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Drafts Aren’t Cheques
Published in the December 2010 issue of Litigation Notes - View Article
The Ontario Superior Court of Justice refuses to strike a claim for conversion of a bank draft because the Bills of Exchange Act rules applicable to cheques don’t necessarily apply to drafts.
The Ontario Superior Court of Justice recently considered an application by the Bank of Montreal (“BMO”) and its investment arm, BMO Nesbitt Burns (“Nesbitt”) to strike portions of a statement of claim. The action arose as a result of a fraud perpetrated by Gregory Rao, an investment advisor with Nesbitt. Nesbitt sought to strike the plaintiff’s allegation to the effect that Rao had perpetrated a massive customer fraud which went undetected by his supervisors or the Nesbitt Compliance Department. BMO sought to strike an allegation that BMO had converted a $10,000 bank draft deposited by Rao into a BMO personal account owned by him.
With respect to the allegation relating to the massive fraud, Nesbitt argued that the pleading was irrelevant to any breach of Nesbitt’s duty of care to the plaintiff, Caporrella. Allegations of fraud directed against persons other than Caporrella would divert the course of the litigation, unnecessarily expand discovery and potentially prolong a trial.
Nesbitt relied on the case of Brodie v Thomson Kernaghan [2002] OJ No. 1850 in which an investor brought an action against her financial advisor and sought to rely on allegations regarding the advisor’s previous conduct. The court struck the allegations relating to the advisor’s previous conduct on the basis that the effect would be to have a trial with respect to the mishandling of Ms. Brodie’s investments as well as several similar trials with respect to the investments of strangers to the action.
Caporrella, on the other hand, argued that the issue raised by the impugned pleading related to whether the alleged negligence of Nesbitt’s Compliance Department or supervisory systems was reflective of a systemic problem. The enquiry would not require a forensic analysis of the suitability of a number of investments as might have been required in the Brodie case. The evidence would relate to the number of Nesbitt clients defrauded by Rao and this information should be readily available to Nesbitt.
The court agreed with Caporrella. Although the allegation of Rao’s fraud against other Nesbitt clients might increase the complexity and scope of the discovery process and the trial, the facts had some relevance and were potentially probative of Nesbitt’s negligence in relation to Rao as part of a systemic failure of Nesbitt’s supervisory and compliance systems. The pleading was allowed to stand.
BMO sought to strike the allegation of conversion against it. BMO argued that if the provisions of the Bills of Exchange Act and the principles developed in relation to the conversion of cheques were applied to banker’s drafts, no reasonable cause of action could lie against BMO in conversion. Pursuant to the Bills of Exchange Act, only the drawer, payee or the endorsee of a cheque can bring an action for conversion.
The Court was unwilling to accept this analogy: “A bankers’ draft is a negotiable instrument by which payment is made between banks in contrast to a cheque where a party, the drawer/payer, can direct through the cheque that funds be drawn from their bank account and directed to be paid to another party, a payee. A bank draft is purchased and directs that a specific sum be paid to a payee. The payee may be the purchaser of the draft or another party to whom the purchaser wishes to direct the funds. A bankers’ draft drawn on a branch at the same bank is neither a cheque nor a bill, because there is no distinct drawer or drawee.”
There has been very little Canadian jurisprudence on the subject of bankers’ drafts or indeed of money orders. Since the rights of a purchaser/remitter of a bankers’ draft is a novel area of law, the Court was of the view that it was not a matter that should be dealt with on a pleadings motion, but by a trial with the benefit of a full record and expert evidence.
Caporrella vs BMO Nesbitt Burns Inc., 2010 ONSC 6738 (CanLII)