2011 QCCA 226, 2011 QCCA 226

124329 Canada inc. c. Banque Nationale du Canada/National Bank Of Canada 2011 QCCA 226 COURT OF APPEAL CANADA PROVINCE OF QUEBEC REGISTRY OF MONTREAL No: 500-09-019298-090 (500-17-027537-052) DATE: February 8, 2011 CORAM: THE HONOURABLE FRANÇOIS PELLETIER, J.A. JACQUES DUFRESNE, J.A. NICHOLAS KASIRER, J.A. 124329 CANADA INC. TERRY JACKSON C. JACK JACKSON ROBERT D. JACKSON APPELLANTS – plaintiffs v.

BANQUE NATIONALE DU CANADA / NATIONAL BANK OF CANADA RESPONDENT – defendant JUDGMENT [ 1 ] THE COURT: On appeal from a judgment of the Superior Court, District of Montreal (the Honourable Guylène Beaugé) rendered on December 4, 2008, rectified on January 28, 2009, dismissing the appellants' claim in civil liability for damages; [ 2 ] For the reasons of Kasirer, J.A., with which Pelletier and Dufresne, JJ.A. agree: [ 3 ] ALLOWS the appeal, with costs throughout; [ 4 ] CONDEMNS the respondent to pay the appellants the sum of $454,206.12, with interest at the legal rate from the date of service of the motion to institute proceedings and the additional indemnity provided for by law.

FRANÇOIS PELLETIER, J.A. JACQUES DUFRESNE, J.A. NICHOLAS KASIRER, J.A. Mtre Christine Gosselin Mtre Benoît Côté CÔTÉ GOSSELIN For the appellants Mtre Jocelyne Gagné LAVERY, De BILLY For the respondent Date of hearing: September 21, 2010

REASONS OF KASIRER, J.A. I Introduction [ 5 ] Lawyers and persons in like circumstances charged with the administration of property of others regularly transfer funds that they hold in their trust accounts to a personal or firm account in the ordinary course of business. A cheque drawn on a trust account for deposit into a personal account might well excite the suspicion of a bank called upon to negotiate the instrument.

Banks are not, however, in the business of supervising fiduciary arrangements between their customers and third parties, and subjecting all such transactions to time-consuming and costly verifications is plainly unjustified.

When in Quebec law should a bank – strictly speaking, a "stranger" to obligations imposed on the administrator of property of others – be obliged to make inquiries as to the appropriateness of dealings in a trust account based on its duties to third parties? [ 6 ] Not only are banks not responsible for supervising trusts, the law provides defences where it would be unfair or inefficient to require them to bear the risk associated with certain transactions on a cheque drawn from any account, including one in which funds are held in trust.

The application of one of these defences to misdealing in a lawyer’s trust account – a bank’s defence relating to a cheque made to the order of a "fictitious or non-existing person" as that expression is understood in subsection 20(5) of the Bills and Exchange Act [1] – is at the core of this appeal.

Does this defence limit the duty a bank owes to third parties for whom a lawyer holds money with the bank in trust? [ 7 ] In dismissing the appellants' claim for damages in the present case, the Superior Court held that this defence absolved the respondent from liability to victims of a lawyer’s misdeeds, even though the judge considered that the Bank had failed to take the otherwise appropriate precautions of verifying the endorsements on the cheque drawn on the lawyer's trust account. The victims were third parties to the cheque and persons to whom the Bank only owed a general, extracontractual duty of care.

They appeal, alleging the Bank’s imprudent conduct should require it to make good the loss notwithstanding the fictitious payee defence. II The Relevant Facts [ 8 ] Investors Terry Jackson, Jack Jackson, Robert Jackson and Richard Jackson (the latter acting through his holding company 124329 Canada Inc.) say they lost $500,000 as a result of fraud perpetrated by, among others, Mtre Martin Blanchet.

They seek to recoup the funds from the respondent, claiming that the Bank was negligent in allowing their investment, which was held in trust by Mtre Blanchet at their direction, to be absconded by him in a series of transactions he undertook at one if its branches on September 26, 2002. [ 9 ] To understand the issues presented in this appeal properly, it is useful to divide the sequence of events into three periods: (

i) background to the loan made by the Jacksons on September 16, 2002; (ii) Mtre Blanchet's transactions at the Bank on September 26, 2002; and (iii) subsequent events relevant to the funds invested by the Jacksons. (

i) Background to the loan of September 16, 2002 [ 10 ] In November 2001, Richard Jackson was looking for investment opportunities and, in that connection, he met with Lynnwood Farr, the principal in a company called CareAction. Mr Farr sought financing to restart his business. He solicited a loan of $500,000 from Mr Jackson and his brothers as part of a US$600,000 guarantee for a further loan he claimed to be negotiating with Louis Muro, the principal of a company called Mari-Cap. [ 11 ] In the spring of 2002, Richard Jackson met Mr Muro who confirmed his intention to lend $5 million to CareAction.

Mr Jackson was convinced of the bona fides of the proposed financing.

Without undertaking extensive verifications of the circumstances or the players involved, Mr Jackson arranged in August of 2002 that his brothers join him in lending $500,000 to CareAction. [ 12 ] Under the terms of the loan agreement dated September 16, 2002, the parties agreed that the funds would be held in an interest bearing bank account in the name of CareAction over which Richard Jackson would have joint signing authority with Mr Muro. [ 13 ] The trial judge observed that in fact the Jacksons remitted the sum to Mtre Blanchet, Mr Farr’s lawyer, at the suggestion of Mr Farr and Mr Muro.

This was confirmed in the Bank’s defence to the action at trial. Financial statements of CareAction filed in evidence confirmed that Mtre Blanchet held funds loaned by the Jacksons in his trust account. [ 14 ] The funds were indeed deposited in Mtre Blanchet's trust account at a branch of the respondent on Décarie Boulevard in Montreal.

The record of account number [...] (Martin Blanchet in trust) showed two deposits of $100,000 each, less bank charges, dated September 17, 2002, and a further deposit of $300,000, made on September 19, 2002, all of which correspond to the monies loaned by the Jacksons to CareAction pursuant to the September 16, 2002 loan agreement. [ 15 ] Under the agreement, the loan was to be repaid within 150 days if the Mari-Cap $5 million financing was cancelled.

That financing did not materialize but the Jacksons' loan was never repaid. (ii) Mtre Blanchet's transactions at the Bank on September 26, 2002 [ 16 ] On September 26, 2002, Mtre Blanchet presented himself at the counter of the Décarie Boulevard branch of the respondent. He had been a client of the National Bank since 1996 and was well known at the branch. According to one of the senior employees at the branch, he was considered to be a jovial man and a bon père de famille .

Mtre Blanchet had at least three accounts in his name at the branch: a current account in Canadian dollars for his firm, a trust account for his work as a practising lawyer and a personal account in

U.S. dollars. [ 17 ] At the counter that day, with the assistance of a teller, Mtre Blanchet initiated at least fifteen transactions, in succession, involving all three accounts. At the end of the day, the funds that the Jacksons had advanced under the terms of the loan agreement were no longer in Mtre Blanchet’s trust account. The Jacksons would never retrieve the money and they blame the Bank for the loss. They say Mtre Blanchet diverted the funds from his trust account to his personal account without their knowledge or consent.

They allege the Bank's failure to verify the correctness of Mtre Blanchet's transactions of September 26, 2002 amounted to a breach of the duty of care owed to them by the Bank under

article 1457 C.C.Q. They claim that this extracontractual civil wrong resulted in the loss of the whole of their $500,000 investment thereby rendering the Bank liable to them. [ 18 ] The transactions on September 26, 2002 deserve close attention.

a) Transactions pertaining to the trust account [ 19 ] Before the September 26, 2002 transactions took place, the balance in Mtre Blanchet’s trust account was $511,688.10, the bulk of which represented money held in trust for the benefit of the Jackson brothers. [ 20 ] Mtre Blanchet made three initial deposits which brought his trust account balance to $1,132,300.89: (

i) a deposit to his trust account of a cheque of $81,348.79 from the Government of Canada, payable to Care Transportation International Limited, endorsed by the payee; (ii) a deposit to his trust account of Can$109,900, transferred from his personal account in U.S. dollars; (iii) a deposit, to his trust account, of a cheque drawn on his current business account of $429,364, payable to the Coopérative de Production Supérieure de l’émeu du Québec. This cheque appeared to have been endorsed by the payee. [ 21 ] Next, he withdrew from his trust account the following amounts: (

i) An amount of $429,364 converted to U.S. funds and deposited to his personal account in U.S. funds; (ii) An amount of $8,827.50 converted to U.S. funds and deposited to his personal account in U.S. funds; (iii) A cheque drawn on his trust account by him, in the amount of $681,110, made payable to the order of the Coopérative de Production Supérieure de l’émeu du Québec. This cheque was endorsed twice: first, in appearance, by the payee and, second, by Mtre Blanchet for deposit into his current business account. [ 22 ] At the end of business on September 26, 2002, the balance of the trust account was $12,999.39.

b) Current account for firm business [ 23 ] The account balance at the start of the day was $1,280.18. [ 24 ] As noted, Mtre Blanchet deposited the cheque for $681,110, payable to the Coopérative de Production Supérieure de l’émeu du Québec, to his current account for the firm. Following that deposit the balance was $682,390.18. [ 25 ] Mtre Blanchet effected three withdrawals from this account: (

i) a transfer in the amount of Can$250,000 to the credit of his personal account in U.S. funds; (ii) a second transfer in the amount of Can$2,000 to the credit of his personal account in U.S. funds; (iii) as noted, a withdrawal by cheque drawn by him, payable to and apparently endorsed by the Coopérative de Production Supérieure de l’émeu du Québec in the amount of $429,364, for deposit in his trust account. [ 26 ] Following these transactions, Mtre Blanchet’s current business account showed a balance of $726.18.

c) Personal account in U.S. funds [ 27 ] At the start of the day on September 26, 2002, his personal account in U.S. funds showed a balance of US$234,384.61. He undertook the following transactions as part of the fifteen operations undertaken that day: a withdrawal of the equivalent of Can$109,900 transferred to his trust account; and four inter-account transfers in various amounts from his trust account and his current business account. At the end of the day on September 26, the balance of this account was US$600,256.54. [ 28 ] In

summary, the result of the fifteen transactions effected at the counter on September 26, 2002 was as follows: the trust account began the day at $511,688.10 and ended the day at $12,999.39. His business account began the day at $1,280.18 and ended the day at $726.18. His personal U.S. dollar account began the day US$234,384.61 and ended the day at US$600,256.54. Money is, of course, fungible property and a precise tracing of the Jackson's funds is impossible.

But it can be said that the $500,000 investment from the Jacksons began the day in his trust account and, after the fifteen transactions undertaken by Mtre Blanchet at the teller's wicket, it was no longer there. An equivalent sum was in Mtre Blanchet’s personal U.S. dollar account. [ 29 ] All of these transactions were effected at the counter of the branch. The Bank admits that it undertook no substantial verification nor asked any meaningful questions in respect of the endorsements of the two cheques payable to the Coopérative de

Production Supérieure de l’émeu du Québec.

It admits that it made no serious inquiries as to the validity of the sequence of withdrawals- deposits-transfers made by Mtre Blanchet in the course of the fifteen transactions. [ 30 ] At trial, much attention was focussed on the cheque, dated September 26, 2002, that was drawn on Mtre Blanchet’s trust account at the branch of the National Bank and made payable to the Coopérative de Production Supérieure de l’émeu du Québec. [ 31 ] The trial judge found that Mtre Blanchet had no intention of benefiting the payee of the cheque, which was a company connected at one time to Mr Farr.

The cheque had been endorsed twice and included a direction that the cheque be deposited to the personal account of the lawyer. The back of the cheque was stamped "ENDOSSEMENT GARANTI, Banque nationale du Canada", with the address of the branch and a signature of the Director of Financial Services of the branch next to the stamped notation "DIR.".

This appears immediately underneath the indication "pour dépôt seulement au crédit de Me Martin Blanchet". [ 32 ] As I said, the Bank made no inquiries and deposited this cheque in Mtre Blanchet's firm account as directed and, from there, allowed the various transactions such that the funds later would end up in his personal U.S. dollar account. The endorsements by the payee on the cheque were later discovered to be forged. [ 33 ] As we shall see, the events of September 26, 2002 hold the key to the outcome of the appeal.

But before further examining their detail, it is useful to sketch the events that followed and the discovery of the fraud by the Jacksons. (iii) Subsequent events relevant to the funds invested by the Jacksons [ 34 ] On November 13, 2002, Mtre Blanchet drew a bank draft in the amount of US$500,012.50 from his personal U.S. dollar account at the branch, payable to a company called CIRDE, apparently connected to Mr Farr. [ 35 ] Still under the impression that their funds were in the lawyer’s trust account, Richard Jackson gave instructions to Mtre Blanchet to transfer the money to the "blocked account" referred to in the CareAction loan agreement on November 15, 2002.

He gave Mtre Blanchet signing authority for himself and in name of his brothers for the blocked account, subject to a commitment to ensure that the Jacksons would receive reimbursement of their investment in two instalments over the following eleven months. He closed his letter to Mtre Blanchet with the injunction to "do your utmost to ensure that the funds are never at risk".

It bears noting that as at the date of this letter, the funds were no longer in the trust account and that no evidence was brought that they were in any blocked account fitting the description of the one in the original loan to CareAction. [ 36 ] On November 21, 2002, a deposit of $777,035 appears to have been made into Mtre Blanchet's trust account. Pointing only to a print-out of transactions in the trust account, the Bank states in its factum "[l']argent [belonging to the Jacksons] semble toutefois revenir au compte en fidéicommis le 21 novembre 2002 par le dépôt d'une somme de 777 035,00 $.

Du 21 novembre au 31 mars, le solde au compte en fidéicommis fluctue de façon importante (pièce D-22)". No further evidence linking the Jacksons' funds to this deposit was presented at trial and the judge makes no mention of this in her account of the facts. [ 37 ] On December 24, 2003, Richard Jackson wrote Mtre Blanchet to obtain immediate reimbursement of the loan. He received no answer.

He wrote again on February 6, 2004 and received reassurances from Mtre Blanchet on February 10, 2004 that the funds were in the blocked account. [ 38 ] The Jacksons would never see their money again. [ 39 ] On May 10, 2005, Mtre Blanchet was disbarred. [2] At the disciplinary hearings, the Jacksons discovered that they were victims of a fraud. As compensation for their lost investment of $500,000, they received a total of $45,793.88 of which $32,199 came from the Bar of Quebec’s liability insurance fund and $13,594.89 came from the trustee appointed in the bankruptcy for Mr Farr.

III The Trial Judgment [ 40 ] The trial judge dismissed the action brought by the Jacksons and declined to hold the Bank liable for the brothers' lost investment. [ 41 ] The judge began her analysis by sketching her understanding of the general principles applicable to the case. She noted that banks owe an extracontractual duty of care to others in the exercise of their activities, which duty extends to third parties who are not their clients. While a bank should not meddle in the affairs of its customers, it should make inquiries when it observes unusual dealings in an account in light of this duty.

These inquiries may include a verification of the correctness of cheque endorsements. [ 42 ] The judge wrote that a bank is not bound, however, to verify the correctness of endorsements on a cheque payable to bearer on delivery. [ 43 ] When a cheque is made to the order of a fictitious payee, it is deemed payable to bearer according to subsection 20(5) of the Bills of Exchange Act .

"Dès lors," she wrote at paragraph [38] of her reasons, "la falsification de la signature de l'endosseur ne peut entraîner la responsabilité de la banque négociatrice puisqu'elle n'est pas tenue de vérifier un tel chèque réputé payable au porteur […]". [ 44 ] In her analysis of the facts against the background of these legal principles, the judge agreed with the argument advanced by the Jacksons that the Bank had acted imprudently, making special reference to the decision to honour the cheque drawn on Mtre Blanchet's trust account and made payable to the Cooperative.

In this regard, the judge wrote: [42] Bénéficiaire inconnu, double endossement, roulement des fonds entre les trois comptes de M. Blanchet, et somme d'argent inhabituellement importante pour lui : autant d'éléments douteux, autant d'indices qui auraient raisonnablement dû éveiller la méfiance des préposés de la BNC, et les inciter à vérifier la légitimité de cette opération bancaire. [ 45 ] This said, the Bank, was correct, according to the judge, in its submission that subsection 20(5) provided it with a defence to

the Jackson's claim. The Cooperative existed, to be sure, but it was to be considered a fictitious payee because Mtre Blanchet had no intention of conveying a benefit to the Cooperative as payee in preparing the cheque to its order. The cheque was thus deemed payable to bearer. Applying the principles she had set out earlier in her reasons, the judge decided that the false endorsement on the cheque was thus of no consequence. Accordingly, the Bank could not be held liable for the misappropriation of funds by Mtre Blanchet notwithstanding its imprudent conduct.

This finding, she wrote, was sufficient to dismiss the Jacksons' claim. IV Analysis [ 46 ] On appeal, the Jacksons argue that the Bank owed them an extracontractual duty that was breached on September 26, 2002 when it failed to take reasonable precautions to verify the correctness of the transactions effected by Mtre Blanchet.

They point to the special circumstances that should have alerted the Bank to Mtre Blanchet's wrongdoing, including the dimension and number of the transactions, the size of the cheque made payable to the Cooperative, the fact that this cheque was drawn on a trust account and the funds were eventually deposited to Mtre Blanchet's personal account, and the double endorsement.

They acknowledge that subsection 20(5) of the Act allows banks to consider certain cheques to be payable to bearer, but argue that this does not relieve the respondent from its liability to the Jacksons who were third parties to the cheque. [ 47 ] The Bank answers that the judge made no mistake in applying subsection 20(5) of the Act . The Cooperative was a fictitious payee and the cheque was thus payable to bearer. The endorsements were not necessary to negotiate the cheque. Moreover, there was no causal link between the alleged fault of the Bank and the losses sustained by the Jacksons.

Even if one considers the fact that the Bank accepted the cheque with the double endorsement as a fault, the funds remained in Mtre Blanchet's accounts on September 26, 2002 and, in November of that year, funds that likely belonged to the Jacksons transited back into his trust account. It was only afterwards that the investment was misappropriated.

The alleged negligence of the Bank was thus not causally connected to the loss and it cannot be held liable. [ 48 ] I am of the view that the trial judge was right in finding that the Bank's failure to make any inquiries as to the correctness of the series of transactions undertaken by Mtre Blanchet on September 26, 2002, in particular the deposit to his account of the cheques payable to the Cooperative, was imprudent. This amounted to a breach of the extracontractual duty owed to the Jacksons.

She was correct as well in holding that because the cheque was made to a fictitious payee as that concept is understood under subsection 20(5) of the Bills of Exchange Act , it was deemed to be payable to bearer. [ 49 ] With respect for the judge's contrary view, however, she was mistaken to hold that the defence in subsection 20(5) of the Act served to relieve the Bank from liability for breach of its duty of care owed to the Jacksons. They were third parties and make no claim to title of the cheque such that the defence cannot be set up against them.

Moreover, the Bank must answer for its negligent conduct to the Jacksons. That extracontractual fault is causally connected to the brothers' loss, as third parties, for which the Bank is accordingly liable. [ 50 ] I will consider in turn the matters of (

i) whether the defence of subsection 20(5) can be raised against the Jacksons; (ii) whether the conduct of the Bank amounts to an extracontractual fault in respect of its duty to the Jacksons; and (iii) whether that fault caused the loss of which the Jacksons complain. (

i) Application of the fictitious payee defence under subs. 20(5) of the Act [ 51 ] As we have seen, Mtre Blanchet drew two cheques on his trust account, over which he had sole signing authority, payable to the Cooperative. The judge found that he had no intention to convey these funds to the payee. [ 52 ] Subsection 20(5) of the Act serves to protect persons negotiating a bill which is made payable to the order of a fictitious payee: 20. […] Preneur fictif

(5) La lettre dont le preneur est une personne fictive ou qui n’existe pas peut être considérée comme payable au porteur. 20. […] Fictitious payee

(5) Where the payee is a fictitious or non- existing person, the bill may be treated as payable to bearer. [ 53 ] Notwithstanding the fact that the Cooperative was a real person, it is considered to be a fictitious payee because Mtre Blanchet did not intend the funds to be paid to the Cooperative. As Dean Falconbridge wrote, "[t]he question whether the payee is fictitious depends on the intention of the creator of the instrument […]." Falconbridge explained this by way of a celebrated proposition, applicable here: "[i]n the case of a bill drawn by Adam Bede upon John Alden payable to Martin Chuzzlewit, the payee may or may not be fictitious or non-existing according to the circumstances: […]

(3) If Martin Chuzzlewit is the name of a real person known to Bede, but Bede names him as payee by way of pretence, not intending that he should receive payment, the payee is fictitious, but is not non-existing." [3] [ 54 ] This is what happened here. Mtre Blanchet is like "Adam Bede" who, in making the cheque payable to the Cooperative, was naming a real-life payee by way of pretence, as Bede did in naming Chuzzlewit as payee. The cheque may accordingly be treated as payable to bearer pursuant to the fictitious payee defence in subsection 20(5) of the Act . [4] In principle, the fact that the endorsement of

the Cooperative was forged cannot be raised against the Bank by someone seeking rightful possession of the cheque.[5] Theendorsement is not required in that the cheque, payable to bearer, was negotiable by simple delivery.

As Iacobucci J. observed in Boma,"[t]he presence or absence of a legitimate or forged endorsement is irrelevant to a bearer cheque."[6] [55] The fictitious payee rule is designed, as the Supreme Court noted in Boma, to deprive the drawer – in this case Mtre Blanchet,drawing against his trust account – of the protection afforded to a bill payable to order.[7] But here the Bank does not seek to set up thedefence against the drawer or even the payee; instead it seeks the advantage of the fictitious payee defence against the Jacksons who arethird parties to the cheque and who make no claim to its possession.

Deciding that the cheque should be treated as validly negotiatedunder the Act does not dispose of the potential liability of the Bank, extracontractually, to clients of Mtre Blanchet who make no claim tothe cheque itself. [56] The trial judge correctly noted that the Bank owes a duty to take reasonable care in the conduct of its business and that thisduty extends, extracontractually, to third parties. I am respectfully of the view, however, that she mistakenly absolved the Bank from itsextracontractual duty to third persons on the grounds that the fictitious payee defence applied.

After correctly observing that theCooperative was a fictitious person within the meaning of that term in subsection 20(5) of the Act, the judge wrote: [48] Le chèque du 26 septembre 2002 est donc tenu pour être payable au porteur21 et négociable sans endossement. La BNC en estdevenue détentrice régulière. Ainsi, elle ne saurait être tenue responsable du détournement envers les Jackson; le faux endossement de laCoopérative est donc sans conséquence. 21 Boma Manufacturing Ltd c.

Banque Impériale de Commerce, (SCC), [1996] 3 R.C.S. 727. [57] The Bank continued to owe an extracontractual duty to third persons pursuant to

article 1457 C.C.Q., notwithstanding theapplication of subsection 20(5) of the Act. While the defence provides comfort to the Bank in respect of an action by the drawer, it doesnot preclude a claim by the Jacksons. If the behaviour of the Bank on September 26, 2002 amounted to a breach of the extracontractualduty owed to the Jacksons, that conduct can be the basis for an independent action in civil liability. The rules under subsection 20(5) ofthe Act and those of

article 1457 C.C.Q. are distinct because they speak to different legal relationships. Needless to say, a bank's conductmay, in some circumstances, constitute both a violation of the Act and a distinct breach of the standard imposed by

article 1457 C.C.Q.but, conversely, it cannot be said that where the Act offers a defence on the bill that this necessarily provides a bank with an immunityfrom extracontractual duties owed to third parties. (ii) Was there a breach of the duty owed by the Bank to the Jacksons? [58] It will be recalled that the trial judge found that the Bank's conduct on September 26, 2002 was imprudent.

She was of theview that the multiple transactions undertaken at Mtre Blanchet's direction, including the effective withdrawal of substantial funds fromhis trust account for deposit into his personal account, along with the double endorsement of a cheque made payable to an unknownpayee, should have raised the suspicion of the Bank of the likelihood of misdealing by Mtre Blanchet. Such circumstances, sheobserved, should have prompted the bank to verify the correctness of the transactions.

The trial judge had the benefit of hearing theevidence first hand, in particular the explanations from the personnel at the Bank as to how the events of September 26, 2002 transpired.

Her appreciation of the facts on this point is, of course, deserving of deference on appeal. [59] Was the conduct of the Bank in the circumstances a violation of the extracontractual duty owed to the Jacksons? [60] While the Bank undoubtedly owed an extracontractual duty of care to the Jacksons, it was not necessarily seized of the sametrust-like obligations that Mtre Blanchet owed his clients in respect of the funds he held on deposit for them in his trust account at theBank. [61] In the common law, a bank would be considered to be a "stranger to the trust" existing between a lawyer and his or her clientin like circumstances.

A bank is not obliged to oversee the trust and only exceptionally will an obligation of accountability be impressedupon its relationship with the trust account holder's clients, notably where knowing receipt of the funds by a bank for its benefit allows acourt to invoke the doctrine of the constructive trust to require restitution by the bank.[8] Liability may also be imposed on banks asequitable wrongdoers where, even as strangers to the trust, they knowingly assist in the fraud or show a degree of recklessness or wilfulblindness in respect of the stratagem of a rogue for whom they are later held to answer.[9] A Quebec court cannot of course invoke thedoctrine of the constructive trust directly as a means of imposing a duty to account on a bank in such circumstances.

Absent thejurisdiction in equity to impose trust-like duties on a bank in such circumstances, a Quebec court can nevertheless rely on the generalrules of extracontractual civil liability to hold the bank to account.[10] [62] In Quebec, a bank is not so much a "stranger to the trust" but a stranger to the rules of the administration of property ofothers. In the absence of all the requirements for the constitution of a trust under

article 1261 C.C.Q., the mere deposit by a lawyer ornotary of a client's funds into his or her trust account does not create a valid trust.[11] Understanding the precise legal consequences ofthe indication "in trust" on a cheque will turn on the facts of a given circumstance, but there is no doubt here that Mtre Blanchet wasconfided funds that did not belong to him and over which he would have limited powers. The rules on administration of property ofothers applied between Mtre Blanchet, as administrator, and the Jacksons, as persons ultimately having rights over the funds in theaccount to whom the administrator owed a duty. Mtre Blanchet was bound, pursuant to

article 1310 C.C.Q., not to exercise his powers asadministrator of the Jacksons' property in his own interest, nor could he place himself in a position of conflict of interest with them in hisuse of the funds. By mingling the administered property with his own, after the deposit of the trust funds into his personal account, heviolated his obligation at

article 1313 C.C.Q. By using the funds for his own benefit without the consent of the Jacksons, he violatedarticle 1314 C.C.Q. and, more generally, breached the duty of loyalty and honesty he owed them pursuant to

article 1309 C.C.Q. [63] These obligations are those of the administrator of property of others and not of the Bank. It would be unfair and indeedprofoundly disruptive of ordinary banking practice to hold the Bank to the same standards: it likely did not even know of the existence ofthe Jacksons, let alone of the precise terms under which they had confided funds in trust to Mtre Blanchet. Moreover, the Bank was notbound to see to the proper performance of Mtre Blanchet's obligations due to the Jacksons by the mere notice that the account was one

"in trust". [12] Even if a bank wished to do so, such supervision could not have been readily done: where trust accounts are administered by advocates and notaries bound by professional secrecy to their clients, it is not an easy matter for a bank to inquire freely as to the terms upon which funds are placed in the legal professional's trust and care. [ 64 ] What then is the basis of the alleged liability of a bank to third parties like the Jacksons who have funds held by their legal professional in a trust account?

The Bank owed no duty in contract to the Jacksons, much less a duty, itself, as administrator of their property or as constructive fiduciaries. But this is not to say that the Bank owed no duty to the Jacksons. On the contrary, it had an extracontractual duty not to cause harm to the Jacksons, and the other depositaries in the trust account, by reason of its fault. [13] [ 65 ] When a bank has actual knowledge of misdealing from a trust account, or where circumstances exist allowing it to take advantage of that misdealing, it may well be held liable under

article 1457 C.C.Q. to third parties for whom the advocate or notary administered the funds. [14] In the present case, however, extracontractual liability of the Bank is not alleged based on its actual knowledge or profit from the fraud. If the Bank did not knowingly receive the funds or knowingly assist in the fraud, how can liability be founded on the basis of mere inaction?

Authors L'Heureux, Fortin and Lacoursière explain the circumstances in which this is possible as follows: Quand le client tire, en faveur d'un tiers, un chèque sur un compte en fiducie, la banque n'a aucune obligation de vérifier la légitimité du paiement, sauf si elle connaît la malversation ou si elle profite de la malversation.

Il en est de même dans le cas où le fiduciaire est bénéficiaire du chèque; il n'y a pas, de ce seul fait, présomption de détournement. […] La banque n'échappe pas à la responsabilité si elle connaît l'existence de la fiducie et la commission d'actes déloyaux ou si, en raison des circonstances, elle a le devoir de s'informer et qu'elle néglige de le faire . [15] [ 66 ] There is a consensus in the decided cases and among scholars in Quebec that the general extracontractual duty set forth at

article 1457 C.C.Q. is the proper measure of a bank's conduct in respect of its duty to third parties. The intensity of this obligation is one of means such that, in the civil law, a bank must take reasonable measures to avoid causing a loss to others, including third parties. When one of its customers undertakes transactions that the reasonable banker in the circumstances would consider to be suspicious, the bank must take appropriate measures to remove the suspicion in order to prevent misdealing in the account that would harm third parties.

Failure to take such measures, such as suspending a transaction while its correctness is verified, may result in liability to those who suffer a loss as a result. As Jean-Louis Baudouin and Patrice Deslauriers have written: L'institution [bancaire] a, d'autre part, l'obligation légale d'intervenir en présence d'opérations manifestement illicites ou frauduleuses; elle ne peut pas les tolérer, encore moins s'y associer.

Lorsque sa méfiance est ainsi éveillée ou devrait raisonnablement l'être, par exemple, parce qu'une opération projetée cesse de s'inscrire dans le cours normal de son activité, elle doit redoubler de prudence et de diligence. L'institution a alors l'obligation de s'informer comme le ferait un banquier raisonnablement prudent et diligent pour vérifier la régularité des opérations en cause.

À cet effet, l'importance relative du montant en jeu peut être un élément qui augmente l'intensité de son devoir . [16] [ 67 ] Yet the intensity of the obligation must be understood in the context of legitimate institutional practices of non-intervention in account holders' affairs in the banking industry. In particular, the content of the obligation must take into account the absence of a duty on banks to see to the performance of fiduciary-type obligation for trust accounts. Accordingly, courts should be careful not to deem a bank to have knowledge of misdealing too readily.

While the standard of conduct imposed on banks under

article 1457 C.C.Q. is perforce measured objectively, it is appropriate to look for strong signs of misdealing before deciding a bank can be held liable for not having taken measures to prevent it. Not only would too low a standard impose untenable transactions costs on banks, it would set Quebec law out of step with authorities elsewhere in the country when the transactions in question are not substantively different or easier to police. [ 68 ] In the present case, extracontractual liability of the Bank is not alleged based on its actual knowledge or profit from the fraud.

Here the Bank knew the funds in Mtre Blanchet's trust account did not belong to him, but it did not know to whom the funds belonged or on what basis the funds were held in trust. Even the reasonable banker in the circumstances would not have known of the terms of the September 16, 2002 loan made by the Jacksons and the arrangement by which they agreed to confide the funds to Mtre Blanchet.

But while the details of the breach of the trust arrangement may have been unknown to the Bank, the conduct of Mtre Blanchet on September 26, 2002 at the branch meant that it should have been alive to the strong possibility that some kind of fraudulent conduct behind the transactions. On that basis, the Bank was deemed to know not of the specifics of the stratagem, but that something was askew. As a result, the Bank was bound to act.

Author Marc Lemieux explains that in this connection, in Quebec law, "[t]he expression 'constructive knowledge' refers to existence of circumstances which would lead a reasonable person to enquire into the possibly fraudulent origin of a customer's deposit. A bank which in the presence of such circumstances fails to enquire is presumed to have known the fraudulent origin of the funds." [17] The issue is whether, in the circumstances, a reasonable bank would have observed that the transactions were suspicious and suggestive of fraud.

If so, the Bank was bound to take reasonable measures to remove the suspicion of wrongdoing. [ 69 ] Is it right to impute knowledge of some wrongdoing by Mtre Blanchet to the Bank that should have prompted it into taking action? On the facts, the signs of misdealing that the Bank ignored on September 26, 2002 were very substantial.

These signs included the amount of funds transacted by Mtre Blanchet, including notably the $681,110 cheque drawn on his trust account; the significant number of transactions undertaken at the same time, which meant that tracing the path of funds moving between the three accounts difficult to assimilate at once; the fact that a substantial percentage of the funds held on trust were transferred out of the trust account into his personal U.S. dollar account; the fact that the cheque made payable to the Cooperative, a third-party payee unknown to the Bank; and the fact that two substantial cheques made payable to the Cooperative have double endorsements upon which Mtre Blanchet sought to rely to deposit the funds in the accounts other than his trust account.

The Bank's suspicions that misdealing was taking place should have been raised in the circumstances. [ 70 ] It would be wrong to infer the perpetration of fraud from the mere fact that funds from a legal professional's trust account are transferred to his or her personal account. [18] But when this occurs on the scale and in the manner undertaken by Mtre Blanchet, the

transaction was so abnormal that it should have alerted the Bank that misdealing might be taking place. [19] The test is that of a reasonable bank in like circumstances. [ 71 ] The Bank fell well short of this standard. [ 72 ] The precautions it took in the circumstances were somewhere between non-existent and extremely poor. The testimony of the Director of Financial Services of the Décarie Boulevard branch was telling in this regard.

He explained that the employee brought him the $681,110 cheque drawn on Mtre Blanchet's trust account, with a double endorsement, to approve for deposit in the lawyer's personal account. He signed the guarantee of the endorsement made by Mtre Blanchet. During his testimony, he freely admitted that he took no measures to verify the correctness of the transaction. His job, as he saw it, was to sign, not to verify: [Mtre Côté] Q Est-ce que vous avez fait des démarches de vérifications avant d'endosser ce chèque? [Director of Financial Services] R Non. Q Vous n'avez fait aucune démarche?

R C'est l'adjointe qui fait les vérifications, je suis là juste pour apposer ma signature. Q Okay. On ne vous a pas demandé qui était la Coopérative de production supérieure de l'émeu du Québec? R C'est l'adjointe qui fait toutes ces vérifications. Q C'est l'adjointe qui fait les vérifications? R Oui. Q Vous, personnellement, vous n'en avez pas fait? R Non. Q Est-ce que vous avez posé des questions à votre adjointe, savoir ce qu'elle avait fait comme vérifications? R À chaque fois, moi je pose toujours la question : est-ce que tout est correct? Oui, c'est un client qui est connu de la succursale.

Q Et ça, c'était suffisant? R Le fait que le client était connu de la succursale, oui. [ 73 ] It may be recalled that Mtre Blanchet effected fifteen transactions, in something akin to a shell game, involving hundreds of thousands of dollars. The case of Aird v.

Royal Bank of Canada , provides helpful guidance for measuring the suitability of the Bank's conduct here: "[i]l n'est pas facile de déterminer la nature des démarches qui doivent être suivies pour s'assurer de l'authenticité d'un endossement, mais il est au moins certain que de n'avoir posé aucun geste dans le but de réaliser cet objectif est insuffisant; la banque intimée ne s'est donc pas déchargée de son obligation". [20] As my colleague Forget, J.A. wrote of the bank in that case, it was wrong to place such confidence in its longstanding client when other circumstances suggested that an independent verification of the transaction was in order. [21] This is what occurred here.

Proceeding to honour the transactions, without any meaningful effort to verify their correctness beyond the confidence branch employees placed in Mtre Blanchet, was not just imprudent or negligent, it can be fairly thought of as reckless behaviour that justifies a finding of fault. [ 74 ] It is no answer to say that funds in a trust account are somehow shielded from the Bank's general supervisory duty imposed by

article 1457 C.C.Q. While it is true that the Bank was no trustee, it knew of the special character of the trust account. As a general matter, a bank cannot close its eyes to the distinction between trust accounts and personal accounts. In this case, the Director of Financial Services at the branch of the respondent Bank acknowledged that he knew and understood the distinction or, in his words, " […] le compte in trust c'est le compte en fidéicommis, c'est un compte qui n'appartient pas à l'avocat […]".

It is appropriate that banks have this in mind when they transact business for a professional in his or her trust account. While a bank may not know the precise terms upon which the property is held "in trust", it is well placed to see behaviour that is out of step with the ordinary manner in which an account is managed in service of others.

Authors Baudouin and Deslauriers make special mention of the alertness required of a bank to suspicious circumstances surrounding funds held in trust: Néanmoins, dans certaines circonstances, par exemple, tenant à la nature de l'opération projetée ou lorsque l'autorité du mandataire (ou de l'administrateur du bien d'autrui) devrait apparaître douteuse et éveiller les soupçons de l'institution, celle-ci est tenue à procéder à une vérification. Cette vérification doit être réelle et l'institution ne peut se contenter des réponses évasives du mandataire.

Si non, on qualifiera son comportement d'aveuglement volontaire. [22] [ 75 ] While this is not an instance of actual knowledge of the fraud in a trust account and, unlike Mercier v. National Bank of Canada , [23] liability is not founded on participation in the misdealing, the blatant signs of some kind of misconduct should have prompted the Bank to verify the transactions to remove suspicions of wrongdoing as would a reasonable banker in the circumstances. Finding fault in the Bank's conduct here is not only consonant with the requirements of

article 1457 C.C.Q., it does no disservice to the idea that a bank cannot be held to bear inordinate risk given the reckless behaviour of the respondent on the particular facts of this case.

(iii) Did the Bank's fault cause the loss suffered by the Jacksons? [ 76 ] The Bank argues that even if its failure to verify the transactions undertaken by Mtre Blanchet is held to be an extracontractual fault, this conduct did not cause the loss of the Jacksons' $500,000 investment. The Bank presents two principal arguments on causation, both of which deserve attention. [ 77 ] Firstly, the Bank argues that whether or not its conduct on September 26, 2002 is held to be a fault, the funds that the Jacksons had confided to Mtre Blanchet were not lost on that day.

At the end of the day on September 26, 2002, the sum was still on hand at the Bank, held in U.S. funds in Mtre Blanchet's personal account. It was subsequent events, says the Bank, and subsequent misdealing by persons other than the Bank, that resulted in the loss. On November 15, 2002, as we have seen, the Jacksons would give Mtre Blanchet authority to sign for them from the blocked account, subject to a commitment to ensure their reimbursement and the safekeeping of the funds.

Mtre Blanchet's abuse of this authority, argues the Bank, caused the loss in November or thereafter, whatever imprudence may or may not have occurred at the teller's wicket on September 26, 2002. [ 78 ] The Bank's argument on this point is not convincing. As to the date of the loss, the facts show that it was September 26, 2002. It was then that Mtre Blanchet undertook the dubious sequence of fifteen transactions to move the Jacksons' money to a place where he had unfettered control over it. He was not authorized to transfer the funds to his personal U.S. dollar account on September 26, 2002.

The fifteen transactions, undertaken together on that day, were both the first step and the essential component of the fraud. These transactions cannot be considered to be the equivalent of a transfer of funds to the promised blocked account because the Jacksons had no signing authority or equivalent control over the funds after that date, and Mtre Blanchet had a free hand to do with the money what he wished.

This free hand would be in plain view on November 13, 2002 when Mtre Blanchet took funds for the US$500,012.50 bank draft, likely including the Jacksons' funds, from his U.S. dollar account for CIRDE without the Jacksons' consent. But Mtre Blanchet's hands were free much earlier – from September 26, 2002 – when he moved the funds out of the trust account without their authorization. [ 79 ] The fact that the funds "did not leave the Bank" on September 26, 2002 is irrelevant. The funds were in the hands, from that point on, of Mtre Blanchet personally.

From that time on the funds were neither "in trust" nor "blocked": they were lost to the Jacksons from September 26, 2002 and not, as the Bank argues, at a later date. Richard Jackson's authorization letter to Mtre Blanchet of November 15, 2002 – in which, it should be recalled, he enjoined Mtre Blanchet to keep the money secure – came too late. All the money was probably gone from the Bank by November 13, 2002.

But be that as it may, it was on September 26, 2002 that the funds were effectively lost to the Jacksons. [ 80 ] It is of course difficult to establish the exact path of the funds after September 26, 2002. The matter is not helped by the fact that Mtre Blanchet was summoned to testify by the Bank at trial and failed to honour the subpoena served upon him. As noted above, the Bank affirms that the Jacksons' money "appears" to have returned to Mtre Blanchet's trust account on November 21, 2002 at which time a print-out of the account statement records that $777,035 was so deposited.

One can only speculate as to the origins of these funds – the word "spéculation" was used by counsel for the Bank in his pleadings before the trial judge – but the Bank nevertheless contends that the presence of this money in the trust account after November 21, 2002 erases the causal link between the Bank's conduct on September 26, 2002 and the Jacksons' loss. [ 81 ] Whether or not funds from the Jacksons transited through the trust account on November 21, 2002, this fact does not in itself break the chain of causation between the Bank's negligence and the Jacksons' loss.

What is decisive, in this respect, is that as of September 26, 2002 – the date of the Bank's civil wrong – the Jacksons lost effective control of the funds that they had confided to Mtre Blanchet and that they never, after that date, secured control of those funds again. After that date, everything points to the fact that they had no say over the destiny of the funds that were supposed to be held in trust or in the blocked account. Mtre Blanchet's subsequent behaviour makes plain that he did not consider the funds held in trust or "blocked" for the benefit of the Jacksons.

Mtre Blanchet did not respond to requests for reimbursement and he obfuscated and lied to the Jacksons, in the period after September 26, 2002, to avoid honouring commitments in the original loan agreement. It may be said that the fraud manifested itself at the Bank on September 26, 2002 continued through November of 2002 and beyond. Given Mtre Blanchet's ongoing roguery, the Jacksons' loss was in no way diminished if and when funds "returned" to the trust account.

The Bank's negligence in September 26, 2002 marked the date that the Jacksons lost effective control of their money and no subsequent event, including funds of uncertain provenance moving through Mtre Blanchet's accounts, undermined the causal link between that fault and the brothers' loss as it took shape at the teller's wicket that day. [ 82 ] Secondly, the Bank argues that it was not its conduct – civilly wrong or otherwise – that caused the loss, but rather Mtre Blanchet's fraud.

Even if the Bank had acted on September 26, 2002, it could not have prevented the loss given the limits of what it knew or could have known in the circumstances. [ 83 ] The Jacksons face the always difficult burden of establishing the causal link in respect of losses caused by a wrongful omission.

The situation is not unlike that of a physician who fails to take reasonable steps to care for his or her patient and who then claims that the patient's later misfortune was not caused by the omission. [24] Just as in the case of the doctor who fails to act, the Bank's omission to undertake verifications means that we will never know exactly what it would have discovered had those verifications been undertaken. Even expert evidence in this regard – which the Jacksons did not adduce at trial – would not have completely resolved this uncertainty.

Determining causation here requires the evaluation of a hypothetical state of facts relating to what the Bank should have done and what it would have discovered had it acted. These facts will never exist. In the circumstances, care must be taken not to relieve the Jacksons of their burden unfairly or to reverse that burden by effectively requiring the Bank to disprove that its omission to verify caused the Jackson's loss.

Care too must be taken not to infer a finding of causation based on the mere fact that the Bank's conduct was the source of causal uncertainty. [25] But by the same token, that same uncertainty cannot preclude the Jacksons from arguing, based on a hypothetical chain of events following the Bank's fault, that the Bank's proper action would have prevented the loss. [ 84 ] As we have seen, the trial judge correctly found the Bank to be at fault in that the circumstances surrounding the transactions initiated by Mtre Blanchet on September 26, 2002.

These circumstances would have excited the suspicious of a reasonable bank as to the existence of some misdealing. From there, the causal chain that the Jacksons were bound to demonstrate, on the balance of probabilities, is as follows: first, that the Bank should have stopped the transaction for a time to make reasonable verifications as to the correctness of the transaction; second, that it should have asked Mtre Blanchet to explain the business purpose of the fifteen consecutive transactions

involving such sizable sums; third, it should have undertaken verifications of the suspicious transactions, based on cheques with double endorsements and made to payees unknown, drawn from Mtre Blanchet's trust account.

From there, the Jacksons had to show that the Bank would have learned enough about the possibility of a fraud to stop the transaction and, in so doing, head off the loss. [ 85 ] The Bank argues that even if it had temporarily held up the transactions, it would not necessarily have discovered the fraud and it would likely have been obliged, after a fruitless verification, to approve the various cheques and bank transfers. Had Mtre Blanchet been questioned, he would have invoked professional secrecy and provided no further explanation of the fifteen transactions.

Had the Bank contacted the unknown payee on the cheques drawn on the trust account, it would likely have been directed by Mtre Blanchet to Mr Farr. In turn, Mr Farr would probably have fraudulently induced the Bank into believing that the transactions on the cheques were legitimate. After those pointless verifications failed to confirm a suspicion of misdealing, says the Bank, the operations would have proceeded.

As a result, it can only be said that the loss was caused by Mtre Blanchet and not the Bank. [ 86 ] I am of the view that, on the balance of probabilities, the Jacksons have proved that the Bank's omission to verify the transactions caused their loss. [ 87 ] The Jacksons brought complete evidence of how Mtre Blanchet undertook fifteen transactions, often at cross-purposes with one another, involving what for Mtre Blanchet were unusual sums of money emanating from his trust account.

It is implausible that Mtre Blanchet could have convinced a reasonable bank, already on its guard for misdealing, that those transactions had a proper explanation. I think it is fair to suggest that the Bank would have recognized, upon closer verification, that the fifteen transactions that Mtre Blanchet sought to effect had no purpose other than to confound the authorities at the branch and cloud the fact that, within minutes, his trust account had been emptied to the advantage of his personal U.S. dollar account.

The Jacksons also brought evidence that the cheque to the Cooperative was endorsed twice, that the Bank did not know the payee or the signatory, and that branch officials blindly guaranteed the endorsement for deposit allowing substantial funds of unusual dimension to transit from the trust account into an account controlled by Mtre Blanchet.

It is implausible to say that a reasonable bank, already on its guard, would have been duped again by Mr Farr, an unknown to the Bank, if verification had been undertaken. [ 88 ] Had the Bank taken these two reasonable precautions, its suspicions of some kind of wrongdoing involving the branch accounts would not likely have been quieted. True, it is unlikely that a bank could have discovered the violation of the specific undertakings that Mtre Blanchet owed to the Jacksons – strangers to the Bank – on that day.

It is true as well that the Bank would likely not have learned of all the details of the fraud, or of the identity of the Jacksons, or of the specific character of Mtre Blanchet's transgressions. But it would have known that something was askew. The overall impression of the extraordinary transactions on September 26, 2002 was that something improper was occurring. It would have been reasonable, given the size of the amount in play, to stop the transactions until that doubt was otherwise lifted. The Bank did not do so.

That failure caused the loss. [ 89 ] It is right to say that the courts cannot, on the strength of rules of either causation or of fault, impose an untenable duty of verification on a financial institution. Prudent conduct by the Bank, when it was confronted with these blatant signs of wrongdoing, could not have guaranteed that the fraud would not take place. What is striking on the facts here, however, is that the Bank took no precautions whatsoever. It is true that the Jacksons bear the burden of proving causation.

But the Bank's answer here – had our employees taken precautions, even when they were already on their guard for wrongdoing, Mtre Blanchet would have successfully confounded them again – is farfetched. [ 90 ] Delays brought about by stop-payments are not costless. But a bank cannot be held to be liable for losses caused by a delay in honouring a transaction when that delay merely reflects the time required to make reasonable inquiries to prevent a fraud.

Moreover if the Bank had suspended the transactions on September 26, 2002 in order to make reasonable inquiries as to their correctness, it would later have had a defence to raise in the event the fraud had occurred nonetheless. [ 91 ] The Bank must answer for the loss that resulted from its mistake in blindly honouring the transactions, including the loss to the Jacksons.

The cause of action in extracontractual liability against the Bank – fault, damage, causation – was thus crystallized on September 26, 2002. [ 92 ] I would accordingly allow the appeal, with costs throughout, reverse the judgment of the Superior Court and condemn the Bank to pay the appellants the sum of $454,206.12, being the amount of their loss not already compensated. Interest at the legal rate and the additional indemnity provided for by law should be added from the date of service of the motion to institute proceedings. NICHOLAS KASIRER, J.A.