2011 QCCA 1148, 2011 QCCA 1148

Caisse populaire Desjardins de Côte-des-Neiges c. Banque Toronto- Dominion 2011 QCCA 1148 COURT OF APPEAL CANADA PROVINCE OF QUEBEC REGISTRY OF MONTREAL No.: 500-09-020100-095 500-09-020108-098 500-09-020109-096 (500-22-149810-080) (500-22-084286-031) (500-22-084650-038) DATE: June 17, 2011 CORAM: THE HONOURABLE PIERRE J. DALPHOND, J.A. ALLAN R. HILTON, J.A. JULIE DUTIL, J.A. No. 500-09-020100-095 (500-22-149810-080) CAISSE POPULAIRE DESJARDINS DE CÔTE-DES-NEIGES APPELLANT – Defendant v.

TORONTO DOMINION BANK RESPONDENT – Plaintiff ______________________________________________________________________ No. 500-09-020108-098 (500-22-084286-031) CAISSE POPULAIRE DESJARDINS D’ARVIDA-KÉNOGAMI APPELLANT – Defendant v. TORONTO DOMINION BANK RESPONDENT – Plaintiff ______________________________________________________________________ No. 500-09-020109-096 (500-22-084650-038) CAISSE POPULAIRE DESJARDINS DU CHRIST-ROI (JOLIETTE) APPELLANT – Defendant v. TORONTO DOMINION BANK RESPONDENT – Plaintiff JUDGMENT

[ 1 ] THE COURT : On the appeal from three judgments of the Court of Quebec, District of Montreal (the Honourable Judge Gilson Lachance), rendered on October 1, 2009, that condemned the Caisse populaire Desjardins du Christ-Roi (Joliette) to pay $31,379.42, the Caisse populaire Desjardins de Côte-des-Neiges to pay $15,145.35, and the Caisse populaire Desjardins d'Arvida- Kenogami to pay $40,202.96 to the respondent. [ 2 ] For the reasons of Dalphond J.A., with which Hilton and Dutil JJ.A. agree: [ 3 ] DISMISSES the three appeals, with costs. PIERRE J. DALPHOND, J.A. ALLAN R. HILTON, J.A. JULIE DUTIL, J.A.

Mtre Geneviève Cotnam Mtre Maud Rivard Stein Monast LLP Attorneys For the appellants Mtre Michel Deschamps Mtre Jocelyn Perreault McCarthy Tétrault LLP For the respondent Date of hearing: May 2, 2011 REASONS OF DALPHOND J.A. [ 4 ] These appeals seek to determine who should bear the losses related to three cheques drawn from the respondent, the TD Bank, which were fraudulently and non-apparently altered by changing the name of the beneficiary designated by the drawer in order to deposit them in the accounts of the clients of the appellant Caisse populaires ("the Caisses").

In addition, in one case, the amount of the cheque was altered to appear as $40,202.96 instead of $4,202.96. Like the trial judge, I find that these losses should be borne by the collecting institutions, namely, the Caisses. BACKGROUND [ 5 ] The three cheques were deposited in the accounts of the apparent beneficiaries, who were clients of the appellant Caisses. The cheques were not endorsed.

The Caisses then obtained payment via the Canadian Payments Association (CPA) clearing system. [ 6 ] The frauds were discovered by the drawers long after the time limitation for return in Rule A4 of the CPA rules to cancel a payment between the drawee institution and the collecting institution through the clearing system.

The TD Bank then credited the accounts of the drawers, their defrauded clients, and asked the negotiating financial institutions, the Caisses, to reimburse the amounts paid through the clearing system. [ 7 ] Since the Caisses refused, three actions were instituted before the Court of Quebec and were heard together. In three similar

judgments rendered on October 1, 2009, the trial judge allowed all three claims, hence the present appeals by the Caisses. The Caisse populaire Desjardins du Christ-Roi (Joliette) was condemned to pay $31,379.42, the Caisse populare Desjardins de Côte-des-Neiges was condemned to pay $15,145.35, and the Caisse populaire Desjardins d'Arvida-Kénogami was condemned to pay $40,202.96. GROUNDS OF APPEAL [ 8 ] The Caisses first argue that the only remedies available between institutions participating in the CPA clearing system are those set out in Rule A4.

The TD Bank did not, however, return the cheques within the prescribed deadline to cancel the clearing, that is to say, the payment. It is therefore not entitled to reimbursement. Next, they argue that, while the TD Bank may institute an action, said action must be dismissed pursuant to the second paragraph of

section 144 of the Bills of Exchange Act , R.S.C. (1985), c. B-4 (" BEA "), because the Caisses are holders in due course of cheques subject to alterations that were non-apparent and, consequently, may claim the full amount entered on each cheque. Finally, although subsection 144(2) BEA does not preclude a claim for reimbursement, subsection 165(3) , which is also applicable, does. ANALYSIS I. Rule A4 does not prohibit ordinary remedies : [ 9 ] Rule A4, enacted under

section 19 of the Canadian Payments Act , R.S.C. 1985, c. C-21, establishes a time limitation for the return of altered items. According to the Caisses, once this limitation has expired, the drawee institution no longer has a remedy against the collecting institution. This would be the allocation of risk accepted by institutions participating in the CPA compensation scheme.

In other words, by agreeing to participate in this scheme, the TD Bank waived its potential remedies under the BEA or the ordinary law, which in Quebec is set out in the Civil Code . [1] [ 10 ] In Quebec civil law, the forgiveness of a debt and the waiving of a right are not presumed.

Therefore, the Caisses must demonstrate that, by participating in the clearing system, the TD Bank had an explicit or implicit intent to waive the right to restitution under the ordinary law in the event of a payment made in error discovered after the expiration of the time limitation set out in Rule A4 for the return of a cheque and the cancellation of the clearing (articles 1491, 1492, 1699 et seq. C.C.Q .). [2] [ 11 ]

Section 1 of Rule A4, however, makes it clear that there was no such intent. The version applicable to the files involving the Caisse populare du Christ-Roi and the Caisse populaire d'Arvida reads as follows: 1a) La présente Règle expose les procédures, les échéanciers et les responsabilités applicables chaque fois qu'un effet est échangé par la compensation pour paiement et que le paiement est refusé ou ne peut être obtenu, et lorsque le tiré retourne ou réachemine l'effet par la compensation .

b) Rien dans la présente Règle n'empêche le tiré ou l'institution négociatrice d'exercer ses droits ni de faire valoir ses recours en dehors du cadre de la compensation . Avant qu'il ne prenne ces mesures, cependant, il lui est recommandé d'examiner la possibilité d'exercer les options qui s'offrent à lui en vertu de la Règle A6 ou de la Règle A9 . [Emphasis added.] 1. (

a) This Rule outlines procedures, timeframes and responsibilities whenever an Item is exchanged through the Clearing for payment and payment is refused or cannot be obtained, and where the Drawee returns or redirects the Item through the Clearing. (

b) Nothing in this Rule precludes a Drawee or a Negotiating Institution from exercising its rights and seeking recourse outside of the Clearing . Before taking such actions, however, it is recommended that consideration be given to exercising any options available under Rule A6 or Rule A9 . Rule A6 on Items in Dispute and Rule A9 on Arbitration, which are referred to at the end of subsection 1(b), set out the rules applicable to disputes between drawees and negotiating institutions that are members of the CPA. In other words, subsection 1(

b) cannot be read as reserving only the rights of third parties in relation to the clearing system. Plainly, the provision contemplates disputes between drawees and negotiating institutions in the context of the operation of the clearing system, providing an optional arbitration procedure. In no way does it exclude remedies between these parties under the BEA or the suppletive law before ordinary courts of law. As for the version of

section 1 of Rule A4 applicable to the Caisse populaire de Côte-des-Neiges, it is to the same effect, although more precise:

1a) La présente Règle expose les procédures, leséchéanciers et les responsabilités applicableschaque fois qu'un effet est échangé aux fins de lacompensation et du règlement et que le paiementest refusé ou ne peut être obtenu, et lorsque letiré retourne ou réachemine l'effet par le mêmeprocessus.

b) Rien dans la présente Règle n'empêche le tiréou l'institution négociatrice d'exercer ses droits nide faire valoir ses recours en dehors du cadre desRègles. Avant qu'il ne prenne ces mesures,cependant, il lui est recommandé d'examiner lapossibilité d'exercer les options qui s'offrent à luien vertu de la Règle A6 ou de la Règle A9. [jesouligne] [Emphasis added] 1. (

a) This Rule outlines procedures, timeframesand responsibilities whenever an Item isExchanged for the purpose of Clearing andSettlement and payment is refused or cannot beobtained, and where the Drawee returns orredirects the Item through the same process. (

b) Nothing in this Rule precludes a Drawee or aNegotiating Institution from exercising its rightsand seeking recourse outside of the Rules. Beforetaking such actions, however, it is recommendedthat consideration be given to exercising anyoptions available under Rule A6 or Rule A9. Therefore, adhering to the clearing system cannot be seen as an implicit waiver of ordinary remedies between participating institutions inthe event of payments in error. [12] That is also the position accepted in scholarly commentary.

The lawyer Marc Lemieux, in "La responsabilité résultant del'encaissement et du paiement d'un cheque frauduleux," in Développements récents en droit bancaire, 2003 (Service de la formationpermanente du Barreau du Québec, 2003) at 59, writes the following on page 72: [translation] ... But the CPA members understood that, in other circumstances, the parties have rights and remedies in addition to clearing that theapplication of the mechanisms of Rule A-4 could preclude. In the clear terms of

section 1(b), they expressed their intention that, in suchcircumstances, the rights and remedies of the parties outside the clearing system should prevail over the mechanisms of Rule A4.

Similarly, the lawyer Bradley Crawford adopts this approach in The Law of Banking and Payment in Canada, supra Vol. 2, October2010, No. 11:20 70(1)(f)(i), at 11-40: The ACSS Rules expressly preserve the right of a drawee to return items outside the operations of the ACSS: viz., "Nothing in this Ruleprecludes a Drawee … from exercising its rights and seeking recourse outside of the Rules". [13] As for case law from appellate courts, it has been to the same effect for some time now. For example, in Bank of Nova Scotiav.

Toronto-Dominion Bank (2001), (ON CA), 200 D.L.R. (4th) 549, leave to appeal to the S.C.C. denied, [2001]SCCA No. 370, the Court of Appeal for Ontario ruled in favour of maintaining BEA or common law remedies, stating the following: [27] TD did not provide the missing endorsement. Therefore, if the CPA Clearing Rules apply it must bear the loss. In my view,however, the CPA Rules cannot oust s. 20(5) of the BEA and the common law. I find support for this view in the Rules themselves, textwriters' commentary and case law from this Court. CPA Rule A4(1)(b), which introduces Rule A4, on which BNS relies, provides: (

b) Nothing in this Rule precludes a Drawee or a Negotiating Institution from exercising its rights and seeking recourse outside of theClearing. Before taking such action, however, it is recommended that consideration be given to exercising any options available underRule A6 or Rule A9. [28] In a preliminary examination of the Committee on Payments System in 1972 the Canada Law Reform CommissionAdministrative Law Project specifically said that the fictitious payee rule allocates loss outside a system like the CPA: Security is not solely a banker's problem.

The fictitious payee rule and the rule with respect to losses occasioned by negligence of thedrawer facilitating alteration are instances in which the risk is placed outside the system of deposit institutions by existing law. [29] Mr. Bradley Crawford's most recent edition of Falconbridge's text on Banking and Bills of Exchange also takes the position thatthe CPA Clearing Rules do not prevail over the BEA. The position of the English banks is probably no different in this respect than that of the Canadian banks.

There is authority for theproposition that one who retains an agent to conduct a transaction in a certain market impliedly assents to the usages and customs of themarket, whether actually aware of them or not. But that falls short of authority for the proposition that the clearing rules, even if properlydescribed as customs, may take precedence over the provisions of the Bills of Exchange Act. [30] The position taken by Crawford in Falconbridge is supported by two earlier judgments of this Court: Bank of BNA v. Haslip(1914), (ON CA), 20 D.L.R. 922 (Ont. S.C. App. Div.) and Bank of British North America v.

Standard Bank of Canada(1917), (ON CA), 35 D.L.R. 761 (Ont. S.C. App. Div.). In the latter case Maclaren J.A. wrote at pp. 763-4: In my opinion, this rule [the Clearing Rule in issue] does not bear the construction and does not have the effect claimed for it by thedefence, and it is in no respect an answer to the position taken by the trial Judge, or to the conclusion arrived at by him. The rule is

simply intended to place the parties on the same footing as though they had dealt with each other directly and not through … theClearing House as a means of obtaining payment of a disputed claim, and I find nothing in the rule which militates in anyway against thepresent claim of the plaintiff.

By the express terms of the rule, the rights of the parties are to be the same as they would have been if the exchange of the cheques andother commercial paper had been made between them directly, and without the intervention of a Clearing House or any of its officers,and are to be determined by the law applicable to such a transaction, including the law merchant. [31] The Clearing Rules, commentary on them and the case law all affirm that the BEA prevails over Rule A4(16)(b). Section 20(5) ofthe BEA allocates the loss in this case to BNS. In light of this excerpt, clause 1(

b) of Rule A4 actually appears to be nothing more than the acknowledgment of a principle long agoestablished by the courts. [14] Recently, in B.M.P. Global Distribution Inc. v. Bank of Nova Scotia, [2009] 1 S.C.R. 504, 2009 SCC 15, the Supreme Courtof Canada made a similar ruling: [55] The clearing rules themselves provide for the survival of the members’ common law rights. Clause 1(

b) of Rule A4 allows anegotiating bank to seek recourse outside the clearing system. [15] Finally, in my opinion, the following passage from the judgment of this Court in Banque Nationale du Canada v.

Caissecentrale Desjardins du Québec, (QC CA), [2001] R.J.Q. 846, recognizes the same reality by faulting the draweeinstitution for having returned an item to cancel the clearing long after the expiry of the time limitation in Rule A4 instead of taking civilaction. [translation] [40] It [the collecting bank] knew, however, that once the time period had expired, the drawee institution had irrevocably accepted to paythe cheque and to try to collect only outside the clearing system. [Emphasis added.] Moreover, the Caisses argue that paragraph 44 of that judgment limits civil actions outside the clearing system to actions against theperpetrators of the fraud.

Although such a reading remains possible, it is nevertheless contrary to the analysis in the preceding paragraphsand to decisions rendered since, notably by the Supreme Court of Canada. [16] Like the trial judge, I must find that the Caisses were wrong to argue that the TD Bank has no recourse under the BEA or theC.C.Q. after the expiry of the time limitations in Rule A4. That settles the outcome of the first ground. II.

Material alteration of an item within the meaning of the BEA: [17] In each case, without the knowledge of the Caisses, the client who deposited the cheque was merely an apparent payee, notthe payee designated by the drawer; indeed, the client made a fraudulent claim to be the payee. Does this constitute a material alterationof the cheques within the meaning of the BEA? Clearly, yes. [18] The BEA provides the following definition of material alteration: 145. Est notamment substantielle toutealtération :

a) de la date;

b) de la somme payable;

c) de l’époque du paiement;

d) du lieu du paiement;

e) consistant à ajouter, sur une lettre acceptéed’une manière générale, un lieu de paiement sansl’assentiment de l’accepteur. [Emphasis added.] 145. In particular, any alteration (

a) of the date, (

b) of the sum payable, (

c) of the time of payment, (

d) of the place of payment, or (

e) by the addition of a place of paymentwithout the acceptor’s assent where a bill hasbeen accepted generally, is a material alteration. [19] In the case at bar, in one case, the amount of the cheque was increased. This is consistent with the material alteration

[19] In the case at bar, in one case, the amount of the cheque was increased. This is consistent with the material alterationdescribed in subsection 145(b). [20] Moreover, in all of the cases, the names of the payees were fraudulently altered, which constitutes an alteration to the chequesto order not authorized by their drawers. As noted in scholarly commentary and case law, the list of examples in

section 145 is notexhaustive. It must now be determined whether altering the name of the payees constitutes a material alteration within the meaning ofthe Act.

In The Law of Banking and Payment in Canada, supra Vol. 2, October 2010, No. 11:20.70(1)(f)(i), at 11-46, Crawfordwrites:[3] Material alteration – I think that a material alteration is a change in the original terms of a negotiable bill, cheque or promissory note thatalters in any way, materially or not, the obligation of any person who is a party to the instrument at the time of the change and who doesnot consent to it. [21] The alteration of the name of the payee can lead to a double payment from the drawer if the altered cheque is negotiated andaccepted by the drawee, since the claim of the original payee is not extinguished by payment.

This is a material change to the cheque,which, according to the case law, constitutes a material alteration of the three bills of exchange at issue: Knaffo v. Banque Toronto-Dominion, J.E. 98-1442 (Sup. Ct), appeal dismissed on motion; Banque nationale du Canada v. Caisse populaire de St-Joseph deBeauce, [1982] C.P. 295 and the authors cited therein; Franklin Traffic Service Inc. v. Canadian Imperial Bank of Commerce, [2008]O.J. 3898 (Ont. Sup. Ct. J.) at para. 29; Lin v. Canada Trustco Mortgage Co., [1995] B.C.J. No. 223 (B.C.S.C.) at para. 14; CanadianImperial Bank of Commerce v.

Bank of Credit & Commerce Canada, (AB KB), [1989] 4 W.W.R. 366 (Alta. Q.B.) atpara. 16. [22] Clause (2)(

e) of Rule A4 is to the same effect, which illustrates the understanding of the participating institutions that thealteration of the name of the payee constitutes a material alteration. The parties also agree. [23] It is also not disputed that these alterations were non-apparent. III. Consequences of the alterations under the BEA: [24] The legal consequences of these alterations are set out in

section 144 BEA: 144.

(1) Sous réserve du paragraphe (2),l’altération substantielle d’une lettre, ou de sonacceptation, sans le consentement de toutes lesparties obligées entraîne son annulation, sauf ence qui concerne celui qui l’a faite ou autorisée,ou qui y a consenti, et les endosseurssubséquents.

(2) Le détenteur régulier ayant entre les mainsune lettre qui a subi une altération substantiellemais non apparente peut en faire usage comme sielle n’avait pas été altérée et en exiger lepaiement selon les termes originaux. 144.

(1) Subject to subsection (2), where a bill oran acceptance is materially altered without theassent of all parties liable on the bill, the bill isvoided, except as against a party who has himselfmade, authorized or assented to the alteration andsubsequent endorsers.

(2) Where a bill has been materially altered, butthe alteration is not apparent, and the bill in thehands of a holder in due course, the holder mayavail himself of the bill as if it had not beenaltered and may enforce payment of it accordingto its original tenor. [25] It appears to me that the first paragraph codifies the common law rule described by Deschamps J. for a unanimous panel ofthe Supreme Court in the recent judgment i Trade Finance Inc. v. Bank of Montreal, 2011 SCC 26 at para. 45: [45] Fraud makes an agreement voidable, not void: A. Swan, Canadian Contract Law (2nd ed. 2009), at p. 656; G. H. L.

Fridman, TheLaw of Contract in Canada (5th ed. 2006) at p. 293; 434438 B.C. Ltd. v. R.S. & D. Contracting Ltd., 2002 BCCA 432, 121 B.C.A.C. 111at para. 34. This long-standing proposition is exemplified by Bawlf Grain Company v. Ross (1917), (SCC), 55 S.C.R.232, where Fitzpatrick C.J. wrote the following (at 233): What is only voidable and not void cannot be held as invalid until it has been rescinded. It is not enough to avoid the contract, thatnothing is done to affirm it, it must be disaffirmed. In Deposit Life Assurance Co. v.

Ayscough [6 E. & B. 761], the defence was that thecontract was induced by fraud and Lord Campbell C.J. said: – It is now well settled that a contract tainted by fraud is not void, but only voidable at the election of the party defrauded. See also Allcroft v. Adams (1907), (SCC), 38 S.C.R. 365 at pp. 375-76, per Idington J.; Racicot v. Bertrand, (SCC), [1979] 1 S.C.R. 441, at p. 453, citing United Shoe Machinery Company of Canada v.

Brunet, [1909] A.C. 330 (P.C.),at p. 339. [26] From this I find that the drawer and the drawee can seek the invalidation of the three altered cheques unless they consented toor approved the alterations, which was not the case here.

[ 27 ] Under subsection 144(2), however, if the Caisses are holders in due course, they may nonetheless demand payment from the drawee, TD Bank, or from the drawer, under the original terms of the cheques (maturity, interest rate, amount, and so on). It follows that, in the case of the cheque deposited in the account of a client of the Caisse d'Arvida-Kénogami, the amount of which was fraudulently altered to $40,202.96, if the Caisse is a holder in due course, it can claim only $4,202.96. [ 28 ] What remains to be determined is whether the Caisses qualify as "holders in due course" within the meaning of the BEA . Unfortunately for them, they do not. Indeed, under

section 55, to be considered holders in due course, they must have taken cheques (

i) complete and regular on their face, (ii) in good faith, (iii) for value, and (iv) at the time of negotiation, without having received any notice of any defect in the title of the person who negotiated it, their clients. 55.

(1) Est un détenteur régulier celui qui a pris une lettre, manifestement complète et régulière, dans les conditions suivantes :

a) il en est devenu détenteur avant son échéance et sans avoir été avisé d’un refus d’acceptation ou de paiement;

b) il a pris la lettre de bonne foi et à

titre onéreux et, à la date de la négociation, n’avait été avisé d’aucun vice affectant le

titre du cédant.

(2) Au sens de la présente loi, le

titre du négociateur d’une lettre est défectueux notamment lorsqu’il a obtenu l’effet, ou son acceptation, par fraude ou contrainte, ou par d’autres moyens illégaux ou pour cause illicite, ou lorsque la négociation constitue un abus de confiance ou est menée en des circonstances frauduleuses. 55.

(1) A holder in due course is a holder who has taken a bill, complete and regular on the face of it, under the following conditions, namely, (

a) that he became the holder of it before it was overdue and without notice that it had been previously dishonoured, if such was the fact; and (

b) that he took the bill in good faith and for value, and that at the time the bill was negotiated to him he had no notice of any defect in the title of the person who negotiated it.

(2) In particular, the title of a person who negotiates a bill is defective within the meaning of this Act when he obtained the bill, or the acceptance thereof, by fraud, duress or force and fear, or other unlawful means, or for an illegal consideration, or when he negotiates it in breach of faith, or under such circumstances as amount to a fraud. [ 29 ] Two elements are missing here. First, the negotiation of a cheque payable to order is negotiated by delivery and by the endorsement of the payee (

section 59 BEA ). In this case, none of the cheques were endorsed by the apparent payee when they were deposited at the appellant Caisses. [ 30 ] Furthermore, it cannot be denied that the transferors, the clients, had a defective title within the meaning of subsection 55(2). It follows that the evidence brought before the trial judge made the Caisses lose the presumption that they are holders in due course and that they were therefore required to establish that, "subsequent to the alleged fraud or illegality, value has in good faith been given for the bill by some other holder in due course" (

section 57 BEA ). However, this is not the case.

Even if we were to ignore this statutory requirement on the ground that the legislature could not have intended this meaning, as argued by Crawford, supra , Vol. 3, January 2010, No. 24:30.60 at 24-34 and 34-35, among others, I find from the records that the Caisses have not established that they should nevertheless be considered to be holders in due course because they committed no fault and were neither negligent nor wilfully blind, or that the apparent payees could validly deliver them the cheques (a false payee cannot validly deliver). [ 31 ] They preferred to plead a strictly legal argument, the application of subsection 165(3) BEA , which is the final point to be decided.

IV. Inapplicability of subsection 165(3) BEA : [ 32 ] Subsection 165(3) of the BEA reads as follows:

(3) Lorsqu’un chèque est livré à unebanque[4] en vue de son dépôt au compte d’unepersonne et que la banque porte au crédit decelle-ci le montant du chèque, la banque acquierttous les droits et pouvoirs du détenteur régulierdu chèque. 165.

(3) Where a cheque is delivered to a bankfor deposit to the credit of a person and the bankcredits him with the amount of the cheque, thebank acquires all the rights and powers of aholder in due course of the cheque. [33] This provision, which was added in 1966 (S.C. 1966-67, c. 12, s. 4), has been the subject of much discussion. As noted byDeschamps J. in B.M.P. Global, supra at para. 42: “The least that can be said is that the

interpretation of the scope of s. 165(3) BEA istaking shape”. Far be it from me to try to determine its entire scope today, when it is sufficient to apply the part defined by the SupremeCourt in Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce, (SCC), [1996] 3 S.C.R. 727. [34] I note that the clients of each Caisse were the apparent payees of the cheques and did not endorse them before depositingthem in their accounts.

In Boma, Iacobucci J. summarizes the purpose of subsection 165(3) as follows: The purpose of s. 165(3), in my view, is to deal with, among others, situations like the one that arose in Royal Bank of Canada v. Wild(1974), (ON CA), 51 D.L.R. (3d) 188 (Ont. C.A.), that is, where a payee deposits a cheque to his or her own accountwithout endorsement, and to deal with restrictive endorsements. In that case, a cheque drawn by Wild and payable to Building SystemsLimited was delivered to the bank by the payee, to be deposited to the credit of his account.

The words "for deposit only to the credit ofInterlocking Building Systems Limited, dealer's account" were typed on the back of the cheque. There was no actual signature by way ofendorsement on the cheque. The cheque was credited to the payee's account. When the cheque was presented by the collecting bank tothe drawee, it was dishonoured, and charged back to the account of the payee. However, the funds in the payee's account wereinsufficient, there being an overdraft of $1,550. Several months later, the collecting bank demanded payment from the drawer of thecheque, Wild.

The defendant conceded that the collecting bank had acquired the rights of a holder in due course by virtue of s. 165(3) ofthe Act. [Emphasis added.] LaForest and McLachlin JJ, for the minority, came to the same conclusion. In their view, the provision aims "to protect banks in thosesituations where a cheque is restrictively endorsed or where the payee fails to endorse a cheque upon presenting it to an accepting bankfor deposit" (para. 109). [35] In short, the effect of the previously discussed defect under

section 59 BEA, namely, the lack of endorsement, may be setaside if section 165(3) applies. Unfortunately for the Caisses, that is not the case here because the apparent payees were not entitled tothe cheques. According to Iacobucci J., this is fatal to the application of the provision. This position is shared by the minority judges,who find that the word "person" in subsection 165(3) excludes the perpetrator of a fraud. In Boma, Iacobucci J. writes the following atpara. 76: [76] In my view, the "person" in s. 165(3) must mean a person who is entitled to the cheque.

This means that only the payee or thelegitimate endorsee of the payee would qualify as a "person" for the purposes of s. 165(3). [36] This is now the state of the law. This is apparent in Westboro Flooring and Décor Inc. v. Bank of Nova Scotia (2004), (ON CA), 241 D.L.R. (4th) 257 (Ont. C.A.), which stated that the delivery to which subsection 165(3) refers must beaccomplished by a person who is entitled to do so: [29] I reject the CIBC's submission. Section 165(3) operates only where a cheque is "delivered" to a bank. I agree with the holding inGough Electric Ltd. v.

Canadian Imperial Bank of Commerce (1986), (BC CA), 7 B.C.L.R. (2d) 39, 31 D.L.R. (4th)307 (C.A.), that delivery is only effective when made by an authorized party: see also s. 39(1) of the BEA. The obvious purpose of s.20(4) is to protect a recipient of a bill against misnomer where the bill is received from a legitimate payee, not to facilitate conversion.

Inother words, the cumulative effect of ss. 20(4) and 165(3) is to afford protection to a collecting bank where the collecting bank deposits acheque without an endorsement from a legitimate, albeit misdescribed, payee. [Emphasis added.] [37] Commenting on subsection 165(3), Crawford, supra, Vol. 2, January 2010, writes the following at pages 10-78.1,10-78.2 and10-79: §10:50.20(1)(

f) Person "Entitled to the Proceeds" In simple terms, and putting aside the encumbrance of scholarly citation of authority for a moment, the law interpreting s. 165(3) hasbecome unmanageably complicated. I think that the reason is that the

section was never intended to apply to cases in which thedepositing customer had no, or only a defective, title to the cheque. If the

section were now to be restricted to cases of missing payeeendorsements, or a restrictive endorsement that is not noticed by the bank staff, then the requirement that the person depositing it beentitled to the proceeds is logical, practical and reasonable. It would give the banks the usual rights with respect to cheques on which theonly missing endorsement was one that their customer could effectively provide. The

section has not been applied, and should never beapplied, to cases in which a necessary endorsement of someone other than the depositing customer is missing or forged. The banks canmonitor this by examining the endorsements on cheques offered for deposit. [Emphasis added.] CONCLUSION AND DISPOSITION [38] In accordance with the specific rules applicable to bills of exchange, the appellant Caisses were not holders in due course and

the invalidity of the altered cheques could be set up against them by the drawee bank, the TD Bank, who could demand reimbursement of the amounts paid out in error. The risk is thus assumed by the collecting institution, which is in all likelihood in the best position to verify the existence and honesty of its clients. [ 39 ] For these reasons, I would dismiss the three appeals, with costs. PIERRE J. DALPHOND, J.A.