2019 QCCA 973, 2019 QCCA 973

Translated from the original French Gescoro inc. c. Rémillard 2019 QCCA 973 COURT OF APPEAL CANADA PROVINCE OF QUEBEC REGISTRY OF MONTREAL No.: 500-09-026475-160 (500-17-081733-142) DATE: June 3, 2019 CORAM: THE HONOURABLE MARK SCHRAGER, J.A. SIMON RUEL, J.A. STEPHEN W. HAMILTON, J.A. GESCORO INC. APPELLANT – Plaintiff v.

FRANCIS-PIERRE RÉMILLARD RESPONDENT – Defendant and STEWART TITLE GUARANTY COMPANY IMPLEADED PARTY – Intervener JUDGMENT [ 1 ] The Appellant appeals a judgment rendered on October 18, 2016 by the Honourable Madam Justice Chantal Corriveau of the Superior Court, District of Montreal, that dismissed its suit against the Respondent. [ 2 ] For the reasons of Hamilton J.A., with which Schrager and Ruel JJ.A. concur, THE COURT : [ 3 ] DISMISSES the appeal, with legal costs. MARK SCHRAGER, J.A. SIMON RUEL, J.A. STEPHEN W. HAMILTON, J.A. Mtre Michel S. Jeanniot JEANNIOT INC.

For the Appellant Mtre Mireille Brosseau COLAS MOREIRA KAZANDJIAN ZIKOVSKY For the Respondent Mtre Josiane Brault

BORDEN LADNER GERVAIS For the Impleaded Party Date of hearing: October 22, 2018 REASONS OF HAMILTON J.A.

INTRODUCTION [ 4 ] Fraudsters succeeded in obtaining more than $300,000. [ 5 ] The issue in this appeal is simple: who, between two innocent parties, should bear this loss – the Respondent, who issued the cheque to the order of one of the fraudsters, or the Appellant, who received the cheque from the fraudster and paid it? [ 6 ] In a judgment rendered on October 18, 2016, Madam Justice Chantal Corriveau of the Superior Court of the District of Montreal decided that the Appellant should bear the loss and she dismissed its originating application. [1] The Appellant appeals that judgment.

BACKGROUND [ 7 ] The facts as summarized in the judgment at trial are not in dispute. It is helpful to go over some of the key points in that

summary. [ 8 ] In December 2011, the Respondent, who is a notary, was given a twofold mandate relating to the sale of a property located at 4930-4932 Borden Street in Montreal. [ 9 ] First, Paul Turcot introduced himself as the purchaser of the property and gave him the mandate of preparing the deed of sale.

The seller was Tanja Schudel, the owner of the property. [ 10 ] Second, First National Financial Corporation (“First National”) granted a hypothecary loan of $334,701.85 to Turcot to be used to buy the property, and it wanted a deed of hypothec to secure repayment of the loan. [ 11 ] The Impleaded Party issued a title insurance policy in favour of First National. [ 12 ] The aforementioned deeds were completed and signed before the Respondent on December 8, 2011.

The Respondent’s assistant carried out the usual checks and made photocopies of Turcot’s and Schudel’s health insurance cards and driver’s licences. [ 13 ] First National disbursed the amount of the loan to the Respondent, and the Respondent in turn issued a cheque (the “Cheque”) for $324,155.88 payable to Schudel, drawn on his trust account at the Bank of Montreal (“BMO”), and gave it to Schudel. [ 14 ] However, the persons who represented themselves as Turcot and Schudel were not the real Paul Turcot and Tanja Schudel. They stole the identities of these persons.

The transaction was a fraud. [ 15 ] The Appellant is a company that operates cheque-cashing centres. [ 16 ] On December 9, 2011, before the fraud was discovered, the false Schudel went to BMO and had the Cheque certified by BMO. She then went to one of the Appellant’s retail outlets to cash the Cheque. She showed her driver’s licence and health insurance card and completed an identification sheet. [ 17 ] Before cashing the Cheque, the Appellant’s representative made inquiries with the Respondent’s office.

First, on December 12, 2011, he faxed the Respondent a copy of the certified Cheque presented by the false Schudel so that the Respondent could confirm its authenticity. The same day, the Respondent sent back the photocopy of the Cheque with the notation [ translation ] “Cheque OK!” [ 18 ] In addition, either that day or the next, the Appellant’s representative also went in person to the Respondent’s office to validate the authenticity of the Cheque. The Respondent reassured him and wrote “Proceeds of sale” on the back of the Cheque.

The Appellant’s representative showed him the photocopies of the driver’s licence and health insurance card of the false Schudel, and the Respondent confirmed that this was the right person. [ 19 ] On the strength of these observations, the Appellant accepted the Cheque endorsed by the false Schudel. The Appellant’s representative stated that he gave the amount of the Cheque to the false Schudel in cash, between December 13 and 15, 2011, in three payments of $15,000, $150,000 and $151,050.50. [2] He filed a copy of the receipts to prove these payments (Exhibit P-6).

The Respondent objected to his testimony and to the filing of Exhibit P-6 and challenged the remittance of the amounts to the false Schudel. [ 20 ] The Appellant deposited the Cheque in its account at TD Bank, which received payment from BMO. BMO withdrew the amounts from the Respondent’s trust account.

[ 21 ] Shortly thereafter, on or about December 15, 2011, the Respondent learned that the real Ms. Schudel and Mr. Turcot had been the victims of identity theft. It was not until a few months later that the Appellant learned from the police that they were conducting an investigation on the false Schudel. Neither of the fraudsters was found, and the amounts disbursed by the Appellant were never recovered. [ 22 ] The real Ms.

Schudel had the deed of sale and deed of hypothec entered into before the Respondent cancelled, along with the charges registered on her property. [3] She stated that she had not endorsed the Cheque or authorized anyone to endorse the Cheque on her behalf, and that the endorsement was fraudulent. [ 23 ] The Impleaded Party indemnified First National and was subrogated in its rights. It asked to be reimbursed by the Respondent.

The Respondent in turn asked BMO to return the Cheque to TD Bank in application of the rules of the Canadian Payments Act . [4] TD Bank accepted the returned Cheque and remitted the sum of $324,155.88 to BMO, which deposited it in the Respondent’s trust account. Thus, on February 13, 2014, the Appellant had $324,155.88 withdrawn from its bank account for the reason [ translation ] “Returned cheque”. [ 24 ] On March 27, 2014, the Appellant sued the Respondent for the value of the Cheque. [ 25 ] The Respondent contested the application. Given the dispute, the amount remained in his account.

The Respondent undertook to remit the amount to the Impleaded Party if the court found in his favour. JUDGMENT UNDER APPEAL [ 26 ] The judge summarized the facts and claims of the parties. She considered the issue to be whether the Appellant was the holder in due course of the Cheque according to the Bills of Exchange Act (“BEA”). [5] [ 27 ] The judge found, first, that the Appellant did not benefit from the presumption in Section 57(2) BEA which states that the holder of a bill of exchange is deemed to be the holder in due course, since the evidence had established the fraudulent nature of the endorsement.

Consequently, she placed the onus on the Appellant to prove that it was the holder in due course. [ 28 ] The judge referred to the criteria the Court of Quebec identified in Savard c. Lavigne [6] as the necessary criteria for a holder to qualify as a holder in due course: the holder must have negotiated in good faith and for value a complete and regular bill of exchange without knowledge of any defect in it. The judge found that the Appellant had acted in good faith and taken reasonable measures to verify the identity of the false Schudel.

However, she considered the bill of exchange to be irregular because of the fraudulent endorsement. Furthermore, she was of the opinion that the evidence that the bill of exchange had been negotiated for value was flawed because the Appellant had not proved that it had remitted the amounts claimed to the false Schudel. [ 29 ] The judge found that the Appellant was not the holder in due course of the Cheque within the meaning of the BEA and that the endorsement of the Cheque was fraudulent. The judge dismissed the Appellant’s application.

ISSUES [ 30 ] The Appellant does not claim that the Respondent committed a fault, but instead argues that it is entitled to the proceeds of the Cheque under the BEA. [ 31 ] The Appellant asks four questions: 1. Did the trial judge err in law when she found that the Appellant was not a holder in due course within the meaning of Section 55(1) BEA? 2. Did the trial judge err in law when she decided that the endorsement was fraudulent and that Section 48(1) BEA applied as a result? 3. Subsidiarily, did the trial judge err in law by allowing the Respondent to present a defence based on

Section 48 BEA? 4. Does the impleaded party have an interest to act in this appeal? ANALYSIS [ 32 ] Arguments 2 and 3, which relate to the fraudulent endorsement and Section 48(1) BEA, should be dealt with first . If the Appellant fails on these arguments, it will not be necessary to deal with the evidence that the bill of exchange was negotiated for value or the Impleaded Party’s interest to act. [ 33 ] The judge concluded that the endorsement of the Cheque by the false Schudel was fraudulent and irregular and hence the Cheque itself was not regular within the meaning of Section 55(1) BEA .

As a result, the Appellant could not be the holder in due course. [ 34 ] With respect, there are two errors of law in this analysis. [ 35 ] Section 55(1) BEA provides that to be considered a holder in due course, the holder must be in good faith, the bill acquired must be “complete and regular on the face of it”, taken for value and negotiated without the holder having been given notice of any defect in

the title of the person who negotiated it: [7] 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, 55

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

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

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

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.

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. [Emphasis added.] [ 36 ] Author Bradley Crawford defines a “complete” bill of exchange as a bill which has the appearance [8] of all the required elements, and a “regular” bill as one which, in addition to being apparently complete, seems to comply with legal requirements. Therefore, a fraudulent endorsement does not affect a bill being “complete and regular on the face of it” within the meaning of Section 55(1) BEA . [ 37 ] An analysis of the fraudulent endorsement must be made instead under Section 48(1) BEA.

In fact, whether or not the Appellant is a holder in due course does not protect it from a defence based on Section 48(1) BEA . [9] This subsection reads as follows: 48

(1) Subject to this Act, where a signature on a bill is forged, or placed thereon without the authority of the person whose signature it purports to be , the forged or unauthorized signature is wholly inoperative, and no right to retain the bill or to give a discharge therefor or to enforce payment thereof against any party thereto can be acquired through or under that signature , unless the party against whom it is sought to retain or enforce payment of the bill is precluded from setting up the forgery or want of authority. 48

(1) Sous réserve des autres dispositions de la présente loi, toute signature contrefaite , ou apposée sans l’autorisation du présumé signataire, n’a aucun effet et ne confère pas le droit de garder la lettre, d’en donner libération ni d’obliger une

partie à celle-ci à en effectuer le paiement , sauf dans les cas où la

partie visée n’est pas admise à établir le faux ou l’absence d’autorisation . [Emphasis added.] [ 38 ] However, the judge referred to Section 48(1) BEA in her analysis under Section 55(1) BEA, such that, as we will see, this led to the same result. Therefore, this error did not affect the outcome of the case. [ 39 ] The second error is that, before analyzing the effect of the endorsement by the false Schudel, the judge should have focused on the Cheque itself to determine whether or not the endorsement was required.

It is only if an endorsement was required that a fraudulent endorsement could have affected the Appellant’s rights. If an endorsement was not required, a fraudulent endorsement would have had no effect. [ 40 ] An endorsement is required to negotiate a cheque payable to order, but it is not required for a cheque payable to bearer, as provided in

Section 59 BEA: 59

(1) A bill is negotiated when it is transferred from one person to another in such a manner as to constitute the transferee the holder of the bill. 59

(1) Il y a négociation quand le transfert de la lettre constitue le cessionnaire en détenteur de la lettre.

(2) A bill payable to bearer is negotiated by delivery.

(2) La lettre payable au porteur se négocie par livraison.

(3) A bill payable to order is negotiated by the endorsement of the holder.

(3) La lettre payable à ordre se négocie par endossement du détenteur. [ 41 ] The cheque in the present case was marked [ translation ] “Pay to the order of: Tanya Schudel” and therefore seems to have been payable to order. However, Section 20(5) provides that: 20

(5) Where the payee is a fictitious or non-existing person, the bill may be treated as payable to bearer. 20

(5) La lettre dont le preneur est une personne fictive ou qui n’existe pas peut être considérée comme payable au porteur. [ 42 ] The Supreme Court explained the effect of this provision in Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce : The

section provides that, where the payee is a fictitious or non-existing person, the bill may be treated as payable to bearer. The significance of a cheque that is payable to bearer, rather than to order, is that it can be negotiated by simple "delivery" to the bank; endorsement is not required. The presence or absence of a legitimate or forged endorsement is irrelevant to a bearer cheque. A bank

becomes the lawful holder of a bearer cheque simply through delivery. By contrast, in order for a bank to become the lawful holder of a cheque that is payable to order, not only must the cheque be delivered to effect negotiation, but the cheque must also be endorsed.

If the cheques in question were payable to fictitious persons, and could accordingly be treated as bearer cheques, the bank would become a "holder in due course" pursuant to s. 73 of the Act despite the forged endorsements and the missing endorsements; to repeat, negotiation of a bearer cheque is achieved simply by delivery. [10] [ 43 ] Consequently, if the Tanya Schudel whose name was written on the Cheque, was a “fictitious person” or a “non-existing person”, the Cheque would have been payable to the bearer and an endorsement would not have been required.

As a result, a fraudulent endorsement would not have affected the status of the Appellant as holder of the Cheque. [ 44 ] The BEA does not define the adjective “fictitious” or the term “non-existing person”. The Supreme Court has considered these concepts on several occasions. Its most recent decision on the matter is in Teva Canada Ltd. v.

TD Canada Trust , [11] a 5-4 decision rendered in 2017. [ 45 ] Abella J., writing for the majority, summarized the test as follows: [7] This Court has also, in multiple decisions, provided what is, in essence, a two-step framework which outlines what a bank must prove to demonstrate that a payee is fictitious or non-existing. Step one — the subjective fictitious payee inquiry — asks whether the drawer intends to pay the payee . If the bank proves that the drawer lacked such intent, then the payee is fictitious, the analysis ends and the drawer is liable.

If the bank does not prove that the drawer lacked such intent, then the payee is not fictitious, and the analysis proceeds to step two. Step two — the objective non-existing payee inquiry — asks if the payee is either (1) a legitimate payee of the drawer; or (2) a payee who could reasonably be mistaken for a legitimate payee of the drawer . If neither of these is satisfied, then the payee does not exist, and the drawer is liable. If either is satisfied, then the payee exists, and the bank is liable. [8] It is accepted that Teva did not participate in the fraud. It follows that none of the payees were fictitious.

Further, all payees were either (1) known customers of Teva’s; or (2) companies whose names could reasonably have been mistaken for its actual customers, such that all payees existed . In my respectful view, therefore, and based on this Court’s jurisprudence, none of the payees in this case were either fictitious or non-existing. As a result, the defence in s. 20(5) does not apply and the banks are liable for conversion. [Emphasis added.] [ 46 ] The effect of this test is to transfer the risk of a fraudulent cheque to the bank that cashed the cheque, unless the drawer is involved in the fraud.

Abella J. justified this result by writing: “Banks are well-situated to handle the losses arising from fraudulent cheques, allowing those losses to be distributed among users, rather than by potentially bankrupting individuals or small businesses which are the victims of fraud.” [12] Furthermore, she referred to Iacobucci J. in Boma , who noted that “the banks are the more significant beneficiaries of the bills of exchange system.

It is therefore appropriate, in certain circumstances, for them to bear risks and losses associated with that system”. [13] [ 47 ] Côté and Rowe JJ. vigorously dissented, with the agreement of McLachlin C.J. and Wagner J., as he then was . They proposed the following test: [85] The first step in determining whether an in​strument ought to be considered as payable to bearer under s. 20(5) of the BEA involves determining whether the payee is a non-existing person. Under our objective approach, a payee will be non-existing where the payee does not in fact exist at the time the instrument is drawn (see B.

Crawford, The Law of Banking and Payment in Canada (loose- leaf), vol. 3, at pp. 22 - 31 and 22 - 32). The non-existence of the payee obviously makes endorsement by this person impossible. Thus such a cheque may be treated as payable to the bearer, providing the banks with a defence to the tort of conversion. [86] If the payee is an existing person, then a sec​ond inquiry is required: Is the payee fictitious? As we will explain, this step has a troubled history in Canadian case law, but we are of the view that it can be rehabilitated as an appropriate allocator of risk and efficient arbiter of disputes.

In our view, a payee will be fictitious where there is no real transaction between the drawer and the payee . By definition, or necessary implication, a payee who is non-existing is also fictitious (given that there can be no real transaction with a person that does not exist). But a payee who is a real person can nevertheless be ficti​tious.

This is the case where the payee, despite be​ing a real person, is not entitled to the proceeds of the cheque because there is no underlying transac​tion with the drawer. [Emphasis added.] [ 48 ] This approach has the advantage of imputing the risk of loss to the drawer of the cheque, who issued the cheque and is generally in the best position to prevent fraud, rather than to the bank that cashed the cheque. [ 49 ] However, our Court is bound by the decision of the majority, and we must therefore apply the analysis set out by Abella J. [ 50 ] According to this test, the first step aims to determine whether the payee is fictitious.

This is a subjective analysis of the drawer’s intentions: Did the Respondent want to pay Schudel? In this particular case, there was fraud, but the Respondent was not involved in the fraud. It is clear that the Respondent believed that Schudel was selling her property and he wanted to give her the proceeds from the sale. Consequently, Schudel was not a fictitious person. [ 51 ] The second step aims to determine whether the payee is an existing person. This is an objective test.

It is satisfied because Schudel was a real person who was the owner of the house contemplated in the sale. [ 52 ] Therefore, according to Teva , the payee was neither a fictitious nor a non-existing person. [ 53 ] The facts are similar to the fourth proposition of Dean Falconbridge, cited by the Supreme Court:

(4) If [the payee] is the name of a real person, in​tended by [the drawer] to receive payment, the payee is neither fictitious nor non- existing, notwithstanding that [the drawer] has been induced to draw the bill by the fraud of some other person who has falsely represented to [the drawer] that there is a transaction in respect of which [the payee] is entitled to the sum mentioned in the bill. [14] [ 54 ] Consequently, the Cheque remained a cheque to order and the validity of its endorsement by the false Schudel needs to be examined. [15] Thus, the judge’s failure to examine whether the Cheque was payable to order or to bearer had no impact on the trial judgment. [ 55 ] The judge found that the endorsement was false.

There is no reason to intervene on this conclusion. The Cheque was endorsed by the false Schudel. This was therefore a forged signature within the meaning of Section 48(1) BEA , and the Appellant could not enforce payment against the Respondent. [ 56 ] Subsidiarily, the Appellant argues that the judge erred in law by allowing the Respondent to present a defence based on Section 48(1) BEA, because he failed to notify BMO of the forgery within the year after the date he acquired notice of the forgery. Section 48(3) BEA states: 48

(3) Where a cheque payable to order is paid by the drawee on a forged endorsement out of the funds of the drawer, or is so paid and charged to his account, the drawer has no right of action against the drawee for the recovery of the amount so paid, nor any defence to any claim made by the drawee for the amount so paid, as the case may be, unless he gives notice in writing of the forgery to the drawee within one year after he has acquired notice of the forgery. 48

(3) En cas d’endossement falsifié d’un chèque payable à ordre et imputé à son compte par le tiré, le tireur ne peut exercer contre celui-ci une action en recouvrement de la somme ainsi payée, ou une défense contre toute réclamation visant celle-ci, que s’il l’a avisé du faux dans l’année qui suit la date où il en a eu connaissance. [ 57 ] This argument is unfounded: assuming such a notice had been omitted, the Appellant could not have set up this omission against the Respondent.

Only BMO could have done so had it exercised a remedy against the Respondent. [ 58 ] Consequently, the Appellant fails on this first ground and the appeal must be dismissed. [ 59 ] This conclusion is sufficient to settle the outcome of the appeal. However, it seems to me appropriate to deal with the Appellant’s argument that the bill of exchange was negotiated for value. As specified earlier, one of the essential criteria in order for a holder to be characterized as a holder in due course is that the holder took the bill for value (s. 55(1)(

b) BEA). The judge found that the Appellant had not proved that it had taken the bill for value because the evidence surrounding the three payments made to the false Schudel was flawed.

The judge wrote: [ translation] [72] The testimony of Gescoro’s representative suggests that there were three payments, a first one for $15,000, a second for $150,000 and a third one for the balance, namely $151,050. [73] According to Exhibit P-6, it seems that an amount of $150,050.50 was indicated on a receipt prepared by Gescoro on December 12, 2011 at 2:22 p.m. and that on December 13, 2011, at 2:21 p.m., an identical amount of $150,050.50 also appears. [74] The only amount that appears on the photocopied receipt connected with the name of Tanja Schudell is $151,050.50, which appears twice. [75] There is nothing to connect Tanja Schudell to the remittance of a first amount of $15,000 and then a second remittance amounting to $150,000. [ 60 ] The judge erred in law in this analysis.

It was not in fact necessary to prove that the consideration given to the false Schudel was equal to the amount of the bill. The value may be less than the value of the bill and still meet the condition of

Section 55 BEA . [16] [ 61 ] Therefore, for the foregoing reasons, I would dismiss the appeal, with legal costs. STEPHEN W. HAMILTON, J.A.