2007 BCSC 1261 The Toronto-Dominon Bank v. Merenick

Before: The Honourable Madam Justice H. Holmes

Reasons for Judgment
In Chambers (Rule 18A)

Counsel for the Plaintiff:	R.P. Sloman
Counsel for the Defendant:	D.M. Frechette
Date and Place of Hearing:	June 8, 2007
	Vancouver, B.C.

INTRODUCTION

[1] Todd Merenick had recently begun his short and unsuccessful career as a rookie financial consultant with Investors Group in Kelowna, when he started to receive unsolicited emails from a purported Dr. Chris Martins and then a Dr. Ahmad Rehman of Nigeria. The Nigerians asked Mr. Merenick to help them transfer millions of dollars out of Nigeria, funds that they said were unused from a government grant that had supported their medical research team, and which the scientists wanted to use outside Nigeria for their retirements. Mr. Merenick immediately saw “red flags” but, he explains, thought there was a chance that the Nigerians and the sympathetic situation they presented were genuine, and that Dr. Rehman would move with his wealth to Canada and become a client.

[2] Over the next eight months, Mr. Merenick resisted Dr. Rehman’s numerous requests. Finally, he agreed to conduct two transactions through his own account at the Toronto-Dominion Bank. At Dr. Rehman’s direction, he received and deposited a cheque for more than $82,000, and the next day directed the bank to wire a similar sum from his account to an account in Hong Kong in a name provided by Dr. Rehman.

[3] The cheque turned out to be counterfeit, and the bank has been unable to recover the funds transferred to the Hong Kong account. As soon as he heard these things, Mr. Merenick resigned from his job, reported the situation to the police, and declared personal bankruptcy. He acknowledges that he is liable to the bank for the full amount of the cheque.

[4] The question in this summary trial under rule 18A is whether, when he deposited the cheque and directed the wire transfer, Mr. Merenick engaged in “false pretences or fraudulent misrepresentation” within the meaning of s. 178(1)(e) of the Bankruptcy and Insolvency Act. If he did, then his debt to the bank will survive his bankruptcy, because it would fall within s. 178(1)’s list of claims which society, through Parliament, considers to be of a quality that outweighs any possible benefit that will flow from relieving a bankrupt of them.

[5] Underlying that question are two essential issues:

· whether, as the bank contends, Mr. Merenick made false statements to the bank concerning the cheque or the wire transfer, and

· even if he did not, whether Mr. Merenick’s acknowledged failure to alert the bank to the suspicious circumstances surrounding the cheque, together with his other conduct, amounted to false pretences or fraudulent misrepresentation.

BACKGROUND

[6] The “Nigerian” scam began early in November 2004, with an email from a Dr. Chris Martins. Dr. Martins, purported Head of the Department of Clinical Pharmacology and Director of Research at the University of Lagos, explained that the department had an unused balance of USD $8.3 million of a USD $12.5 million research grant, and the academics wished to transfer the funds outside Nigeria on a confidential basis to provide for their otherwise unfunded personal retirements.

[7] Mr. Merenick responded quickly, briefly, and sceptically.

[8] Nonetheless, Dr. Martins and then Dr. Ahmad Rehman pursued an extensive email correspondence with Mr. Merenick over many months, punctuated – it appears from the content of the emails – by occasional telephone conversations. Dr. Rehman politely but persistently implored Mr. Merenick to help him with his objective of moving the funds out of Nigeria, explaining that if the opportunity were lost, he would gain nothing from his twenty-five years of service to his government as a health research expert.

[9] Mr. Merenick was offered a commission for helping with the movement of the $8 million. Dr. Martins’ first email included this: “Upon receipt of your acceptance to assist us in this, we will negotiate on what should be your take from this ammount [sic] for helping us”. In an email on December 5, 2004, Dr. Rehman said:

Please remember I have offer you 20% for any assistance which you will give to successful delivary [sic] and claearance [sic] in canada [sic].

Mr. Merenick’s responses do not contradict the 20% amount, and it is reasonable to conclude that the amount was mentioned in an intervening phone call. The emails that follow make no overt reference to a percentage commission for Mr. Merenick, but refer on numerous occasions to the “business opportunity” that will be “of mutual benefit”.

[10] There can be no doubt that Mr. Merenick knew that the chances of the proposed transaction being authentic were slim. On numerous occasions, he told Dr. Rehman that he was “suspicious” of the transaction, that he and his supervisor at Investors Group were concerned that the transaction was to launder money, and would call the police if that were so, and that the proposal “seemed too good to be true”. On January 17, 2005, Mr. Merenick told Dr. Rehman that “Nigeria is notorious for scams similar to the idea you are using with me and fortunately most Canadians do not fall for them but once in awhile one does and they sure lose lots of money”. On numerous occasions, Mr. Merenick noted unlikely features of the proposed transaction, such as that “someone with 8 million dollars coming to him has to access it through transferring it into a bank account of someone he does not know in a country far from his own”. On January 26, 2005 Mr. Merenick told Dr. Rehman that despite his claimed eminence as a scientist, Mr. Merenick could find no reference to him or any of his publications on the internet. He also forwarded to Dr. Rehman an article from a website detailing frauds, a description of a scam offering a business opportunity with a purported Dr. Ibrahim Martin in Lagos, Nigeria, on terms very similar to those proposed by Dr. Rehman. Late in the email correspondence, Dr. Rehman purported to involve a “Reverend” friend in Nigeria; Mr. Merenick remarked, after speaking to the so-called Reverend on the telephone, that the Reverend’s voice sounded remarkably like Dr. Rehman’s own voice.

[11] That Mr. Merenick had his suspicions is also borne out by his rejection of numerous efforts Dr. Rehman made to extract funds from him personally. On several occasions, Dr. Rehman sought amounts such as USD $8,300 (later reduced to USD $3,300) as purportedly value-added tax of 1% on the USD $8.3 million. Then Dr. Rehman requested USD $15,000 for revenue tax on USD $5 million said to have been transferred to an account in Mr. Merenick’s name. Mr. Merenick remitted neither amount.

[12] However, eventually Mr. Merenick fell prey and agreed to assist. Dr. Rehman asked him to receive and deposit the cheque now in question in order to pay various charges Dr. Rehman said must be paid before the approximately $8 million could be transferred out of Nigeria and into Mr. Merenick’s account. Dr. Rehman said that the cheque represented funds lent by an investor willing to act as a “loaner” for this specific purpose.

[13] Dr. Rehman gave these instructions in relation to the cheque:

As soon as you receive the check, you quickly pay it into your bank and wait for your bank to tell you the day it will clear and due for withdrawal. If your bank tells you the date the check will clear, please get back to me immediately so that I can forward to you the account where you will pay in the money to enable us settle all the bank charges here so that the US$8.3 Million be transferred into your bank account in Canada.

Be also informed that the total amount in the check is US$82,466.86. This is to enable us pay all the charges in the bank to avoid any hitch in transferring the US$8.3 Million into your account.

[14] The next day, Mr. Merenick arranged for the wire transfer out of his account. He deposes that he would not have done so had he believed that the cheque was fraudulent or had not been cleared.

[15] Mr. Merenick’s debt to the bank for the amount of the counterfeit cheque will be subject to the terms of his proposal in bankruptcy unless he engaged in a false pretence or fraudulent misrepresentation within the meaning of s. 178(1)(e) of the Bankruptcy and Insolvency Act: (see s. 62(2) of the Act).

[16] Section 178(1)(e) reads as follows:

178 (1) An order of discharge does not release the bankrupt from

. . .

(e) any debt or liability for obtaining property by false pretences or fraudulent misrepresentation;

. . . .

(To show the types of debts listed in s. 178 which are not subject to a proposal, the full text of s. 178 is attached as an appendix to these reasons.)

[17] “Property” is defined broadly in s. 2 of the Act. The funds transferred by wire, at Mr. Merenick’s direction, to the account in Hong Kong clearly fall within the terms of the definition, which expressly includes money.

[18] It is clear also that for a debt or liability to fall within the scope of s. 178(1)(e), the property need not have been obtained by the bankrupt, but may have – as here – passed directly from the creditor to a third party at the bankrupt’s direction or on his or her behalf: Canadian Imperial Bank of Commerce v. Askoy (1989), 75 C.B.R. (N.S.) 248 (Ont. Dist. Ct.); L.W. Houlden, G.B. Morawetz & J. Sarra, Bankruptcy and Insolvency Law of Canada, 3d ed. (Scarborough: Thomson Carswell, 2005) at 6-134.6.

[19] The only question here is therefore whether Mr. Merenick’s conduct, including his failure to disclose the suspicious circumstances surrounding the cheque, amounted to false pretence or fraudulent misrepresentation.

[20] I turn first to whether Mr. Merenick knowingly made certain false statements to the bank. If he did, as the bank alleges, it would follow almost inexorably that he engaged in false pretence or fraudulent misrepresentation.

1. DID MR. MERENICK MAKE FALSE STATEMENTS TO THE BANK?

[21] The bank contends that when Mr. Merenick deposited the cheque, he falsely told the bank’s customer service representative that the cheque represented retirement funds he was investing for a client. The customer service representative then consulted the branch manager, who reviewed the cheque, verified Mr. Merenick’s financial information and history with the bank, including that he worked for Investors Group, and on the strength of all this information approved the deposit of the cheque without attaching a “hold” requirement to it. A hold would have prevented funds being released until the cheque cleared.

[22] In my view, the evidence is not sufficient to establish that Mr. Merenick made the statement that the bank imputes to him. Fraud is a serious allegation, and evidence to prove it must meet a high standard.

[23] The evidence on which the bank relies is tendered second-hand, through the bank manager of the Vernon branch where Mr. Merenick deposited the cheque. The customer service representative to whom Mr. Merenick spoke provides no evidence, and Mr. Merenick deposes that he does not recall any significant discussions with her. While I do not doubt the bank manager’s sincerity, her evidence (as it relates to what Mr. Merenick said, on depositing the cheque) is hearsay, and her evidence as a whole is defensive. On all the evidence, I conclude that the bank manager likely made certain assumptions from limited information she was given, and also that miscommunication may have played a part.

[24] The bank manager explains that the customer service representative consulted her about the deposit and told her what Mr. Merenick had said about it. The manager had no direct discussion with Mr. Merenick herself, and does not set out – even second-hand – Mr. Merenick’s specific words or the particular context in which they were spoken. It is thus not clear whether, for example, Mr. Merenick is said to have made the remark in response to a specific inquiry from the customer service representative (in which case he could be expected to take some care in his reply, and would be more likely to remember the conversation), or, rather, in idle conversation confirming a leading suggestion that he may not have fully heard or paid attention to.

[25] In my assessment, Mr. Merenick likely made a vague and – to him – forgettable remark relating the funds to retirement, without associating the funds with Investors Group. After all, by Mr. Merenick’s understanding, if the transaction was authentic it was to enable the Nigerian scientists to move money to Canada in order that they could retire here. I conclude that the bank manager, on ascertaining Mr. Merenick’s occupation, then made and relied on her own association of the deposit with Investors Group and its clients, and did so without Mr. Merenick’s knowledge. I also note that the deposit was to Mr. Merenick’s personal account, not to an Investors Group account.

[26] The bank contends that Mr. Merenick knowingly made a further false statement when he signed a bank document that described the reason for the outgoing wire transfer as “retirement investment”. However, for reasons similar to those above I find the document itself to be insufficient evidence that Mr. Merenick deliberately gave the bank false information about the source of the cheque. Mr. Merenick signed the document, but there is no evidence to indicate the origin of the information in it or to what extent the precise description (“retirement investment”) may be attributed to Mr. Merenick; Mr. Merenick deposes that the teller asked him no questions about the wire transfer. Most likely, I conclude, is that the description was written by a bank representative on the basis of the earlier, likely miscommunicated, information about the reason for the original deposit by cheque.

[27] The evidence therefore does not establish that Mr. Merenick made false statements to the bank, either on depositing the cheque or on directing the wire transfer.

[28] I turn now to address whether Mr. Merenick’s conduct as a whole, including his admitted failure to disclose the highly suspicious circumstances in which he received the cheque, amounted to false pretence or fraudulent misrepresentation.

2. DID MR. MERENICK’S SILENCE ABOUT THE SUSPICIOUS CIRCUMSTANCES AND HIS OTHER CONDUCT AMOUNT TO FALSE PRETENCE OR FRAUDULENT MISREPRESENTATION?

[29] The governing authorities treat the concepts of “false pretence” and “fraudulent misrepresentation” in s. 178(1)(e) as virtually interchangeable. Each rests ultimately on deceit: Houlden & Morawetz at 6-141, and, for example, Re McKee (1997), 47 C.B.R. (3d) 70 (A.B.Q.B.) at ¶35-37.

[30] A “fraudulent misrepresentation”, for the purposes of s. 178(1)(e), requires proof of four elements:

1. the bankrupt made a representation;

2. the representation was false;

3. the representation was made knowingly, without belief in its truth, or recklessly indifferent to whether it was true or false; and

4. the creditor relied upon the representation in turning over the property

See Derry v. Peek (1889), 14 App. Cas. 337, discussed in Houlden & Morawetz at 6-138.3. The bankrupt’s motive in making a false representation is immaterial. He or she need not have intended that the creditor should suffer a loss: Houlden & Morawetz at 6-140.

[31] It is well settled that both a “fraudulent misrepresentation” and a “false pretence” may be made by non-disclosure or inadequate disclosure of material facts. This proposition often finds expression in the following language, as quoted in Houlden & Morawetz at 6-139:

The representation need not be made verbally: it can be made by blameworthy or cunning or strategic silence. Thus, the failure to disclose material facts of which the debtor had knowledge when he received money from creditors can constitute fraudulent misrepresentation.

[32] A half-truth may thus amount to a fraudulent misrepresentation, such as where a person is asked a question and gives a selective answer that is literally true but omits important facts which significantly colour the true statement. In Freeman v. Perlman (1999), 65 B.C.L.R. (3d) 97, 1999 BCCA 40 at ¶13, Madam Justice Rowles referred to the long-established authority of Tapp v. Lee (1803), 3 Bos. & P. 367, 127 E.R. 200, and noted that “a negative statement which is deceptively benign could be both treacherous and effective” (¶13).

[33] The question arises whether Mr. Merenick’s remark when he deposited the cheque, which associated the funds to retirement, amounted to such a half-truth, particularly in light of his failure to tell the bank about the cheque’s suspicious origin. However, I conclude that it did not, because the evidence does not establish that Mr. Merenick acted deceitfully, as is fundamental to false pretence and fraudulent misrepresentation. Rather, for the following reasons I conclude that Mr. Merenick sincerely believed that the bank would not transfer funds out of his account until the supporting cheque had cleared.

[34] Mr. Merenick’s account had never before held funds anywhere close to the amount of the cheque. Mr. Merenick had never before deposited more than $2,000 at one time. Nor had he ever wired money out of his account. Largely because of these readily ascertainable features of Mr. Merenick’s history with the bank, bank investigative staff later concluded that the loss would, if not recovered from Mr. Merenick, be specifically allocated to the Vernon branch. In the circumstances, it was reasonable for Mr. Merenick to assume, as he says he did, that the bank would not release funds from his account until it was confident that the cheque had cleared.

[35] Despite Mr. Merenick’s position at Investors Group, there is no serious suggestion that he had special knowledge concerning bank or financial transactions that would have told him differently. He was brand new in the field, and his training had been limited and focussed on mutual funds.

[36] The $82,456.86 cheque was purportedly drawn on the Caisse Centrale Desjardins in Montreal, Quebec, on the account of one Metalium Inc. of Laval, Quebec. It was reasonable for Mr. Merenick to suppose that inquiries about whether such a cheque had cleared would not have been difficult or time-consuming.

[37] The bank suggests that deceit is evident in the fact that Mr. Merenick attended the Vernon branch of the bank to make the deposit, even though his account is held at the Kelowna branch, where he lives, works, and is well-known. However, Mr. Merenick explains that he was at the time attending classes at the Investors Group office in Vernon, and made the deposit during his lunch break.

[38] The bank suggests also that Mr. Merenick expected to benefit from the deposit of the cheque and the wire transfer, and therefore calculated to deceive. The bank manager deposes that when, on learning that the cheque was counterfeit, Mr. Merenick met with bank staff to discuss the matter, he advised among other things that the amount of the cheque represented the first small instalment in the $8 million transaction on which he expected to gain a commission.

[39] Mr. Merenick acknowledges certain portions of the long conversation that the bank manager describes, but denies that he made the specific statement I have just described. I conclude that Mr. Merenick’s recollection of that portion of the conversation is more accurate, because it accords with the email correspondence upon which both parties rely. Also, the very fact that the day after the deposit Mr. Merenick directed a wire transfer of all the funds represented by the cheque is inconsistent with an instalment of funds remaining with him. Although it is clear from the email correspondence that Mr. Merenick expected a commission on the larger transaction (involving the transfer of USD $8.3 million) should that transaction ever take place, there is no indication that he was to benefit from the in-and-out movement of the funds represented by the cheque.

[40] The remaining question, then, is whether Mr. Merenick’s simple non-disclosure of the highly suspicious circumstances, either standing alone or in the larger factual context, amounts to false pretence or fraudulent misrepresentation.

[41] There is no doubt that the wise and cautious course of action would have been to advise the bank of the suspicious circumstances on depositing the cheque, and to have made sure that the cheque had cleared before directing the wire transfer. The Vernon bank manager deposes that had she been apprised of the circumstances in which Mr. Merenick had received the cheque, as described in the email correspondence, she would not have approved the deposit or the wiring of funds, at least not without a hold: Nigerian email scams are well-known to the bank.

[42] The bank says that Mr. Merenick’s failure to disclose the background of email correspondence must amount to false pretence or fraudulent misrepresentation, because the court found false pretences on remarkably similar facts in Toronto-Dominion Bank v. Runyon, 2003 BCSC 10. Mr. Runyon received an email from Nigeria making an offer that at trial he described as “too good to be true”: if he assisted the Nigerians in clearing USD $45 million through Amsterdam, he would receive 25% commission. Mr. Runyon accordingly deposited a cheque from the Nigerians into an account with the plaintiff bank, and before it cleared – and indeed after the bank told him that it was dishonoured – used funds credited to his account as a result of the deposit. In the course of concluding that the bank was entitled to the return of the funds, Madam Justice Kirkpatrick, then of this court, also concluded that Mr. Runyon had obtained the funds under false pretences.

[43] The immediate issue in Toronto-Dominion Bank v. Runyon was whether Mr. Runyon was liable to the bank for the dishonoured cheque, not whether, as here, an admitted debt survived a bankruptcy. However, in my view not much turns on the fact that Madam Justice Kirkpatrick reached her conclusion in a different legal context, given her detailed discussion of the facts that she concluded amounted to false pretences.

[44] But I do not agree with the bank that Madam Justice Kirkpatrick’s conclusion in Toronto-Dominion Bank v. Runyon must also apply here. The general factual context is very similar, but the details of the debtor’s involvement are markedly different.

[45] Mr. Runyon engaged in “obvious subterfuge” (¶30). He opened an account for the particular purpose of depositing the cheque in question, and lied to the bank about the purpose of the account. Although he made some inquiries about whether the cheque had cleared, he withdrew funds represented by the cheque even after the bank told him about a problem with the cheque, and he took steps to prevent the bank from learning of its mistake in allowing him to do so. Then he used the withdrawn funds, even after the bank manager made a personal visit to his home and told him that the funds must be returned. Mr. Runyon was untruthful in his statements to the bank and to the court.

[46] Nothing in Mr. Merenick’s conduct approached Mr. Runyon’s degree of subterfuge. Nor did Mr. Merenick use – or expect to use or benefit from – the proceeds of the cheque in question. At most, Mr. Merenick failed to tell the bank about the suspicious circumstances by which he received the cheque, and made a vague statement about the cheque funds relating to retirement, from which, as I find, the bank drew flawed inferences on which it relied without Mr. Merenick’s knowledge.

[47] Mr. Merenick was under no affirmative duty to disclose to the bank the circumstances in which he received the cheque. Where there exists a positive duty to disclose information (as imposed by statute or under a contract, or as a result of a relationship, such as a fiduciary relationship, between the parties in question), a failure to disclose the required information often indicates an intent to deceive. The contractual terms relating to Mr. Merenick’s his account protect the bank by providing that it may reverse a credit in Mr. Merenick’s account where the credit is based on a deposit that is later dishonoured, but they do not go so far as to require that Mr. Merenick spontaneously alert the bank to the circumstances leading to a deposit, however suspicious those circumstances may be.

[48] The onus is on a creditor who alleges that a claim falls within s. 178(1) to prove that such is the case: Houlden & Morawetz at 6-121. I am unable to conclude that the bank has done so.

CONCLUSION

[49] Mr. Merenick was unwise and even careless in allowing himself to be made victim of a “Nigerian email scam”, but the evidence does not establish that he was untruthful or otherwise acted deceitfully in his dealings with the bank. He mistakenly assumed that the bank would not release funds represented by the cheque until the cheque had cleared, just as the bank made certain tacit and inaccurate assumptions about the source and reliability of the cheque.

[50] The bank has not met the onus of proving that Mr. Merenick’s debt to the bank arose from his false pretence or fraudulent misrepresentation such that the debt should survive his bankruptcy by the effect of s. 178(1)(e).

[51] The bank’s application is therefore dismissed.

“H. Holmes, J.”
The Honourable Madam Justice H. Holmes

APPENDIX

178.(1) An order of discharge does not release the bankrupt from

(a) any fine, penalty, restitution order or other order similar in nature to a fine, penalty or restitution order, imposed by a court in respect of an offence, or any debt arising out of a recognizance or bail;

(a.1) any award of damages by a court in civil proceedings in respect of

(i) bodily harm intentionally inflicted, or sexual assault, or

(ii) wrongful death resulting therefrom;

(b) any debt or liability for alimony or alimentary pension;

(c) any debt or liability arising under a judicial decision establishing affiliation or respecting support or maintenance, or under an agreement for maintenance and support of a spouse, former spouse, former common-law partner or child living apart from the bankrupt;

(d) any debt or liability arising out of fraud, embezzlement, misappropriation or defalcation while acting in a fiduciary capacity or, in the Province of Quebec, as a trustee or administrator of the property of others;

(e) any debt or liability for obtaining property by false pretences or fraudulent misrepresentation;

(f) liability for the dividend that a creditor would have been entitled to receive on any provable claim not disclosed to the trustee, unless the creditor had notice or knowledge of the bankruptcy and failed to take reasonable action to prove his claim;

(g) any debt or obligation in respect of a loan made under the Canada Student Loans Act, the Canada Student Financial Assistance Act or any enactment of a province that provides for loans or guarantees of loans to students where the date of bankruptcy of the bankrupt occurred

(i) before the date on which the bankrupt ceased to be a full- or part-time student, as the case may be, under the applicable Act or enactment, or

(ii) within ten years after the date on which the bankrupt ceased to be a full- or part-time student; or

(h) any debt for interest owed in relation to an amount referred to in any of paragraphs (a) to (g).

(1.1) At any time after ten years after a bankrupt who has a debt referred to in paragraph (1)(g) ceases to be a full- or part-time student, as the case may be, under the applicable Act or enactment, the court may, on application, order that subsection (1) does not apply to the debt if the court is satisfied that

(a) the bankrupt has acted in good faith in connection with the bankrupt’s liabilities under the loan; and

(b) the bankrupt has and will continue to experience financial difficulty to such an extent that the bankrupt will be unable to pay the liabilities under the loan.

(2) Subject to subsection (1), an order of discharge releases the bankrupt from all claims provable in bankruptcy.

Citation:	*The Toronto-Dominion Bank v. Merenick,*
	2007 BCSC 1261