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WHITE COLLAR CRIME

Cheque fraud: know your payee

Jim Patterson and Kirsten Thoreson,
Bennett Jones LLP

Cheque fraud victims may

benefit from taking certain
precautions, including
obtaining actual knowledge
about their intended payees.
There is a reason one should take
special care when issuing cheques
and carefully consider the specific
description of the payee(s). In certain
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circumstances of cheque fraud, doing

so (or not) may be key to determining liability.
For instance, Canadian corporate
names must include a legal element
suffix (e.g. Ltd., Inc., Corp., etc.).
Though such suffixes are often overlooked, a recent Ontario Court of
Appeal case highlights the fact that
these suffixes do matter.

Bank liability
When a bank deposits a cheque into
the account of an entity that is not

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entitled to such a deposit, the bank

may be found liable in an action for
conversion and required to repay the
full value of the funds. In conversion,
it does not matter that a bank was an
innocent party in the transaction or
that it acted diligently in carrying out
the transaction; these circumstances
are not defences to a claim for conversion, since conversion is a strict
liability tort.
But, there is a statutory defence
available in conversion actions
against banks. Where a cheques
See White Collar Crime, page 93

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payee is determined to be fictitious or
non-existing, the bank will not be
held liable for conversion, and the
victims of the fraud will not be entitled to recover from the bank. (See:
Bills of Exchange Act, s.20(5).)
Fortunately for victims of fraud, if
the payee is the name of a real person
who was intended by the drawer to
receive payment, the payee is neither
fictitious nor non-existing and the
bank will be liable. This principle
applies even if the drawer has been
induced to draw the bill by the fraud
of some other person who has made
false representations about the payees
entitlement to the amount of the bill.

Kayani case
The fictitious or non-existing person
defence to conversion was recently
considered by the Ontario Court of
Appeal in Raza Kayani LLP v.
Toronto-Dominion Bank (Kayani).
The Court heard two separate but
related actions concerning instruments (cheques and a bank draft)
made payable to Nithiyakalyaani
Jewellers.
Unfortunately for the plaintiffs,
Nithiyakalyaani Jewellers was a registered sole proprietorship that had
been created by a fraudster to be
intentionally similar to Nithiyakalyaani Jewellers Ltd., an entirely different incorporated company that was
owned by strangers to the transactions at issue.
Everyone agreed that the plaintiffs
were victims of fraud. The issue was
whether the collecting bank should
bear the financial consequences of
that fraud. The bank denied liability,
claiming that Nithiyakalyaani Jewellers was a fictitious or non-existing
person.

Trial judgment
The trial judge found the defendant
bank liable for conversion, holding
that the bank could not rely on the fictitious or non-existing person exceptions. The Court found that whether a

payee is fictitious depends on the

intention of the drawer of a cheque.
In the Kayani case, the payee was
not fictitious because the plaintiffs
made their instruments payable to
Nithiyakalyaani Jewellers with the
honest belief that the instruments
were being made out for an existing
obligation to a real company, despite
the fact that the name of the payee
was not precisely accurate.

Appeal decision
The Court of Appeal disagreed. It
held that the payee was not the name
of any real person known to the
drawers at the time they drew the
instruments. The payee was, therefore, non-existing and the bank was
not liable.

Knowledge review
A determination of whether a cheque
is payable to a non-existing person
requires a review of the payor s
knowledge of the payee at the time
the instruments were drawn. In the
Kayani case, the plaintiffs admitted
that, at the time the instruments were
drawn, they had no dealings with, no
prior business relationship with and
no knowledge of the payee (with or
without a Ltd. suffix). The plaintiffs did not know whether the payee
was a sole proprietorship or an incorporated entity.

Actual knowledge
To succeed against the non-existing
payee exception, the payor must have
knowledge of the payee, at least in
the sense of awareness of the payee
and who he or she is. The victims in
Kayani did not have actual knowledge of the intended payee at the
time the funds were deposited.
Rather, they simply named the
payee as they were directed by the
fraudster. The Court held that the
victims could not have believed they
were paying a company of which
they had no actual knowledge.
In the course of completing the
transaction, one of the victims had

Legal Alert March Volume 33 Number 12

simply searched the name on Canada

411 and found a business listed under
what they believed to be the proper
name and address. The Court found
that search to be insufficient to establish an intention to direct payment to
the proper payee.

Significance
Cheque fraud cases involving determinations of liability are highly dependent on the facts and circumstances of
the specific case. However, the Court
of Appeals decision in Kayani indicates that victims may benefit from
taking certain precautions, including
obtaining actual knowledge about their
intended cheque payees.
Companies should be diligent in
determining the nature of entities
named as payees on the cheques that
they issue. Investigation is warranted
before cheques are made payable to
entities with whom a payor has not
previously dealt, even if based on
directions and representations from a
trusted third party.
It is unlikely to be sufficient to
simply know the name of a payee: if
the payee is a company, a payor should
clarify the precise type of business
enterprise; check the address; and
obtain verification documents and
registered corporate searches.
If the payee is an individual, the
payor should verify the individuals
full name. Finally, the payor should
consider retaining records of any
searches conducted (or other measures taken) to substantiate the identities of payees, in case of litigation.
REFERENCES: Raza Kayani LLP v.
Toronto-Dominion Bank, 2014
ONCA 862, 2014 CarswellOnt 16810
(Ont. C.A.), at para 11; Raza Kayani
LLP v. The Toronto-Dominion Bank,
2013 ONSC 7967, 2013 CarswellOnt
18666 (Ont. S.C.J.), at paras. 70, 37,
41, 44; Bills of Exchange Act, RSC
1985, c B-4, s.20(5); Rouge Valley
Health System v. TD Canada Trust,
2012 ONCA 17, 2012 CarswellOnt
255 (Ont. C.A.), at paras. 22-23.
A Carswell Publication

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