Date: 19980108 Docket: CA022551 CA022559 Registry: Vancouver COURT OF APPEAL FOR BRITISH COLUMBIA BETWEEN: CA022551 THE TORONTO-DOMINION BANK PLAINTIFF (APPELLANT) AND: TONY CAROTENUTO, AVANTI HAIR DESIGN LTD. BOB TOM HOLDINGS LTD., ROBERT TOMLJENOVICH PETER PAN and KIM LORANGER DEFENDANTS (RESPONDENTS) - AND - BETWEEN: CA022559 THE TORONTO-DOMINION BANK PLAINTIFF (RESPONDENT) AND: TONY CAROTENUTO, AVANTI HAIR DESIGN LTD. BOB TOM HOLDINGS LTD., ROBERT TOMLJENOVICH PETER PAN and KIM LORANGER DEFENDANTS (APPELLANTS) Before: The Honourable Madam Justice Ryan The Honourable Mr. Justice Donald The Honourable Madam Justice Newbury J.D. Shields Counsel for the Plaintiff/Appellant, Toronto-Dominion Bank D.J. Barker Counsel for the Defendants/Respondents Peter Pan and Kim Loranger Place and Date of Hearing Vancouver, British Columbia November 21, 1997 Place and Date of Judgment Vancouver, British Columbia January 8, 1998 Written Reasons by: The Honourable Madam Justice Newbury Concurred in by: The Honourable Madam Justice Ryan The Honourabe Mr. Justice Donald Reasons for Judgment of the Honourable Madam Justice Newbury: [1] This appeal arises from a set of facts reminiscent of a law school examination question: they involve a rogue (the defendant Mr. Carotenuto); two apparently innocent individuals (the defendants Mr. Pan and Ms. Loranger) whom he persuaded to invest a total of $500,000 in a real estate venture that in fact never materialized; and a naive and overly enthusiastic bank manager who was duped into issuing bank drafts for $500,000 on the strength of Mr. Carotenuto's promises. As in most law school examination questions, the fraudsman is now nowhere to be found, and it falls to the court to decide on whom the loss occasioned by his dishonesty should fall. To complete the analogy, one of the two major legal issues in the case is a longstanding "chestnut" in banking law that has been debated in learned articles and treatises but not directly considered by a court in Canada since prior to 1926, the date of a controversial House of Lords' decision on the point. FACTUAL BACKGROUND [2] The facts can be recounted from two viewpoints - that of the plaintiff Toronto-Dominion Bank (the "Bank") and that of Mr. Pan and Ms. Loranger (whom I will refer to as the "Respondents"). From the Bank's viewpoint, the narrative begins in late October 1995. Around that time Mr. Carotenuto had succeeded in impressing an acting branch manager of the Bank, Mr. Farquharson, with his apparent success in business and knowledge of international banking matters. Viewing Mr. Carotenuto as a potential source of new business for the Bank, Mr. Farquharson agreed to provide him with bank drafts totalling $725,000 payable to a company controlled by one of Mr. Carotenuto's associates. In return Mr. Carotenuto handed Mr. Farquharson a cheque for $725,000 drawn on the account of Score's Sports Caf‚ Inc., one of his companies, and assured him it would be covered the following day. In fact the account had insufficient funds to cover the cheque the next day. Eventually however, Mr. Farquharson received a draft from Mr. Carotenuto drawn on another bank in the required amount. [3] Some days later, in November 1995, Mr. Farquharson agreed to consider Mr. Carotenuto's request for another $500,000 which he said he wanted in order to repay a loan owing to two individuals who had invested in a real estate project. In due course, Mr. Farquharson agreed to provide Mr. Carotenuto with two drafts totalling $500,000 in return for cheques payable to the Bank in the same amount, drawn by another of Mr. Carotenuto's companies, Avanti Hair Design Ltd. ("Avanti"). Mr. Farquharson was aware that Avanti's accounts did not have funds sufficient to cover the cheques at the time the drafts were issued, but he accepted Mr. Carotenuto's promise that the necessary funds would be in those accounts by the next day, November 22. Accordingly, one bank draft in the amount of $350,000 payable to Peter Pan, and one in the amount of $150,000 payable to Kim Loranger, were delivered to Mr. Carotenuto, who in turn handed them to Mr. Pan and Mr. Young (Ms. Loranger's common-law husband) respectively. They deposited the drafts immediately to their accounts at their respective credit unions. [4] From the point of view of the Respondents, the narrative begins in March 1995, when each of them was persuaded to advance funds to Mr. Carotenuto for the purpose of investing in real estate projects in which he was somehow involved. Mr. Pan advanced $350,000, much of which was provided by a friend; and Ms. Loranger advanced $150,000, most of which came from Mr. Young or his construction company. (In my view, nothing turns on the fact that the investments were made in the names of Mr. Pan and Ms. Loranger respectively.) In evidence of each investment, Mr. Carotenuto produced a one-page acknowledgment on the letterhead of "Westlynn Construction Corp.", which referred to an "end date" a year later, in March 1996. Subject to minor variations, each document said that the investment would "yield a return of initial investment plus bonus + profits on completion of projects." Each document was signed by Mr. Carotenuto and by one Bob Tomljenovich, a defendant herein, for "Bob Tom Holdings". Neither Mr. Pan, Mr. Young nor Ms. Loranger knew Mr. Tomljenovich or his company, and none knew anything about Westlynn Construction Corp. or "Westlynn Dev.", the name that was inserted as the payee of Mr. Pan's cheque. [5] On or about November 22, 1995, Mr. Carotenuto contacted Mr. Young and Mr. Pan to advise that the projects in which their money was to have been invested had `fallen through'. According to Mr. Young's evidence: Tony [Mr. Carotenuto] offered to repay me my initial investment of $150,000. I asked him whether I would get any interest on this money but he said no, I would not. I was disappointed because I had let Tony use this money for several months and I was not going to receive any interest at all. Tony explained that there was this guy, whose name I think is Henry Peters, who had taken off with some money and that the projects were in jeopardy. He further said I should consider myself lucky to get my money back. Since I understood my investment to be dependent on the success of the projects, I felt that the whole purpose of my investment had been frustrated. I then told Tony that if I got my principal back I would not ask him to pay me any interest. He said that that would be alright and apologized to me that things did not work out adding that he would find new projects to invest in. Tony said he could give me a bank draft in the next couple of days and he asked me who it should be made payable to. I asked him to make the draft payable to Kim Loranger. On or about November 22, 1995, Tony handed me a bank draft for $150,000 payable to Kim Loranger . . . . Mr. Young deposited Ms. Loranger's draft to the couple's account on November 23. Mr. Pan also received a bank draft in the amount of his investment, which he deposited on November 22, 1995. [6] Needless to say, these were the drafts that had been provided by the Bank to Mr. Carotenuto on the understanding that funds would be in Avanti's account on November 23 to cover the cheques that had been handed to Mr. Farquharson. Perhaps also needless to say, the cheques failed to clear on that date or any subsequent date, due to insufficient funds. The Bank did not take any steps, however, to stop payment on the drafts that had been issued to Mr. Pan and Ms. Loranger. It was not until six weeks later that the Bank contacted their respective credit unions concerning alleged improprieties in connection with the issuance of the drafts. PROCEEDINGS IN THE COURT BELOW [7] The Bank commenced its action in Supreme Court in early 1996 against inter alia Mr. Pan and Ms. Loranger, against whom it advanced claims for unjust enrichment, money had and received, damages for conversion, and constructive trust. In their pleadings, Mr. Pan and Ms. Loranger denied the claims generally and sought the protection accorded to holders in due course by s. 56 of the Bills of Exchange Act, R.S.C. 1985, c. B-4. On May 2, both Mr. Pan and Ms. Loranger moved to have the Bank's claim dismissed under R. 18A - an application followed by the Bank's application for judgment against Mr. Pan in the amount of $350,000 and against Ms. Loranger in the amount of $150,000, pursuant to R. 31(6). By this time, the Bank had succeeded in obtaining a judgment (which is presumably a dry one) for fraud against Mr. Carotenuto and Avanti in the amount of $500,000, interest and costs. [8] The two applications for summary determination were heard in September 1996. On October 29, the Chambers judge issued reasons (Vancouver Registry No. C957125) declining to decide the action summarily and remitting it to the trial list. After noting counsels' lengthy submissions on the "holder in due course" issue, she adverted to various deficiencies in the evidence before the court: For example, in an affidavit filed on May 2, 1996, in support of the defendants' motion, Peter Pan deposed, in part, at paragraph 7: . . . Mr. Carotenuto told me at the time that when the chosen project was completed I would get my money back as well as any bonus and share of profits. He told me that this would not take more than 12 months. I trusted Mr. Carotenuto to make sure that my investment was safe. While we never discussed what would happen if the project did not go ahead or was terminated, I always assumed that I would get my principal back. At paragraph 8 Mr. Pan deposed: I was contacted by Mr. Carotenuto over the telephone in November, 1995. He left a message on my answering machine on November 22, 1995 that he had my cheque. After getting that message I drove to Scores Restaurant and he told me that he was sorry but that the deal had fallen through. . . . It is clear that portions of those two passages offend the hearsay rule. Counsel for Mr. Pan argued that the statements were tendered, not for the truth of the contents of the statement, but for the purpose of determining Mr. Pan's state of mind at the time in question. That may be a legitimate reason to admit the evidence, but I was not persuaded that the foundation for admitting the evidence was properly laid. A similar objection arose with respect to the evidence of Tim Young. In Mr. Young's affidavit filed May 2, 1996, at paragraph 17, he deposed: Sometime in November, 1995, Tony [Carotenuto] told me that there was a problem and the projects he had invested my money in were not going ahead. He never specified which projects and I never knew which projects my money was invested in. Tony offered to repay me my initial investment of $150,000. I asked him whether I would get any interest on this money but he said no, I would not. I was disappointed because I had let Tony use this money for several months and I was not going to receive any interest at all. . . . I then told Tony that if I got my principal back I would not ask him to pay me any interest. He said that that would be alright and apologized to me that things did not work out adding that he would find new projects to invest in. Tony said he could give me a bank draft in the next couple of days and he asked me who it should be made payable to. I asked him to make the draft payable to Kim Loranger. Since no interest was payable under the agreement between Carotenuto and Loranger, to suggest, as is done in paragraph 17, that Loranger and/or Young agreed to forego the payment of interest in return for the repayment of principal, offends the parol evidence rule. The only useful purpose of such evidence would be to support the contention that there was consideration given for the early repayment of the loan. These passages from the evidence filed in support of the defendants' motions demonstrate a lack of care and precision which properly attracted the objections of counsel for the bank. Further, the objections, if upheld, would mean that there was insufficient evidence to establish the necessary indicia of good faith, value, and notice for the defendants to succeed on their motions. [paras. 18- 20] In the result, the Chambers judge said she could not be fully confident that all relevant evidence had been put before the Court and that she was uncertain as to her ability to find the facts necessary to decide the issues of fact and law. More importantly, she concluded, it would be unjust to decide the issues before the Court on the application, as is required by R. 18A(11)(a)(ii). In the words of the Chambers judge: Having particular regard to the amount involved and the complexity of the matter, I conclude that it would be unjust to give judgment under Rule 18A. If there is evidence sufficient to establish good faith, value and notice, then Pan and Loranger ought to be given the opportunity to present such evidence in order to defend the claims against them. It is, of course, stating the obvious that such evidence should have been properly presented on their motion for summary trial. [para. 23] THE APPEALS [9] Notwithstanding the Chambers judge's comments regarding the disarray of the evidence, both the Bank and the Respondents have appealed the Court's ruling. Both seek a determination by this court of the Bank's claims without a full-blown trial. In particular, Mr. Shields on behalf of the Bank acknowledged on appeal that if a trial were held, he would be unable to prove that the Respondents had not been "innocent" of any involvement in Mr. Carotenuto's fraud; and Mr. Barker on behalf of the Respondents urged us to decide as a matter of law, on the affidavit evidence adduced before the court below, that his clients have no liability to the Bank - despite the observation of the Chambers judge that "If this were a trial, the defendants would, on the basis of the clearly admissible evidence before the court, fail." In short, none of the parties to this appeal wishes the opportunity given to them by the Chambers judge to marshall further evidence or refine the manner in which it was presented. Equally important for our purposes, they emphasize that there are no material conflicts in the affidavit evidence as to the facts of the case. In these circumstances, there seems little point in forcing the parties through the time and expense of a full trial. [10] Counsel do not agree, however, on the admissibility of the evidence that was excluded by the Chambers judge as hearsay and as offending the parol evidence rule. That evidence was adduced by the Respondents to prove the general circumstances of their deposit of the bank drafts and more particularly, what they understood was the reason for Mr. Carotenuto's return of their funds to them before the one-year investment period had expired. Counsel for the Bank argued that the evidence had been properly excluded, and that because it was incumbent on the Respondents to prove a "juristic reason" for their receipt of the funds (insofar as the claim for unjust enrichment is concerned) or to prove that they had given "value" for the drafts (insofar as the defence based on the Bills of Exchange Act is concerned), the Respondents had failed to make out a crucial part of their defence. (As to the onus of proof in the unjust enrichment claim, see para. 13 below.) [11] I agree that the impugned evidence is an important part of the defence, but I do not agree that it was hearsay or inadmissible on any other basis. As I understand it, the recollections of Mr. Pan and Mr. Young as to their conversations with Mr. Carotenuto on or about November 22, 1995 were not adduced for the purpose of proving the truth of Mr. Carotenuto's statements; rather, they were adduced to prove that the Respondents had been given to understand, and did understand, that because the alleged real estate projects had fallen through, they were to receive their money back early. It may well be that Mr. Carotenuto was not being truthful, but if the Defendants understood that the bank drafts they received represented the return of their investments, that understanding is relevant to the existence of a juristic reason for their enrichment. [12] As for the Respondents' acceptance of their original principal without interest, effectively in satisfaction of all Mr. Carotenuto's obligations to them, it seems to me that whether the parties were in a debtor-creditor relationship (as counsel assumed) or whether Mr. Carotenuto was a trustee of the Respondents' funds, the conversations are admissible as "operative words" or (to quote Sopinka, Lederman and Bryant in The Law of Evidence in Canada (1992), "words which, when spoken, effect a legal result." (at 236) Nor in my view is the parol evidence rule engaged with respect to Mr. Young's advice to Mr. Carotenuto that it would be "alright" if Mr. Carotenuto repaid his money without interest. This "agreement" about interest would constitute a collateral or amending agreement (see the comments of Lambert J.A. in Gallen v. All State Grain Co. Ltd. (1984) 9 D.L.R. (4th) 496 at 506-7) rather than an oral term of an otherwise complete written agreement. Accordingly, I find that the Chambers judge erred in ruling the evidence of Mr. Young and Mr. Pan as to their conversations with Mr. Carotenuto on November 22 inadmissible, although one may share her concerns about the "lack of care and precision" that characterized the manner in which the evidence was adduced. UNJUST ENRICHMENT [13] I turn, then, to the questions of law raised by the uncontradicted affidavit evidence previously excluded by the court below. The first issue is whether the Respondents were unjustly enriched by their receipt of the bank drafts or the funds for which they were exchanged. It is by now trite law that an action for unjust enrichment involves proof of three elements - an enrichment; a corresponding deprivation; and the absence of a juristic reason for the enrichment: see Peter v. Beblow [1993] 1 S.C.R. 980. (Contrary to Mr. Shields' argument described above at para. 10 above, the onus of proof of all three elements lies on the Bank.) There is no doubt in this case that the Respondents were "enriched" by the return of their funds, nor that the Bank was "deprived" of $500,000 by the transactions that occurred on November 22, 1995. Was there a juristic reason for the enrichment? Mr. Shields argued that there was not for many reasons - the fact that Mr. Carotenuto had obtained the funds (or more precisely the drafts) by a fraud on the Bank; the fact that the Respondents had not expected payment in November 1995 and in Mr. Shields' submission were not "entitled" to payment at that time; and the fact the Bank had "no obligation" to pay the Respondents anything and received no consideration from them in return for the drafts. These arguments tended to merge in counsels' submissions with arguments relating to the alternate "holder in due course" issue, an issue that arises only if it is found that the Respondents were unjustly enriched or are otherwise liable to the Bank. On that issue, Mr. Shields argued at length that the bank drafts were not "negotiated" within the meaning of s. 59(1) of the Bills of Exchange Act, and that the Respondents could not be said to have given "value" for the drafts. [14] It is important, however, to keep the question of unjust enrichment separate from that of the meaning of "holder in due course" under the Bills of Exchange Act. In particular, it is important to keep in mind that "juristic reason" is a much broader concept than that of the value or consideration moving from the Respondents either to the Bank or to Mr. Carotenuto. In this regard, I note the comments of McLachlin J. for the majority in Peter v. Beblow, supra: What matters should be considered in determining whether there is an absence of juristic reason for the enrichment? The test is flexible, and the factors to be considered may vary with the situation before the court. . . . In every case, the fundamental concern is the legitimate expectation of the parties. . . . [at 990] No authority was cited to us that requires as a condition of the "juristic reason" in an action for unjust enrichment that a contractual obligation have existed between the payor and ultimate payee. Indeed, there is authority of this court to the contrary: in Cherrington v. Mayhew's Perma-Plants Ltd. (1990) 45 B.C.L.R. (2d) 374, it was held that the presence of a juristic reason was not dependent "on any obligation or relationship as between the respondents and the appellant." (at 378) Thus a "juristic reason" was held to exist for the appellant's receipt of funds in Cherrington because the fraudulent actor had owed money to the recipient of the funds misappropriated from the respondents. Similarly, in Royal Bank of Canada v. Harowitz (1994) 17 O.R. (3d) 671 (Ont. Gen. Div.), a lender who had demanded and received repayment of her loan from a borrower who had obtained the funds by perpetrating a fraud on his bank, was held to have had a juristic reason for receiving the funds. The Court characterized as "absurd" the suggestion that "the juristic reason must always be tied irrevocably to the person who asserts the unjust enrichment." (at 682) [15] Mr. Shields notes, however, that the Court went on in Cherrington to add that there had been no suggestion that the debt was "other than enforceable at the time" of payment and that in Harowitz, the lender had made demand on her promissory note. Mr. Shields contrasts those situations with that of the Respondents who, he says, could not have sued Mr. Carotenuto for the return their funds before the expiration of the one- year period referred to in the one-page "agreements". Again, however, I am not persuaded that the existence of a "juristic reason" requires an enforceable obligation at the time of payment. In this case, Mr. Carotenuto had notified the Respondents that their agreements with him were effectively frustrated - the real estate projects that were the purpose of their investment had fallen through. (If the agreements gave rise to trusts, their purpose had fallen away and they were being terminated.) In these circumstances, the Respondents had, it seems to me, a commercially reasonable expectation of receiving their money back when they did, and perhaps even an "entitlement" to it. (Indeed, if the trust analogy is correct, they were receiving back their own funds.) This expectation, coupled with the documentary proof of their investments and the return of the same amount of money to them, support the inference that they were in fact receiving the return of their investments, and not, as Mr. Shields suggested, a gift or "windfall" payment from Mr. Carotenuto. In the absence of any evidence that the Respondents were not acting bona fide, then, one may reasonably conclude that there was a legitimate "juristic reason" for the Respondents' "enrichment". Conversely, the Bank fully expected to pay the funds to the Respondents when it did - its "mistake" did not relate to the nature of the drafts or the identity of the payees. It is not reasonable for it to expect that it may now change its mind about honouring the drafts because of a fraud in which the Respondents have not been shown to have participated. [16] By the same token, I would reject Mr. Barker's argument that the question of unjust enrichment should be coloured by the "relative positions of the parties" (i.e., the fact that "the Bank is certainly in a better position to absorb the loss in all of the circumstances"), and by the fact that the branch manager consciously "took a risk" in providing the drafts to Mr. Carotenuto. All the parties in this case took risks and questions of unjust enrichment are not decided according to which party has deeper pockets or greater assets. MONEY HAD AND RECEIVED/CONVERSION [17] The balance of the Bank's claims were touched upon only briefly by counsel in his factum and oral argument, and the claims for conversion and `money had and received' were treated as if they were interchangeable. In fact the two causes of action have different origins - the action for money had and received arises out of contract law and is now regarded as a restitutionary remedy; while conversion is a longstanding tort usually involving wrongful interference with goods, but also applied to funds or to instruments representing funds. (See the learned judgment of Robertson J.A. in Arrow Transfer Co. Ltd. v. Royal Bank of Canada et al. [1971] 3 W.W.R. 241 (B.C.C.A.) at 255-261.) It appears, however, that neither cause of action lies in the case at bar. In general, the essence of the action for money had and received is that the defendant was under a liability to account to the plaintiff in respect of a benefit which the defendant received from a third person (Halsbury's Laws of England, 4th ed., v. 9 at para. 675). This may occur where the defendant has promised to pay to the plaintiff funds belonging to another person, but has neglected to do so; where the defendant is a stakeholder for both the plaintiff and the third party; where the defendant is an agent or employee of the plaintiff; or where the defendant has usurped an office belonging to the plaintiff: Halsbury's, supra. None of those circumstances exists in this case, as indeed Mr. Pan and Ms. Loranger were intended by all parties at the time to receive the funds in question as their own and conversely, the Bank intended to, and did, honour the drafts when they were presented. [18] The essence of the tort of conversion, which is a strict liability tort, is a "wrongful act of dealing with the goods of another in a manner inconsistent with the owner's rights". (Halsbury's, supra, v. 45 at para. 1422) Again, I do not think it can be said that the Bank remained the "owner" either of the drafts or the funds they represented. The Bank was aware that Mr. Carotenuto intended to hand the drafts over to the Respondents, and it honoured the drafts by paying the funds over to the Respondents' credit unions on presentment. [19] I would therefore dismiss the Bank's claims for conversion and for money had and received insofar as the Respondents are concerned. CONSTRUCTIVE TRUST [20] Apart from a bare assertion that "Pan and Loranger hold the Bank's funds as constructive trustees and the Bank is entitled to an order for the return of those funds" and a reference to Bruyninckx v. Bruyninckx (1995) 4 B.C.L.R. (3d) 341 (B.C.C.A.), counsel for the Bank did not provide us with any analysis as to why a constructive trust should be imposed in this case. In Bruyninckx, such a remedy was granted to give effect to a finding of unjust enrichment, a finding that has not been made in this case. I am not persuaded that any other basis for the granting of the remedy has been shown, given Mr. Shields' acknowledgment that he is unable to prove any fraudulent intention on the part of the Respondents. I would dismiss this aspect of the Bank's claim as well. ALTERNATIVE ARGUMENT [21] Counsel before us spent a great deal of time and attention on the "chestnut" referred to earlier - the Respondents' alternate argument that in any event, they were holders in due course of the bank drafts and therefore entitled to the protection afforded by s. 56 of the Bills of Exchange Act. Much has been written on the question of whether the actual payee of a draft can qualify as a holder in due course. Our attention was drawn inter alia to the decision of the House of Lords in Jones v. Waring [1926] A.C. 670; Crawford and Falconbridge, Banking and Bills of Exchange (8th ed., 1986) at 1442-49; and two articles by Benjamin Geva, "Irrevocability of Bank Drafts, Certified Cheques and Money Orders" (1986) 65 Can. Bar Rev. 107 and "The Autonomy of the Banker's Obligation on Bank Drafts and Certified Cheques" (1994) 73 Can. Bar Rev. 21. These make it clear that the issue is a contentious one and of considerable importance to the banking industry. However, it is not necessary to enter into the debate, given my conclusions that all the Bank's claims against the Respondents must fail on the evidence that was before the court. [22] I would allow the appeal and substitute an order dismissing the Bank's action against the Respondents in place of the Chambers judge's earlier order remitting the matter to the trial list. "The Honourable Madam Justice Newbury" I AGREE: "The Honourable Madam Justice Ryan" I AGREE: "The Honourable Mr. Justice Donald"