Supreme Court of Canada finds TD, Scotiabank liable for $5.5 million employee fraud

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The Supreme Court of Canada has handed down its latest ruling in regards to a former Teva Canada Ltd employee carrying out a multi million dollar cheque fraud.

In a 5-4 decision, Canada’s top court has ruled that TD and Scotiabank will be held liable for the $5.5 million loss resulting from the scheme, and Teva, a major pharmaceutical company, will not be held responsible. The Supreme Court stated that the responsibility falls on the two banks that the former employee used, TD Canada Trust and the Bank of Nova Scotia.

“To allocate losses to the drawer for having failed to identify and detect fraud is inconsistent with the strict liability tort of conversion, which makes any negligence on the part of the drawer or the banks in preventing the fraud irrelevant,” Justice Rosalie Abella wrote on behalf of the court in Teva Canada Ltd. v. TD Canada Trust and Bank of Nova Scotia.

The scheme that spurred the dispute involved drafting false cheque requisition forms for six businesses — four using the names of company customers and two with similar names of existing customers. The former Teva employee then registered the business names as sole proprietorships and opened bank accounts for them, depositing 63 fraudulent cheques amounting to $5.5 million.

In their next step, Teva filed against the banks, stating that they were liable for the conversion and not the company themselves. An Ontario Superior Court judge had ruled in favour of Teva, but the Court of Appeal reversed that decision in 2016, finding the banks were not liable.

At issue in the appeal to the Supreme Court was whether the payees were fictitious within the meaning of s. 20(5) of the Bills of Exchange Act. A defence of conversion applies if cheques are made out to “fictitious or non-existing” payees.

In the majority decision, the court laid out a two-step test for how a bank must prove a payee is fictitious. The first step involves whether the drawer intends to pay the payee. If they do not, the payee is fictitious and they should not be able to recover from the bank.

If the bank is not able to prove the drawer intended to pay the payee, the second step of the test involves asking whether the payee is legitimate or whether a payee could reasonably be mistaken for a legitimate payee.
If the answer is no to both of these, the payee does not exist and the drawer is liable.

Read the full story over at the Canadian Lawyer.

This story was summarized by Canadian Fraud News Inc.