Cheque-cashing business loses claim against drawer of certified cheque in identity theft case.

The recent decision of the Court of Appeal in the case of Gescoro Inc. v. Rémillard (2019 QCCA 973 conf. 2016 QCCS 5077, full text available here : provides an excellent opportunity to review the liabilities of parties to a certified cheque bearing a forged endorsement of the payee.

The facts of the case can be summarized as follows.

An individual posing as Ms Shudel approached notary Remillard to document the sale of her residential property to another individual posing as Mr Turcot.

Notary Remillard was also instructed by a mortgage lender to document a loan in the amount of $ 334 701 which the lender had agreed to make at the request of the false Mr Turcot. The loan was to be secured by a mortgage on the property to be purchased by him from Ms Shudel.

The individuals who presented themselves as Ms Shudel and Mr Turcot were actually fraudsters impersonating the two named individuals with the assistance of health care cards and driving licenses that were in the names and had the correct information of the true Ms Shudel and Mr Turcot.

In anticipation of the closing, the mortgage lender transferred the proceeds of the loan to the notary’s trust account.

When the deeds were signed and registered and the transaction was completed, the notary delivered to the false Ms Shudel a cheque in the amount of $324 155 payable to Ms Shudel, representing the net proceeds of sale.

Each of the notary and the mortgage lender had verified the identities of the vendor and purchaser but were fooled by the fraudulent or stolen documents presented and other representations made by the false Ms Shudel and Mr Turcot.

Coming out of the notary’s office, the fraudster impersonating Ms Shudel went to the notary’s bank where she obtained the certification of the cheque. She then took the certified cheque to a cheque-cashing business, where she fraudulently signed the name Ms Shudel and exchanged the cheque for cash consideration.

Prior to acquiring the certified cheque the cheque-cashing business made a number of verifications, including a verification of the identity documents of Ms Shudel and Mr Turcot.

When satisfied with its due diligence the cheque-cashing business deposited the certified cheque in its bank account. It was cleared and settled through the retail payment system operated by Payments Canada.

The fraud was discovered a few days after the closing of the sale and mortgage.

There was an investigation by the police.

This investigation was not successful. The cash and the fraudsters were never found.

More than three years after the deposit and settlement of the cheque, the bank that certified it returned the cheque through clearing to the collecting bank, pursuant to the rules of the retail payment system. It also credited the notary’s account with the amount of the cheque.

The collecting bank did not constest the return of the certified cheque. It debited the account in which the cheque had been deposited and gave back the unpaid cheque to the cheque-cashing business.

The cheque-cashing business did not contest the return of the cheque by either bank, nor did it claim the amount of the cheque from either bank.

It did, however, sue the notary, as drawer of the cheque.

The claim rested on section 129 of the Bills of Exchange Act, which reads in part as follows : « The drawer of a bill by drawing it […] engages that on due presentment it shall be accepted and paid according to its tenor, and that if it is dishonoured he will compensate the holder ».

That is one of the statutory contracts of the drawer, to pay the amount of the cheque to the holder if the cheque is not paid by the drawer’s bank.

The cheque-cashing business was in possession of the returned certified cheque, but to qualify as « holder », it was required to prove (a) either that the cheque was validly endorsed to it, or (b) that the cheque was deemed to be payable to bearer and no endorsement was required.

The signature on the cheque was declared by the true Ms Shudel not to be hers nor to have been authorized by her. As a result, pursuant to section 48(1) BEA, it was deemed to be « wholly inoperative ». It was as if there was no signature at all on the cheque acquired by the cheque-cashing business. In the absence of a signature, there was no endorsement, and the cheque-cashing business was not an endorsee.

Could the cheque be considered to be payable to bearer?

Such a presumption can be inferred when the payee is either non-existent or fictitious, within the meaning of subsection 20(5) BEA.

Here, a person actually existed under the name of Ms Schudel, and on the basis of long-standing authority, the payee was not « non-existent ».

And in light of a long-standing interpretation of the provision, if the payee is an existing person to whom the drawer intends to make a payment, then the payee is not « fictitious », even if the drawer was fraudulently induced into issuing the cheque.

There was no doubt that the notary actually intended to disburse funds to the person identified in documents that he verified, namely, the true Ms Shudel.

In view of these considerations, the cheque-cashing business did not qualify as « holder » and section 129 BEA created no duty by the drawer in its favour.

The legal analysis above was shared by the mortgage lender, the notary, the notary’s bank and the collecting bank.

The applicable payment system rules allow a certified cheque to be returned for the reason that it bears a forged endorsement (Section 4(b), Rule A4, Payments Canada).

These rules mimic the provisions of the BEA which allow the loss of cheques bearing fraudulent endorsements to be shifted from the drawer, to the drawer’s bank, to the collecting bank, and to the first endorser following the fraudulent endorsement (sections 48-49 BEA).

The collecting bank did not contest the return of the cheque because it understood that the cheque could not be deemed to be payable to bearer pursuant to subsection 20(5) BEA.

The cheque-cashing business did not contest the actions taken by the banks. This would indicate that it also did not contest the legal analysis above.

At trial and in appeal, the cheque-cashing business argued that it acted in good faith and gave value for the cheque.

It proved that it acted prudently in verifying the identity documents presented by the false Ms Shudel and Mr. Turcot. It even met the notary in person to discuss the matter before relasing the funds to the false Ms Shudel. It examined the copies that the notary made of the documents presented by the fraudsters. The documents matched those that were presented to the cheque-cahing business.

None of this evidence, however, provided any legal assistance to the cheque-cashing business.

First, the good faith and transfer of value did not make the cheque-cashing business a « holder ».

Second, there is no suggestion in section 129 or anywhere else in the BEA that a drawer is precluded from raising the forged endorsement against a « holder in due course ».

In a similar case, another cheque-cashing business argued that such was the effect of section 73(b) BEA, which provides that a « holder in due course » holds the instrument « free from any defect of title of prior parties, as well as from mere personal defences available to prior parties among themselves ». However, the argument was found to be without merit on the basis of long-standing authority to the effect that fraud is a « real » defence which can be raised even against holders in due course (9138-7746 Québec Inc. v. Wells Fargo Financial Canada, 2007 QCCQ 210, at para. 15).

To emphasize that the status of « holder in due course » provided no remedy to the cheque-cashing business, section 128 BEA expressly allows a bank that certifies a cheque to deny to a « holder in due course » the genuineness or validity of the payee’s endorsement. No wonder the cheque-cashing business did not claim its loss from the notary’s bank!

In conclusion, the cheque-cashing business did not have a strong case and the courts rightfully dismissed its claim against the notary.

One last word on this case and the related court decisions : bills of exchange and cheques have been around for centuries and the BEA was adopted at the time of Confederation on the basis of an older English statute.

The principles applied to decide the Gescoro Inc. v. Rémillard case have been tested by time.

The fact that such an old legal framework refers to non-existent or fictitious payees tells us that identity theft may not be as modern as it sometimes seems to be.