The Curious Case of B.M.P. Global Distribution Inc. v. Bank of Nova Scotia
A mysterious cheque in the mail, a sartorially savvy businessman, and non-stick oven pans are some of the factual debris in BMP Global Distribution v. Bank of Nova Scotia, 2009 SCC 15, the latest case to be decided by the Supreme Court. At the centre of the case, however, is a simple question of banking law: if you receive a cheque from one bank and deposit it into an account held at another bank, could those funds be removed from your account if the cheque is later found to be fraudulent?
The facts of BMP Global Distribution v. Bank of Nova Scotia may raise a few eyebrows. The plaintiff corporation was in the business of distributing non-stick bakeware products. In 2001, Mr. Hashka and Mr. Backman, BMP’s two directors and principal shareholders, secured an oral agreement with a Mr. Newman of Sunrise Marketing to buy the American distribution rights of BMP’s products for $1.2 million. At trial, Hashka and Backman revealed that they decided to do business with Newman because he “was a sharp-looking guy” who “dressed well.” They also admitted that they pulled the $1.2 million figure “out of the air,” that they didn’t exchange any business plans or financial statements with Newman, and that they hadn’t done any research on Newman or Sunrise Marketing.
On October 22, 2001, Hashka received an envelope in the mail from an “E. Smith” in Mississauga. The envelope contained no cover letter, but had an unendorsed cheque for $904,563 from an account at the Royal Bank of Canada (RBC) held by First National Financial Corporation. Neither Hashka nor Backman knew of E. Smith or First National, and there was nothing accompanying the cheque to link it with BMP’s new distribution agreement with Sunrise Marketing.
Nevertheless, Hashka took the cheque for $904,563 and deposited it in BMP’s account at the Bank of Nova Scotia (BNS). The account previously had a balance of $59.67. Hashka explained to the bank manager that the cheque was a down payment for distribution rights of BMP’s bakeware in the American market. BNS held the funds for seven days but then released them to BMP in the normal course of business. BMP subsequently transferred various amounts to accounts held by Hashka, Backman, a holding company controlled by Hashka, and a Citibank account of an unknown third party.
On November 9, 2001, RBC notified BNS that the cheque was counterfeit and that the signatures had been forged. BNS froze BMP’s account and reversed its transactions. Ultimately, BNS was able to recover $777,336.04 and transferred the funds back to RBC.
It should be noted that there were no criminal charges against BMP, Hashka or Backman, nor were there allegations that they knowingly participated in the fraud. The courts have treated them as innocent parties. BMP, Hashka, Backman and Hashka’s holding company (BMP et al.) sued BNS, arguing that it had no right to restrain and transfer the funds back to RBC, and that, under banking law, RBC should bear the loss of the fraud and not BMP. (Hashka and Backman also accused BNS of defamation for suggesting they had committed fraud.) The central issue of the case, as it climbed the judicial ladder, was whether BNS had the right to remove the funds from BMP’s account and return the funds to RBC.
At trial, the BC Supreme Court found in favour of BMP et al. The trial judge held that BNS had breached its service agreement with the account-holders (BMP, Hashka and Backman) by removing the amounts already credited to their accounts, contrary to the clearing rules of the Canadian Payments Association. By choosing to assist RBC in recovering the transferred amount, BNS had preferred its business interests with RBC rather than comply with its contractual obligations with the account-holders. The court held that the deposit made in BMP’s account had already matured to “final credit” before the cheque was found to be fraudulent, and “the law prevented a bank charging back against a customer’s account without the customer’s permission” (para. 10). BNS, the court reasoned, had deprived BMP et al. of the right to demand payment of the funds that were firmly in their respective accounts.
The trial judge awarded BMP et al. punitive damages equalling the recovered amount of $777,336.04, despite it arguably constituting a windfall from a fraud scheme. Oddly, the trial judge wrote, “If the law drives us to accept what one might consider an absurd result, we must accept that.”
A unanimous BC Court of Appeal reversed the “absurd result” and found in favour of BNS. The BCCA grounded the ruling in principles of equity. Saunders J.A. wrote that for the court to allow BMP to keep the funds would be tantamount to helping effect the fraud scheme, since the fraud was clearly designed to put funds in BMP’s account. Since BMP had not given consideration for the funds, it would not be unfair for the company to relinquish them; there was no basis for BMP to expect to retain what had been gratuitously deposited into its account. Furthermore, had the funds involved a transfer within the same bank (instead of money coming out of one financial institution and into another), there would have been no issue with reversing the transaction; the fact that two banks were involved should not change the outcome.
Since BMP suffered no real injury from BNS’s breach of the service agreement, the BCCA reduced BMP’s damages to $1. The court also ordered BNS to pay nominal damages of $100 to BMP’s principals (Hashka, Backman and Haska’s holding company), saying that the bank should have first inquired into the true ownership of the accounts before charging them.
SUPREME COURT’S ANALYSIS
The Supreme Court unanimously upheld the B.C. Court of Appeal decision (and also allowed BNS’s cross-appeal against Hashka, Backman and Hashka’s holding company). However, while the Court of Appeal applied principles of equity, the Supreme Court interpreted the case through the lens of mistake of fact; and while the previous courts focused on BNS’s obligations as the collecting bank, the Supreme Court was chiefly concerned with RBC’s rights as the drawee bank, and whether it should bear the loss from a mistake of fact.
BMP tried to argue that the drawee bank (ie. RBC) should bear the loss due to the “principle of finality” as established by two historic cases, Price v. Neal (1762) and Bank of Montreal v. The King (1907). Writing for the SCC, Deschamps J. rejected BMP’s interpretation of the two cases, saying that neither case could stand “for a hard and fast rule that the drawee is in all circumstances precluded from recovering from the collecting bank.”
Among BMP’s other, more interesting arguments was that s. 165(3) of the Bills of Exchange Act barred RBC from recovery. The provision provides:
165(3). Where a cheque is delivered to a bank for deposit to the credit of a person and the bank credits him with the amount of the cheque, the bank acquires all the rights and powers of a holder in due course of the cheque.
Section 165(3) gives a collecting bank the status of a holder in due course and bestows upon it the same right as a party who has given consideration. This suggests that, in situations where a person takes a fraudulent cheque from a Bank X account and deposits it into a Bank Y account, Bank Y can refuse to return the money to Bank X. In the present case, then, BNS arguably had no obligation to return the money to RBC (and so BNS should have instead respected its contractual obligations with BMP et al).
The SCC acknowledged that the case law pertaining to s. 165(3) of the Bills of Exchange Act is still “taking shape,” but pointed out that the purpose of s. 165(3) was to protect the collecting bank (ie. BNS) from liability. The provision was not meant to protect the payee (ie. BMP), and certainly was not meant to allow the payee to demand payment from the collecting bank. It would be contrary to s. 165(3)’s purpose to allow the payee to “use the bank’s shield as a sword against it. The purpose of granting the bank the status of a holder in due course is not to create an entitlement for the payee of a forged instrument.”
The assessment of the drawee’s rights requires a more nuanced enquiry. The principle of finality of payment underlies both the common law rules and the BEA’s provisions and serves as a general goal, but as laudable as it is, it does not negate rights that may otherwise accrue to a party. It cannot be raised by a payee as an indiscriminate bar to the recovery of a mistaken payment.
The Court further found that BNS did not breach its agreement with BMP et al by transferring the funds from their accounts back to RBC, because the common law doctrine of mistake of fact supplemented the account-holders’ respective service agreements; “the common law is implicitly incorporated [into the service contract], since it does not conflict with the explicit terms of the contract.”
Deschamps J. concluded with an eye to policy considerations:
The common law affords a defence to an innocent party who has given consideration or changed his or her position. However, the person who is still in possession of the funds is in the best position to stop the fraud. To preclude means to prevent the continuation of a fraud in order to allow a fraudulent payment to be finalized would be a strange policy. Thus, there is no overarching policy consideration that would bar the payee’s bank from resisting a claim based on a signature that has been proven to be forged where the payee has not used the funds and has neither given consideration for them nor changed his or her position.
Deschamps J. held that the case was a clear example of a mistake of fact, albeit with a bizarre factual matrix. RBC had a right to recover the funds due to a mistake of fact, and nothing about BMP’s circumstances could preclude RBC from seeking recovery. There was also nothing in BMP’s service contract with BNS that barred BNS from returning the funds to RBC.
Given the trial judge’s nonsensical outcome of allowing BMS to keep all the proceeds of a counterfeit cheque, the SCC’s decision to uphold the BCCA finding was expected. One of the possible policy repercussions of the trial judge’s reasoning would have been that banks would be to hold a deposited cheque for a longer period of time before releasing the funds. Currently, typical bank practice is to release the funds after three to five business days. If there was a risk that banks couldn’t recover proceeds from a fraudulent cheque, then the banks would extend the waiting period to verify the cheque’s authenticity.
Another interesting note of the case is the Court’s comments on s. 165(3) of the Bills of Exchange Act, a highly contentious provision because it allows a collecting bank to keep the funds of a cheque — even, potentially, if the cheque is counterfeit and even if there has not been consideration given for the proceeds. In Boma Manufacturing Ltd. v. CIBC,  3 S.C.R. 727, Iacobucci J. wrote at para. 78:
Section 165(3) represents a policy decision with respect to the allocation of risk. When a collecting bank is presented with a cheque for deposit to the credit of the payee, the bank is entitled, essentially, to assume that it was truly the intention of the drawer that the payee receive the proceeds of the cheque.
What BMP Global Distribution v. Bank of Nova Scotia makes clear is that section 165(3) is discretionary: the collecting bank may decline to be a holder in due course of a received cheque. As Deschamps J. points out, however, it remains uncertain how s. 165(3) operates “where the deposited instrument bears a forged signature of the drawer,” and the collecting bank refuses to return the funds to the drawee.