 CBLJ #2 177, at 195.

(4)

Falconbridges
    four propositions

[35]

For
    determining whether a payee is non-existing or fictitious, Iacobucci J. in
Boma
,
    approved, with a significant modification, four propositions taken from the
    late Dean John D. Falconbridges influential book,
Banking and Bills of
    Exchange, 6th Ed.
(Toronto: Canada Law Book, 1956) at 468-9. I will
    discuss the modification separately below.  The four propositions are the
    following:

(1)

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.

(2)

If the drawer for some purpose of his own inserts as payee the name of a
    real person who was known to him but whom he knows to be dead, the payee is
    non-existing, but is not fictitious.

(3)

If the payee is the name of a real person known to the drawer, but the
    drawer names him as payee by way of pretence, not intending that he should
    receive payment, the payee is fictitious, but is not non-existing.

(4)

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,
    notwithstanding that the drawer has been induced to draw the bill by the fraud
    of some other person who has falsely represented to the drawer that there is a
    transaction in respect of which the payee is entitled to the sum mentioned in
    the bill.

[36]

As
    is evident from the propositions themselves, a payee can be:

·

Both non-existing and fictitious,

·

Non-existing but not fictitious, or;

·

Fictitious but not non-existing.

[37]    Falconbridge also drew an important
    distinction between non-existing and fictitious payees:

·

Whether a payee is non-existing is a simple question of fact, not
    depending on anyones intention.

·

Whether a payee is fictitious depends on the intention of the
    creator of the instrument, that is, the drawer of a bill or cheque, or the
    maker of the note.

[38]    In this appeal, Scotiabank and TD contend that
    all six payees designated by McConachie fall under Falconbridges first
    proposition: PCE Pharmacare and Pharma Team System were non-existing; and all
    six payees are fictitious. Thus the banks have a valid defence to Tevas action
    for conversion.

[39]    Teva, on the other hand, contends that all six
    payees fall under Falconbridges fourth proposition. Thus the banks have no
    defence to its action for conversion, and this appeal should be dismissed. To
    come under Falconbridges fourth proposition, two requirements must be met:

·

Each payee must be a real person, that is, not non-existing;

·

Each payee must be intended by Teva to receive payment and thus
    not fictitious.

[40]    As I will discuss, these two requirements give
    rise to the s. 20(5) issues on this appeal.

(5)

Bomas
modification
    to the non-existing payee defence

[41]

The non-existing payee
    defence under Falconbridges first proposition was modified by Iacobucci J. in
Boma
.

He appeared to treat non-existing and fictitious payees interchangeably.
    And, instead of adhering to Falconbridges explanation of non-existing as a
    question of objective fact, Iacobucci J. imported the notion of plausibility
    into the question whether a payee is non-existing. The effect of his
    modification is that even if a payee is, in fact, a creature of the fraudsters
    imagination, the payee may still not be non-existing if the drawer had a
    plausible and honest, though mistaken, belief that the payee was a real
    creditor of the drawers business.
[2]

[42]

Boma
itself shows the impact of this modification to the non-existing payee defence.
    In
Boma
, Donna Alm, a bookkeeper, defrauded her employer, two family
    owned companies, of over $90,000. The companies were controlled by a husband
    and wife, Mr. and Mrs. Mange. Alm was not an officer, director or shareholder
    of the companies. But she was an authorized signing officer on the companies
    bank account with the Royal Bank of Canada. Over the course of five years, she
    fraudulent prepared 155 cheques made payable to various payees, and
    appropriated the proceeds by collecting them through her account with the
    collecting bank, the CIBC.

[43]

Of
    the 155 cheques, 114 were made payable to an imaginary person, either a J.
    Lam or a J.R. Lam. As an objective fact, the payees of these 114 cheques
    were non-existing and would fall under Falconbridges first proposition, as
    LaForest J. held in his dissenting reasons. But Iacobucci J. held that the
    payees came under Falconbridges fourth proposition because Mr. Mange honestly
    believed the cheques were made out to a real person who had business dealings with
    his companies, a Mr. Lam. Iacobucci J. explained his reasoning at paras. 60-61
    of his judgment:

Many of the cheques, however, were made payable not to actual
    persons associated with the companies, but to "J. Lam" and "J.
    R. Lam".  The appellants had no dealings with any persons of such names.
    According to the criteria set out in Falconbridge, supra, such a person would
    be categorized as "non-existing", and hence, fictitious.  But in my
    view, it seems that Boris Mange was reasonably mistaken in thinking that
    "J. Lam" or "J. R. Lam" was an individual associated with
    his companies.  Mange knew that one of the subcontractors retained by the
    companies was a "Mr. Lam".  He did not specifically recall Lam's
    first name, which, incidentally, was Van Sang.  However, when Mange approved
    the cheques to "J. Lam" and "J. R. Lam", he honestly
    believed that the cheques were being made out for an existing obligation to a
    real person known to the companies.  The trial judge's comments in this regard
    were tantamount to a finding of fact, and were not disturbed on appeal; as
    these are concurrent findings of fact, this Court should not intervene.

Accordingly, the cheques made out to "J. Lam" and
    "J. R. Lam" also fall within the fourth category, and could not be
    treated by the CIBC as payable to bearer.  Rather, the cheques were payable to
    order, and in order to be negotiable to the bank, delivery alone was not
    sufficient.  Valid, non-forged endorsements were required.

[44]

In
    The Law of Banking and Payment in Canada (Aurora: Canada Law Book, 2008)
    Bradley Crawford summarized the effect of Iacobucci J.s modification to
    Falconbridges first proposition:

[T]he law appears to be that if the name of the payee is a pure
    invention of the drawer of a cheque (or the maker of a note), the payee may be
    non-existing within the meaning of BEA, s. 20(5), but only if it is also true
    that the name is of a person having no real connection with the drawers
    business, or
semble
, is not a name that
plausibly
might be
    identified by the drawer as being a real creditor of his business. [Emphasis in
    original.]: at p. 22-34.

[45]

Thus,
    where the evidence establishes this honest but mistaken belief, what was under
    Falconbridges first proposition, a non-existing payee, becomes a real payee.
    If the drawer intended this real entity to receive payment, the payee is not
    fictitious either, bringing it within the parametres of Falconbridges fourth
    proposition and leaving the collecting banks liable for the loss.

D.

The Issues under section 20(5) of
    the
BEA

[46]

In
    this appeal, Scotiabank and TD contend that all six payees designated by
    McConachie fall under Falconbridges first proposition. PCE Pharmacare and
    Pharma Team System were non-existing. The other four payees (Medical Pharmacies
    Group, Pharmachoice, London Drugs and Pharma Ed Advantage Inc.), though not
    non-existing, were fictitious because Teva formed no intention that payments be
    made to those payees. No signing officer or directing mind of the company
    turned their minds to the cheques and no one examined them. The cheques were
    mechanically processed without proper internal approvals. In the absence of any
    evidence that Teva actually intended to make the payments to the named (real)
    payees, the payees are fictitious, the cheques are deemed payable to bearer and
    the banks are not liable for negotiating the cheques.

[47]

Teva, on the other hand, contends that all six payees fall
    under Falconbridges fourth proposition. It relies on the modification to
    Falconbridges first proposition in
Boma
to bring the cheques payable to
    the two non-existing entities within the scope of Falconbridges fourth
    proposition. Teva argues that all six payees were real and not fictitious
    because Teva intended that the cheques drawn would discharge legitimate
    obligations to existing Teva customers, or suppliers to customers. Thus, the
    banks have no defence to its action for conversion, and this appeal should be
    dismissed.

(1)

Did the motion judge err by failing
    to hold that the banks had a valid defence under s. 20(5) of the
BEA
for
    the payees PCE Pharmacare and Pharma Team System because both were
    non-existing?

[48]

PCE
    Pharmacare and Pharma Team System were, in fact, non-existing. They were
    invented by McConachie and were creatures of his imagination. Teva has conceded
    as much. Thus, seemingly, these two payees fall under Falconbridges first
    proposition.

[49]

But,
    Teva fairly submits that simply because PCE Pharmacare and Pharma Team System
    did not in fact exist, is not decisive in the light of
Bomas
modification to the non-existing payee defence under Falconbridges first
    proposition. It submits that though both PCE Pharmacare and Pharma Team System
    were invented by McConachie, their names were similar to the names of
    legitimate customers of Teva, PCE Management Inc. and Pharma Systems. Thus,
    Teva argues it plausibly believed these imaginary entities were real persons
    with a connection to its business. Under the modification in
Boma
to
    the non-existing payee defence, they were real persons, not non-existing.

[50]

I
    do not agree with Tevas submission. It seems to me that to satisfy
Bomas
modification to the non-existing payee defence, Teva has to meet two
    requirements, and though it perhaps meets the first, it does not meet the
    second:

·

The name of the imaginary payee is sufficiently similar to the name
    of one of Tevas legitimate customers that Teva could plausibly, though
    mistakenly, maintain it was writing a cheque to a real person, a real creditor
    of its business: contrast
Westboro Flooring and Décor Inc. v. Bank of Nova
    Scotia
, [2004] 71 O.R. (3d) 723 (C.A.), at para. 25 and
Rouge Valley
,
supra
, at paras. 34-35.

·

At the time each cheque was drawn, Teva considered the name of
    the payee on the cheque and, because of the similarity in name, had an honest,
    though mistaken, belief that the named payee was a real customer or service
    provider. See
Rouge Valley
,
supra
, at paras. 34-38 and 40;
Kayani
    v. Toronto Dominion Bank
,

2014 ONCA 862
,
at paras. 39-42.

[51]

I
    accept that the made-up entity Pharma Team System has a name sufficiently
    similar to the name of Tevas real customer Pharma Systems that one might
    plausibly confuse the two. The same might be said of PCE Pharmacare and PCE
    Management Inc., though less obviously so. Indeed, the motion judge at para. 34
    of his endorsement found that the payees could plausibly be understood to be
    real entities and customers of the plaintiff. I would not interfere with this
    finding and so I accept that Teva meets the first requirement of the
    modification in
Boma
to the non-existing payee defence.

[52]

But
    the motion judge made no finding on the second requirement, and therefore erred
    because Teva led no evidence to show it met this requirement. On the evidence,
    those who were in positions of authority at Teva (and who arguably, could
    represent the drawers belief), could not have come to the honest but
    mistaken belief that the named payees Pharma Team System and PCE Pharmacare
    referred to Tevas real customers Pharma Systems and PCE Management Inc.

[53]

No
    one in a position of authority ever looked at any of the requisitions or the
    cheques. Clerks processed the cheques and mechanically applied signing
    officers signatures. The evidence does not even demonstrate that the clerks
    themselves turned their minds to the names on the requisitions or the cheques,
    or that they were misled by the similar names. Instead, the evidence reflects
    that no one gave the names on the requisitions or the cheques any thought at
    all. No officer or other responsible person at Teva considered the identity of
    the payees on the fraudulent cheques and formed an honest, though mistaken
    belief, that the named payees were legitimate customers or service providers.

[54]

By
    contrast, in
Boma
, Mr. Mange at least considered the identity of the
    payees on nine of the fraudulent cheques, and formed an honest, though mistaken
    belief that they were payable to legitimate customers of his companies.  And, it
    can be inferred from the reasons of Iacobucci J. that because Mr. Mange had viewed
    and formulated a mistaken belief that each of the names on the nine fraudulent
    cheques he authorized corresponded to one of his real customers, he would have
    formulated the same mistaken belief in the names had he viewed them on all 114
    cheques payable to the non-existing entities J.R. Lam or J. Lam. I draw
    this inference because Iacobucci J. goes on to treat the payees on all the
    cheques as real, and then considers all the cheques in his analysis of the
    fictitious payee defence.

[55]

This
    courts decision in
Westboro Flooring
is consistent with
Boma
,
    and markedly different from the case before us. In
Westboro Flooring
, the
    fraudster Duarte prepared 36 cheques payable to an imaginary payee with a very
    similar name to a real Westboro customer and presented the cheques to a signing
    officer for authorization. In holding that the banks did not have a defence
    under s. 20(5) of the
BEA
, this court concluded, at para. 25, that
    because Westboro had an existing supplier referred to by a very similar name,
    the signing officers, seeing this very similar name, plausibly believed they
    were paying a legitimate supplier and the error was one of misnomer and did
    not make the payee non-existing under the Falconbridge criteria.

[56]

Here,
    in summary, there is no evidence of anyone, other than McConachie, turning a
    mind to the names of the payees on the cheques at the time they were drawn.
    Tevas argument that PCE Pharmacare and Pharma Team Systems were payees under
    Falconbridges fourth proposition must fail for the same reason the drawers
    identical argument in
Rouge Valley
failed:

Third, as the trial judge noted in
Boma
, Mr. Mange,
    who ran the companies, actually considered the name of the payee when the
    cheques in question were drawn. The court could therefore find that he honestly
    believed he was paying a legitimate creditor of his business. Here, in
    contrast, no one responsible for running Rouge Valley considered any of the
    cheques authorized by Marshner. Therefore, no one at Rouge Valley could say
    that the cheques were being issued to a known entity with whom the hospital had
    previous legitimate business dealings.

[57]

In
    my opinion, the motion judge erred in failing to hold that both PCE Pharmacare
    and Pharma Team System were non-existing payees under Falconbridges first
    proposition, even as modified in
Boma
. The banks were entitled to treat
    the cheques to those two payees as payable to bearer. Correspondingly, Tevas
    conversion action on those cheques must fail.

(2)

Did the motion judge err in failing to hold that the banks had a
    valid defence under s. 20(5) of the
BEA
because the payees were
    fictitious?

[58]

Fictitiousness
    matters under s. 20(5) of the
BEA
and under Falconbridges fourth
    proposition only where the payees are real persons. In this case four of the
    payees  Pharmachoice, London Drugs, Pharma-Ed Advantage Inc.
[3]
and Medical Pharmacies Group  are real persons. They are or were Tevas
    customers or service providers.

[59]

Under
    Falconbridges propositions, whether these payees are fictitious depends upon
    the intention of the creator of the instrument, that is the drawer of a .
    cheque . But whose intent should the court look to? In
Boma
at para.
    40, Iacobucci J. said that the relevant intent for determining whether a payee
    is fictitious, is the intent of the drawer itself, not the intent of the actual
    creator of the instrument.
[4]
Where the drawer is a corporation, the intent of its directing mind or at least
    the intent of one of its responsible officers, is determinative.

[60]

Thus,
    it is Tevas intent or the intent of its directing mind, not McConachies
    intent that governs
[5]
.
    And the relevant time for determining Tevas intent is the time when the
    cheques were drawn, not afterwards. See
Kayani,
supra, at

para. 41.

[61]

So,
    if the payees are real persons intended by Teva to receive payment, then these
    payees are not fictitious, and the banks are liable for the loss. Conversely,
    if Teva has drawn cheques to order, not intending that the payees receive
    payment, then Teva is liable. In
Boma
, at para. 46, Iacobucci J.
    discussed the rationale for the fictitious payee defence:

The policy underlying the fictitious person rule seems to be
    that if a drawer has drawn a cheque payable to order, not intending that the
    payee receive payment, the drawer loses, by his or her conduct, the right to
    the protections afforded to a bill payable to order.

[62]

Although
    the motion judge found that the payees were not fictitious, he made no finding
    on Tevas intent, and at para. 28 of his endorsement he said incorrectly that
    the issue as to whether the drawer is a fictitious person is a question of
    fact. Because of this error and the absence of any finding on Tevas intent,
    the motion judges finding that the payees were not fictitious is not entitled
    to any deference on appeal.

[63]

Teva
    submits that the payees were not fictitious because it had the necessary intent
    to pay the named payees. Teva rests its argument on four planks: the affidavit
    evidence of Schmid shows Tevas intent; Tevas intent can be presumed; a
    general corporate intent should be inferred; and the case law uniformly
    supports its position.

[64]

The
    banks submit that the evidence establishes that Teva formed no intention at all
    for any cheques. They say that Schmids affidavit evidence is undermined by his
    evidence on cross-examination; that if a presumption of intent exists, it has
    been rebutted by the evidence; that a general corporate intent cannot be
    inferred as Teva consistently made CE payments contrary to its own approval
    policies; and that the cases Teva relies on are distinguishable on their facts.
    I agree substantially with the banks submission. The evidence does not support
    Tevas claim that it intended to pay the named payees.

[65]

Schmids
    evidence
. Schmid baldly asserted, at
    para. 10 of his affidavit filed on the motions, that []
at the
    time [Teva] issued the Fraudulent Cheques, [Teva] believed each of these
    cheques was to satisfy a legitimate obligation owed by [Teva] to a legitimate
    [Teva] customer or service provider. But Teva led no evidence to support this
    assertion and it did not stand up to cross-examination.

[66]

When
    he was cross-examined, Schmid admitted no cheque was legitimate; each cheque was
    defective on its face; in each case where the approval of one or more officers was
    required, none was obtained; and in each case McConachie approved the
    requisitions though he had no authority to do so; and finally, although the
    accounts payable department knew that McConachie had no authority to approve
    these transactions, the cheques were nonetheless issued. In the light of his admissions
    on cross-examination, Schmids evidence does not assist Teva in demonstrating
    the drawers intent to make legitimate payments to the payees.

[67]

Presumption
    of intent
.  Teva relies on
Boma
in arguing that Tevas intent to
    pay legitimate creditors should be presumed. Teva finds support for this
    argument at para. 57 of
Iacobucci J.s
    reasons
:

The validity of the cheques is not challenged; therefore, it
    must be presumed that the drawer intended the payees to receive the proceeds of
    the cheques.  Clearly, the appellants had no intention of transferring over
    $90,000 to Alm, rather than the payees, for no reason and via the circuitous
    route of third party cheques.

[68]

Standing
    alone, this paragraph does appear to lend some support to Tevas position. But
    this paragraph must be read in conjunction with the rest of Justice Iacobuccis
    analysis. For he goes on at para. 60 to consider and rely on Mr. Manges honest
    belief that the cheques were being made out for an existing obligation to a
    real person known to the companies. Having found that Mr. Mange formed an
    honest but mistaken belief about the legitimacy of the named payees, Iacobucci
    J. concluded that Mr. Mange also formulated the intent to pay the persons he
    mistakenly believed to be legitimate payees. Justice Iacobucci was not merely
    presuming Bomas intent; he found its intent in the evidence.

[69]

In
    the case before us, Teva has put forward no such evidence. To the extent it can
    rely on a presumption that it intended the payees to receive the proceeds of the
    fraudulent cheques, that presumption has been rebutted by the evidence of its
    undeniable, indeed admitted failure to follow its own approval process. Instead,
    Teva allowed every cheque to be requisitioned and approved solely by McConachie
    and then issued by one of its technicians without any scrutiny whatsoever.

[70]

Inference
    of corporate intent
.  Teva also argues that even if its intent to pay
    legitimate creditors cannot be presumed, it should be inferred. Teva contends
    that we should focus on the intent of the section of the overall enterprise to
    which it had delegated the drawing of cheques, its accounts payable department
    in Quebec. There, Teva employees who prepared the cheques knew they had been
    requisitioned and were payable to customers or service providers recognized by
    its accounting system. Teva did not intend to be robbed by these employees, and
    the employees issued the cheques intending to satisfy legitimate obligations.

[71]

Again,
    Teva draws support for its argument from the majority reasons in
Boma
.
    As in the case before us, all 155 cheques in
Boma
were written on the
    drawers pre-printed cheque forms. Alm used these pre-printed forms to create
    all the cheques, but she signed only 146 of them. She induced Mr. Mange to sign
    the other nine. Again, Iacobucci J. did not distinguish between the cheques
    signed by Mr. Mange and the cheques signed by Alm,
[6]
nor did he distinguish between the cheques payable to existing employees and
    the cheques payable to imaginary persons. He treated them all the same. He
    found that the fictitious payee defence did not apply to any of them.

[72]

Teva
    contends that implicitly, if not expressly, Iacobucci J. was inferring a
    general corporate intent to pay legitimate creditors from Mr. Manges specific
    knowledge of the nine cheques he was induced to sign. Without that inference of
    intent, the collecting bank in
Boma
, CIBC, would have had a good
    defence for all but the nine cheques signed by Mr. Mange - that is, a good
    defence for all the cheques signed by Alm.

[73]

I
    agree that the majoritys reasons seem to infer a general corporate intent to
    pay legitimate creditors from Mr. Manges specific knowledge of the nine
    cheques. However, on the evidence in this case, the same inference is not
    available.

[74]

In
Boma
, there was a basis in the evidence to conclude that Mr. Mange
    honestly but mistakenly believed the imaginary payees were legitimate and that
    he intended to make legitimate payments to these payees. Mr. Mange looked at
    nine cheques, Alm had authority to sign cheques, and she and Mr. Mange agreed
    that she could use her signing authority to sign cheques to pay legitimate
    company obligations when both he and his wife were unavailable.  See
Boma
    v. CIBC
(1995), 120 D.L.R. (4
th
) 250 (B.C.C.A.), at paras.
    8-17. Mr. Manges evidence regarding the nine cheques he did consider and his
    belief regarding these cheques, taken together with Alms role and authority
    within the companies, leads to the reasonable inference that Mr. Mange, as the
    companys directing mind, intended only to make payments to his legitimate
    customers.

[75]

Here,
    by contrast, there is no evidence from which a corporate intent could be
    inferred. Neither Tevas directing mind nor any of its responsible officers
    scrutinized or even looked at any of the fraudulent cheques. Its sensible
    cheque approval policies were not followed. Instead, the only person within
    Tevas organization who considered the identity of the payees on the cheques
    and the legitimacy of the payments was an employee who had no signing
    authority, and no authority even to requisition cheques or approve CE payments.
    On these unchallenged facts, no inference of a corporate intent to pay
    legitimate creditors should be drawn. To hold otherwise would render the
    fictitious payee defence under s. 20(5) of the
BEA
meaningless.

[76]

The
    case law
.  In addition to
Boma
, Teva relies in particular on two
    cases, which it argues support its position: the earlier Supreme Court of
    Canada decision in
Royal Bank of Canada v. Concrete Column Clamps
,
supra
,
    and the decision of Lederman J. in
Metroland Printing, Publishing and
    Distribution Ltd. v. Canadian Imperial Bank of Commerce
, [2001] O.J. No.
    1695 (Sup. Ct.), which was upheld by this court at (2002), 158 O.A.C. 11, with
    leave to appeal to the Supreme Court of Canada dismissed (2003), 180 O.A.C. 400
    (Note). But both cases differ from the case before us in important ways.

[77]

In
Concrete Column
, a payroll clerk, whose duty was to prepare salary
    cheques, perpetrated a fraud by preparing numerous cheques payable either to
    unknown persons or former employees who were not owed any wages. The clerk had
    the cheques signed by an authorized signing officer of the company, who did not
    know the employees personally, but who mechanically placed his signature on the
    cheques. The clerk then took the cheques to the companys bank, and by forging
    endorsements, obtained the proceeds.

[78]

In
    the companys action against the bank, the trial judge held that the cheques
    payable to the unknown persons were payable to fictitious persons and the bank
    was not liable for negotiating them. But he also held that the bank was liable
    for the cheques payable to the former employees, even though they were not owed
    any money. The trial judges decision was upheld by the Quebec Court of Appeal
    and by a majority in the Supreme Court of Canada.

[79]

The
    important distinction in
Concrete Column
is that for the cheques
    payable to former employees, the majority in the Supreme Court implicitly held
    that the intent of the signing officer was the intent of the company or drawer,
    even though the signing officer did not appear to be a directing mind of the
    company. By contrast, in the case before us, the intent of the technicians who
    prepared the cheques and mechanically applied signatures of Tevas signing
    officers could not be equated with Tevas intent. Nor could any intent of the
    signing officers be equated with Tevas intent as they never applied their
    signatures to the cheques or even saw them.

[80]

In
Metroland Printing
, which the motion judge relied on, an accounts
    payable supervisor defrauded her employer by causing the companys computer
    system to produce cheques with legitimate signatures but for non-existing
    obligations. The supervisor was to enter into the companys computer system the
    names of truck drivers who supplied services to the company, but instead she
    reversed the order of the drivers first and last names. She then stole the
    cheques that had been computer-generated and negotiated them.

[81]

In
    an action against the collecting banks for conversion, Lederman J., relying on
Boma
,
    found that the payees were neither non-existing nor fictitious. In doing so he
    made an important finding on the intention of the drawer, which differentiates
    that case from the one before us. At paras. 42-43 of his reasons he said:

The next question which must then be answered is what was the
    intention of the drawer of the cheques. Here, the plaintiff honestly expected
    that the cheques in question were being created in respect of valid obligations
    and being paid out to real individuals, i.e. the plaintiffs truck drivers. The
    fact that the names were created in reverse does not necessarily mean that
    these individuals were non-existing or fictitious. Rather, as the names on the
    cheques were essentially the same names as those of real drivers employed by
    the plaintiff, it follows that the plaintiff would have honestly believed that
    these cheques satisfied actual obligations. As a result, the defence of
    fictitious payee would not apply.

It is true that in the case at bar, as in
Boma
, the
    cheques were made out to non-existing persons, and neither Latiff nor Alm ever
    intended that the payees indicated on the cheques receive the cheques.
    Nonetheless, the plaintiff Metroland, the real drawer of the cheque, did
    believe that the cheques were being made out for existing obligations to real
    persons. As a result, following
Boma
, these payees are not fictitious,
    and subsection 20(5) of the
BEA
would not apply.

[82]

That
    finding was supportable because the cheques were generated in accordance with
    the companys usual practice. Here, by contrast, McConachie circumvented Tevas
    practice and Teva allowed him to do so.

[83]

For
    these reasons, the case law Teva relies on is distinguishable and does not
    support its position.

[84]

In
    saying that in this case no corporate intent should be found, I make two final
    points. First, I do not suggest that every cheque issued by a company must be
    scrutinized and approved by the signatory of the cheque. Of course now many
    companies, like Teva, use pre-printed cheques and have the signature of their
    authorized officers stamped on or applied mechanically. In large companies it
    might be impractical to expect every individual cheque, no matter how small the
    amount, to be scrutinized by the companys directing mind. But if these
    companies do not put in place and follow a policy for approving the issuance of
    their cheques, and if they are then defrauded by an employee within their
    organization, their action for conversion risks being met with a successful
    fictitious payee defence.

[85]

Conversely,
    had Teva followed its own approval policies and mistakenly approved the
    fraudulent cheques obtained by McConachie, I would have inferred a corporate
    intent to pay real creditors for legitimate obligations. Had those in a
    responsible position reviewed and mistakenly approved even some of the cheques
    (as in the case of
Boma
), Teva would have had a basis to argue that its
    intent should be inferred. But that is not the evidence in this case.

[86]

Second,
    my conclusion does not depend on an allocation of fault. It is not Tevas
    negligence for which it is being found liable, but rather its lack of corporate
    knowledge and therefore the absence of any evidence from which one could
    reasonably infer it intended to pay real creditors of its business for
    legitimate debts.

[87]

I
    conclude that Teva has failed to show it intended the four payees who are or
    were its customers or the two non-existing payees to receive the proceeds of
    the cheques. All these payees were fictitious and the banks were entitled to
    treat all the cheques as payable to bearer. Tevas conversion action must
    therefore fail.

E.

Conclusion

[88]

I
    would hold that the payees PCE Pharmacare and Pharma Team System were
    non-existing and that, even if they were deemed real, all six payees were
    fictitious. Therefore, under s. 20(5) of the
Bills of Exchange Act
,
    the banks have a valid defence to Tevas conversion action. I would allow the
    banks appeals, set aside the judgment of the motion judge, and dismiss Tevas
    action. The banks are entitled to their costs of the appeals, which I would fix
    in the agreed amount of $30,000, inclusive of disbursements and applicable
    taxes for each bank.

Released: February 2, 2016 (J.L)

John Laskin J.A.

I agree. K.M. Weiler J.A.

I agree. E.A. Cronk J.A.

[1]
2002, S.O. 2002, c. 24, Sch. B

[2]
This modification has been criticized. See the persuasive dissenting reasons of
    LaForest J. in
Boma
;
Geva
,
supra
and Crawford and Falconbridge, Banking
    and Bills of Exchange (Toronto: Canada Law Book, 1986) s. 4902.3(i) at p. 1254.

[3]
I accept Tevas position that Pharma-Ed Advantage Inc. simply changed its name
    to Majestic Waters Enterprises Inc. in March of 2004 but Teva continued to do
    business with, and issued legitimate cheques payable to Pharm-Ed Advantage
    Inc. after the name change.

[4]
Unless the person who signed the cheque is also the companys directing mind.
    See
Fok Cheong Shing Investments Ltd. v.
    Bank of Nova Scotia
, [1982] 2 S.C.R. 488. This aspect of the majority
    judgment in
Boma
has also been
    criticized. Again, see
Geva
,
supra
and LaForest J.s dissenting
    reasons in
Boma
. The basis of the
    criticism is that the majoritys view does not take account of the law of
    agency or vicarious liability in tort. See also Laskin C.J.C.s dissent in
Royal Bank of Canada v. Concrete Column Clamps
    Ltd.
, [1977] 2 S.C.R. 456.

[5]
If McConachies intent governed, or, in
Boma
,
    if Alms intent governed, then the payees would have been named by pretence,
    and would be fictitious under Falconbridges third proposition. In his dissent
    in
Boma
, LaForest J. so held for
    the 38 cheques signed by Alm and payable to existing employees.

[6]
LaForest J. did in his dissent. He ultimately concluded that the banks were
    liable for converting only three cheques  those payable to existing employees
    and signed by Mr. Mange.