R. v. Pearson, 2010 ABQB 727

Court of Queen ’ s Bench of Alberta Citation: R. v. Pearson, 2010 ABQB 727 Date: 20101123 Docket: 070460001Q1 Registry: Edmonton Between: Her Majesty the Queen - and - Richard Henry Pearson Accused _______________________________________________________ Oral Reasons for Judgment of the Honourable Mr. Justice T.D. Clackson _______________________________________________________ I. Introduction [ 1 ] The accused is charged with having defrauded the Bank of Montreal of $198,353 by deceit, falsehood or other fraudulent means between December 1, 1998 and February 28, 1999.

The charge relates the accused writing cheques on one account at the Bank of Montreal which he deposited at one of the bank’s automated teller machines to the credit of another account he had with the Bank when there were not enough funds in the first account to cover the cheque. [ 2 ] The two accounts at issue in this case relate to Auto Transport Inc. and R. Pearson Auto Transport Inc. (hereinafter ATI and

PAT, respectively). [ 3 ] PAT was originally incorporated by the accused in 1992. The accused moved PAT’s banking to the Bank of Montreal in 1995 and from that point forward, the banking affairs of PAT and later ATI were handled by one of the bank’s account managers, Ms. Connie Sun. [ 4 ] In September 1996 an agreement was reached between the bank and PAT which granted PAT credit up to $100,000 in its business bank account. In exchange for that facility, PAT provided security in the form of guaranteed investment certificates equal to $100,000.

The accused understood and the evidence supports the fact that if PAT was more than $100,000 in debt to the bank on its account, the “overdraft” would bear interest at 21% per annum. The loan agreement provided for interest at a much lower rate on the $100,000 line of credit. The evidence establishes that there were many instances where PAT exceeded its line of credit and when that occurred, “overdraft” fees would be charged against the account. On occasion, the overdraft would prompt a documented temporary increase in credit. That increased credit would be issued by Ms. Sun. [ 5 ] Ms.

Sun would receive a report daily on any of her accounts which were overdrawn and upon receipt of those reports she had to determine whether to cover the cheque or cheques which put the account in an overdrawn circumstance or reject and return the cheque. It was in this way that documented temporary extensions of overdraft privileges were arranged. Despite substantial and chronic overdrafts on the PAT account very, very few cheques written on that account were ever rejected by the Bank of Montreal. [ 6 ] The original agreements between PAT and the bank were reviewed and renewed in September 1997.

In or around December, 1997, in an effort to get a better handle on his accounting affairs and with the advice of a chartered accountant, the accused formed ATI and some other companies. He made arrangements to hire a certified management accountant, Les Barnhouse, to assist with his accounting difficulties. He made an arrangement for a business account with the Bank of Montreal for ATI through Ms. Sun and secured a line of credit for that account in the amount of $150,000. The credit agreement for ATI was increased in June, 1998 to $250,000. Ms. Sun was responsible for both the ATI and PAT accounts.

The loan accounts were further secured with guarantees and personal security agreements. [ 7 ] Despite the cost of overdraft fees and the reorganization of the corporate affairs, the accounts were regularly in an overdraft position. While the line of credit and loan agreement appeared to prohibit overdrafts, the bank continued to allow that very thing. [ 8 ] As I have said, Ms. Sun was account manager for both accounts and would get reports on a daily basis of the accounts which were overdrawn. Therefore she knew when ATI and PAT were overdrawn.

She testified that she told the accused if either account was overdrawn and the deficit wasn’t covered by noon of the day she had received the report of the overdraft, she would return the cheque. By that I understood her to mean she would reject the claim on the overdrawn account on the basis of insufficient funds. The accused said he did start writing cheques from one account to the other to keep them in line. When exactly the accused started this practice is unclear but from the records produced, there were instances where cheques on both accounts were returned, in the month of October. Mr.

Barnhouse’s evidence and the accused’s evidence lead me to believe that Ms. Sun did advise the accused that unless the overdrafts were covered by noon of the day of the report, the cheques would be returned. However, there were a number of instances in the ATI account and a few on the PAT account where that threat was not acted upon. [ 9 ] In October 1998, Mr. Barnhouse testified that he discovered an ATM cheque deposit in the sum of $30,000. He testified that he talked to the accused to find out where the money had come from as Mr.

Barnhouse did not believe there was money in the account upon which the cheque had been drawn to cover the cheque. He testified that the accused said not to worry as it would take two to three days for the cheque to clear. Mr. Barnhouse was not clear whether his concern was respecting the deepening overdraft or the legality of the practice. In any event, the accused testified and I accept, that he thought Mr. Barnhouse was concerned about the overdraft charges. The accused did not understand Mr. Barnhouse’s comment to be directed at legality.

The accused explained his comment, about time to clear, as being a reference to when he expected to receive funds from third parties to cover the overdraft. [ 10 ] Ultimately, the accused wrote a number of cheques back and forth between the ATI and PAT accounts and used the ATM at one of the Bank of Montreal branches to make the deposits. That practice continued until Ms. Ma became the responsible account manager for the ATI and PAT accounts. She quickly became suspicious of the transactions in the account and she stopped payment on the inter-company deposits.

II. Analysis A. The Law [ 11 ] The applicable law was summarized and restated by McLachlin J., as she then was, in R. v. Th é roux , 1993 CanLII 134 (SCC) , [1993] 2 S.C.R. 5. The salient portions of her opinion are as follows: . . . Speaking of the actus reus of this offence, Dickson J. (as he then was) set out the following principles in Olan : (

i) the offence has two elements: dishonest act and deprivation; (ii) the dishonest act is established by proof of deceit, falsehood or "other fraudulent means"; (iii) the element of deprivation is established by proof of detriment, prejudice, or risk of prejudice to the economic interests of the victim, caused by the dishonest act. . . .

Just as what constitutes a lie or a deceitful act for the purpose of the actus reus is judged on the objective facts, so the "other fraudulent means" in the third category is determined objectively, by reference to what a reasonable person would consider to be a dishonest act. . . As noted above, where it is alleged that the actus reus of a particular fraud is "other fraudulent means", the existence of such means will be determined by what reasonable people consider to be dishonest dealing.

In instances of fraud by deceit or falsehood, it will not be necessary to undertake such an inquiry; all that need be determined is whether the accused, as a matter of fact, represented that a situation was of a certain character, when, in reality, it was not. . . This brings us to the mens rea of fraud. . . Most scholars and jurists agree that, leaving aside offences where the actus reus is negligence or inadvertence and offences of absolute liability, the test for mens rea is subjective.

The test is not whether a reasonable person would have foreseen the consequences of the prohibited act, but whether the accused subjectively appreciated those consequences at least as a possibility. In applying the subjective test, the court looks to the accused's intention and the facts as the accused believed them to be: G. Williams, Textbook of Criminal Law (2nd ed. 1983), at pp. 727-28. Two collateral points must be made at this juncture. First, as Williams underlines, this inquiry has nothing to do with the accused's system of values.

A person is not saved from conviction because he or she believes there is nothing wrong with what he or she is doing. The question is whether the accused subjectively appreciated that certain consequences would follow from his or her acts, not whether the accused believed the acts or their consequences to be moral. Just as the pathological killer would not be acquitted on the mere ground that he failed to see his act as morally reprehensible, so the defrauder will not be acquitted because he believed that what he was doing was honest.

The second collateral point is the oft-made observation that the Crown need not, in every case, show precisely what thought was in the accused's mind at the time of the criminal act. In certain cases, subjective awareness of the consequences can be inferred from the act itself, barring some explanation casting doubt on such inference. The fact that such an inference is made does not detract from the subjectivity of the test.

Having ventured these general comments on mens rea, I return to the offence of fraud. The prohibited act is deceit, falsehood, or some other dishonest act. The prohibited consequence is depriving another of what is or should be his, which may, as we have seen, consist in merely placing another's property at risk. The mens rea would then consist in the subjective awareness that one was undertaking a prohibited act (the deceit, falsehood or other dishonest act) which could cause deprivation in the sense of depriving another of property or putting that property at risk. If this is shown, the crime is complete.

The fact that the accused may have hoped the deprivation would not take place, or may have felt there was nothing wrong with what he or she was doing, provides no defence. To put it another way, . . . the proper focus in determining the mens rea of fraud is to ask whether the accused intentionally committed the prohibited acts (deceit, falsehood, or other dishonest act) knowing or desiring the consequences proscribed by the offence (deprivation, including the risk of deprivation).

The personal feeling of the accused about the morality or honesty of the act or its consequences is no more relevant to the analysis than is the accused's awareness that the particular acts undertaken constitute a criminal offence. . . . These doctrinal observations suggest that the actus reus of the offence of fraud will be established by proof of: 1. the prohibited act, be it

an act of deceit, a falsehood or some other fraudulent means; and 2. deprivation caused by the prohibited act, which may consist in actual loss or the placing of the victim's pecuniary interests at risk. Correspondingly, the mens rea of fraud is established by proof of: 1. subjective knowledge of the prohibited act; and 2. subjective knowledge that the prohibited act could have as a consequence the deprivation of another (which deprivation may consist in knowledge that the victim's pecuniary interests are put at risk). Where the conduct and knowledge required by these

definitions are established, the accused is guilty whether he actually intended the prohibited consequence or was reckless as to whether it would occur. The inclusion of risk of deprivation in the concept of deprivation in Olan requires specific comment. The accused must have subjective awareness, [page21] at the very least, that his or her conduct will put the property or economic expectations of others at risk. . . In certain cases, the inference of subjective knowledge of the risk may be drawn from the facts as the accused believed them to be.

The accused may introduce evidence negating that inference, such as evidence that his deceit was part of an innocent prank, or evidence of circumstances which led him to believe that no one would act on his lie or deceitful or dishonest act. B. Falsehood [ 12 ] It is apparent that there is no room in the definition of fraud for mistake of fact: R. v. Wolsey (2008), 2008 BCCA 159 (CanLII) , 233 C.C.C. (3d) 205 B.C.C.A.

Therefore, it would not avail the accused in this case if he said he honestly believed that the bank would cover the cheques he wrote despite the lack of funds because they had done so on virtually every occasion in the past. The actus reus is complete upon the accused voluntarily writing a cheque on an account without funds. That is a falsehood (false representation as to the existence of funds). The issue that remains however, with respect to the actus reus is whether there was in fact insufficient funds at the time the cheques were written. In my view, there were sufficient funds.

The accounts involved were regularly and routinely funded by the bank’s allowance of an overdraft. There were but two criteria relevant to that extension of credit: that any overdraft would be covered by noon on the day it occurred and interest was chargeable on all overdrafts at the rate of 21% per annum. Far from prohibiting the use of overdraft, Ms. Sun actually sanctioned the practice as it was plainly and regularly occurring and she would have had reports of that fact in relation to both accounts virtually every day from October 1997 until February 1999 when she no

longer had responsibility for the accounts. In effect, there were funds pre-authorized in each of the accounts subject to the bank’s discretion. Therefore, the representation by the Defendant, that by writing and depositing a cheque, there were funds in the account to cover the cheque, was accurate. Plainly the representation could prove to be false by noon the next day, but in my view, after all, the bank could, as it had in the past, simply do nothing. The actus reus requires falsity independent of unpredictable third party intervention. C. Other Fraudulent Means 1.

Actus Reus [ 13 ] Is the actus reus of dishonest dealing (other fraudulent means) made out? Plainly, it is dishonest to write a cheque drawing on an account which has no money. However, I have already dealt with insufficient funds issue and concluded that it is not made out as a fact.

In this case, the alleged dishonesty is the use of the ATM facilities to make deposits which when coupled with the bank’s clearing rules and the knowledge that the funds withdrawn may only last until noon of the day after the ATM deposit created the false impression that the corporations were able to cover the overdrafts incurred. [ 14 ] In my view, the actus reus is made out. There is no question that the Defendant had subjective knowledge of what he was doing. As well, I am satisfied that Ms. Sun did conclude that the corporations were able to cover the overdrafts. Ms.

Sun testified, and I accept, that she could not check an individual deposit immediately to see the source of the funds. That required her to request the item from the bank’s clearing house and there would be a delay in obtaining the item. Implicitly, she assumed, perhaps carelessly, that the source of deposited funds did not originate from an overdraft on one of the customer’s other accounts.

She did say had she known the source of the funds deposited to cover overdrafts were the product of an overdraft, she would have returned the cheque as NSF. [ 15 ] While I am not convinced that the Defendant knew what he was doing was wrong, that is not the test. The evidence compels the inference that the Defendant knew he did not have the present ability to cover the overdrafts in the account when writing the cheques and while the bank had effectively extended him overdraft credit, he knew that the credit was supposed to be dependent on the overdraft being covered by noon of the day following the overdraft.

Something he knew he could not accomplish except by drawing down the overdraft credit on another account. In those circumstances, I am forced to conclude that a reasonable person would recognize the Defendant’s actions as dishonest. In my view it is obvious that the bank’s fund were at risk. 2.

Mens Rea [ 16 ] The foregoing analysis relating to dishonesty has application in the analysis of whether the Crown has proved that the Defendant had the necessary guilty mind. [ 17 ] There is nothing in the Defendant’s evidence or any of the rest of the evidence which undermines the inference that he knew he did not have the present ability to cover the overdraft without using the bank money and the inference that he knew that doing what he was doing put the bank’s money at risk.

That is sufficient. [ 18 ] Accordingly, the Defendant is guilty of having defrauded the Bank of Montreal by other fraudulent means of a sum in excess of $5,000. Heard on the 1 st day of November, 2010. Delivered orally on the 12 th day of November, 2010. Dated at the City of Edmonton, Alberta this 22 nd day of November, 2010.

T.D. Clackson J.C.Q.B.A. Appearances: Leah Boyd Special Prosecutions for the Crown David R. Cunningham Beresh Cunningham for the Accused