IN THE SUPREME COURT OF BRITISH COLUMBIA
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Citation: |
B.M.P. Global Distribution Inc. et al v. Bank of Nova Scotia, |
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2005 BCSC 1091 |
Date: 20050722
Docket: S017273
Registry: Vancouver
Between:
B.M.P.
Global Distribution Inc., 636651
B.C. Ltd., Audie Hashka and Paul Backman
Plaintiffs
And
Bank
of Nova Scotia doing business as the
Scotiabank and the said Scotiabank
Defendants
Before: The Honourable Mr. Justice Cohen
Reasons for Judgment
| Counsel for the plaintiffs |
P. Jaffe |
| Counsel for the defendants |
D.G.S. Rae, Q.C. J. Francis |
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Date and Place of Trial: |
January 12 – 16; 19 & 20; |
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Vancouver, B.C. |
I. INTRODUCTION
II. BACKGROUND
A. BMP Global
B. The Distribution Agreement
C. Receipt of the Counterfeit Cheque
D. Deposit of the Counterfeit Cheque
E. Account Activity – October 30, 2001 – November 9, 2001
F. The Counterfeit Cheque and Steps taken by the Branch
H. Events between November 9, 2001 – November 16, 2001
I. The Statutory Declaration and November 19, 2001 Indemnity Agreement
J. Communications with Raynier – November 21, 2001 – December 3, 2001
K. The Revised Indemnity Agreement and the BNS Review and Consideration of the Revised Indemnity Agreement
L. Execution of the Revised Indemnity Agreement and Payment to the RBC
M. Removal of Frozen Status and Communications with the Plaintiffs following December 7, 2001
N. Fraudulent Nature of the Counterfeit Cheque
O. Newman/SunRise Marketing
III. RELEVANT PORTIONS OF THE FINANCIAL SERVICES AGREEMENT, THE CANADIAN PAYMENTS ASSOCIATION RULES AND STATUTE
A. The Agreement
B. The CPA Rules
C. The BEA
D. The PRIVACY ACT
E. The PIPEDA
IV. THE PLAINTIFFS’ POSITION ON LIABILITY
A. Entitlement to the Recovered Amount
B. Disclosure of Information
1. The Common Law
2. The Banking Contracts
3. Legislation
C. Defamation
V. THE BNS’ POSITION ON LIABILITY
A. Entitlement to the Recovered Amount
1. Absence of Legal Entitlement
2. The Contractual Defences
(i) Clause 4.7 of the Agreement
(ii) Limitation of Liability and Indemnity – Clauses 13.1 and 14.1
(iii) Common Law and Statutory Rights Apply
a. Right of Set-Off
b. Recourse Pursuant to the BEA
3. Plaintiffs’ Authorities do not apply
B. Disclosure of Information
1. The PIPEDA
2. No Breach of Contract by Reason of the Disclosure of Information
3. The Privacy Act
C. Defamation
1. The Documents
(i) Tab 45
(ii) Tab 46
(iii) Tab 50.
(iv) Tab 51.
(v) Tab 58
(vi) Exhibit 5
2. Qualified Privilege
(i) Tab 45
(ii) Tab 46
(iii) Tabs 50, 51 and 58
(iv) Exhibit 5
VI. DECISION ON LIABILITY
A. Entitlement of the plaintiffs to the Recovered Amount
B. Disclosure of Information
C. Defamation
1. Tab 45
2. Tab 46
3. Tab 50
4. Tab 51
5. Tab 58
6. Exhibit 5
VII. THE PLAINTIFFS’ POSITION ON DAMAGES
A. Pecuniary Damages
B. Non-Pecuniary Damages
C. Aggravated Damages
D. Punitive Damages
VIII. THE BNS’ POSITION ON DAMAGES
A. Pecuniary Damages
1. Refusing to Honour Instructions
2. Stress and Anxiety
3. Access to Payroll Amounts
B. Damages for Disclosure of Information
C. Damages for Defamation
1. Nature and Circumstances of Publication
2. Nature and Position of the Victim of the Libel
3. The Possible Effects of the Libel upon the Plaintiffs
4. Actions and Motivations of the BNS
D. Aggravated Damages and Punitive Damages
IX. DECISION ON DAMAGES
A. Pecuniary Damages
1. The Recovered Amount
2. Refusing to Honour Instructions and Access to Payroll Amounts
B. Non-Pecuniary Damages
1. Stress and Anxiety
2. Disclosure of Information
3. Defamation
C. Punitive Damages
X. CONCLUSION
I. INTRODUCTION
[1] The personal plaintiffs Audie Hashka ("Hashka") and Paul Backman ("Backman") are directors of the plaintiff B.M.P. Global Distribution Inc. ("BMP Global"). The corporate plaintiff 636651 B.C. Ltd. ("636651") is Hashka's holding company.
[2] In 2001, each corporate plaintiff had a business account, Hashka had a personal account and Backman had two personal accounts which he held jointly with his wife at a Burnaby branch of the defendant Bank of Nova Scotia ("BNS").
[3] BMP Global distributed a line of non-stick bake ware. BMP Global agreed to sell part of its U.S. distribution rights to this product for USD $1.2 million to a party Hashka and Backman met during a trip to the U.S.
[4] On October 22, 2001, BMP Global received a cheque in the amount of CAD $904,563. The cheque was made payable to BMP Global and drawn by a company named First National Financial Corporation ("First National") on an account at a branch of the Royal Bank of Canada ("RBC") in Toronto.
[5] Hashka took the cheque to the BNS and met with the manager, Mr. Jeff Richards ("Richards"). Hashka told Richards the cheque was partial payment for distribution rights to BMP Global's product. Over the following days, Hashka and Backman discussed with Richards the circumstances surrounding their receipt of the cheque, including the nature of the transaction, the fact that no cover letter from the purchaser accompanied the cheque, and the fact that their lawyer Mr. Justis Raynier ("Raynier") was asked by them to prepare a formal distribution agreement.
[6] Richards discussed with Hashka and Backman the risks of a possible scam associated with the transaction and told them that there would be a hold placed on the cheque for several days before release of the funds to BMP Global. After several days, Richards advised Hashka and Backman that to be absolutely certain there would be no chance of any charge back against BMP Global's account, they should wait a full seven days following deposit of the cheque before the BNS released the funds to BMP Global.
[7] On October 30, 2001, Hashka and Backman attended the BNS. By that date, the cheque had been accepted by the RBC. Hashka and Backman gave Richards a list of individuals and companies that they wished to make payments to with certified cheques. These cheques were all produced and eventually honoured. As well, on November 2, 2001, Hashka opened the 636651 account and at his request the BNS certified a cheque in the amount of $100,000 payable to 636651. This cheque was deposited at a branch of the Bank of Montreal, however the Bank of Montreal decided not to open the account and gave Hashka a bank draft for the full amount of the deposit, which he then deposited into the BMP Global account at the BNS.
[8] Between October 30 and November 9, 2001, other cheques were written on the BMP Global account. On November 9, Richards was notified by telephone by the RBC that the cheque for $904,563 deposited into the BMP Global account on October 22 was a forged cheque (the “Counterfeit Cheque”). Upon receipt of this advice, the BNS froze the plaintiffs’ accounts and ultimately charged back the amount frozen, $776,650.48. The BNS also recovered $685.56 by reversing bill payments that had been made on the BMP account from the funds. Together the amount frozen in the plaintiffs’ accounts and the amount recovered by reversing bill payments total $777,336.04 (the “Recovered Amount”). Later on November 9, Richards notified Hashka and Backman of the advice he had received earlier that day and of the BNS' step to freeze the Recovered Amount. From that date the BNS refused to honour any of the plaintiffs' cheques and rejected pre-authorized payments. The BNS also instigated a notice to other banks regarding the Counterfeit Cheque.
[9] The plaintiffs seek an order that the BNS repay to them as pecuniary damages an amount equal to the Recovered Amount. They also seek general and aggravated damages alleging that BNS communicated both confidential and defamatory information to other financial institutions. Finally, they seek punitive damages.
[10] BMP Global was incorporated in July 1999. It is in the business of distributing non-stick bake ware. The manufacturer and supplier of the bake ware is Pantec Technologies (“Pantec”). BMP Global acts as Pantec’s commercial distributor. There is no written agreement between Pantec and BMP Global granting BMP Global distribution rights. Further, BMP Global does not own any interest in the line of bake ware manufactured by Pantec. Backman and Hashka are not aware of who owns the rights to this product.
[11] Backman and Hashka claim that between August and September 2001, they reached an agreement with Mr. Sunn Newman ("Newman") of Sunrise Marketing, whereby BMP Global agreed to sell the right to distribute the bake ware in a portion of the United States to Newman in exchange for payment by him of USD $1.2 million.
[12] Hashka described the negotiations with Newman as follows:
I come up with the number, “How does $1.2 million US sound,” when we’re looking at, you know, what was in the east that still was, you know, possible clientele. There’s large bake – larger franchises, like Krogers, -- you know, things like that. And so I came up with the number 1.2 million US. I called [Mr. Newman] back. I think I caught a hold of him in Houston and put the number onto him. He said, “Okay. I’ll confer with my partners on what they think.” I said “Fine. If you’re interested that’s the number we’re looking at. You get back to me.” And that’s how I left it with him.
[13] Backman agreed that Hashka arrived at the price of USD $1.2 million by pulling the number out of the air. BMP Global had no projected cash flow statements, business plans or marketing plans that were used as the basis for the negotiations. Further, Newman did not request copies of BMP Global’s financial statements or sales records (indicating a net loss of approximately $3,500), nor did BMP Global offer to provide this kind of information to Newman.
[14] Backman and Hashka did no research into Newman or Sunrise Marketing. They did not ask Newman for financial statements, nor did they request information on Newman’s previous experience in the distribution business.
[15] The plaintiffs’ knowledge of Newman was described by Backman, as follows:
Q Okay. So what did -- what did you know about Sunrise Marketing?
A Just that it was Mr. Newman who we were doing business with.
Q And what did you know about Mr. Newman?
A Only that he was a sharp-looking guy that seemed like he had a lot of potential.
[16] Hashka said:
Q [C]an you give us a sense of what you knew about Newman or what your feeling was about him in your dealings with him?
A Well, he seemed like a professional. He dressed well. He seemed professional. He seemed like a businessman to me.
C. Receipt of the Counterfeit Cheque
[17] The Counterfeit Cheque was received in a courier envelope without any covering letter. The sender’s name and contact information appeared on the courier envelope as E. Smith of 6-6855 Airport Road, Mississauga, Ontario, L4V 1Y9, (416) 312-7205.
[18] Neither the drawer of the Counterfeit Cheque (First National) nor the sender of the Counterfeit Cheque (E. Smith) were known to Backman or Hashka at the time the Counterfeit Cheque was received. In addition, no attempts were made to contact either First National or E. Smith to inquire about the Counterfeit Cheque prior to depositing the Counterfeit Cheque.
[19] The plaintiffs gave no consideration to anyone for receipt of the Counterfeit Cheque.
D. Deposit of the Counterfeit Cheque
[20] On October 22, 2001, Hashka brought the Counterfeit Cheque in for deposit to the account of BMP Global (the “BMP Account”) at the BNS branch at 10th and Langley in Burnaby, British Columbia (the “Branch”). Upon presenting the Counterfeit Cheque, Hashka advised Richards that the Counterfeit Cheque was a down payment for distributorship rights for BMP Global’s product in the eastern United States.
[21] Prior to the deposit of the Counterfeit Cheque, the balance in the BMP Account was $59.67. On October 22, 2001, the proceeds of the Counterfeit Cheque in the amount of $904,563.00 (the “Funds”) were provisionally credited to the BMP Account, bringing the balance in the BMP Account to $904,622.67. Backman and Hashka were not provided access to the Funds at the time. Rather, a hold was placed on the funds. The hold was required because BMP Global did not have sufficient funds in the BMP Account to cover the amount of the Counterfeit Cheque if it was returned for insufficient funds.
[22] Following the deposit of the Counterfeit Cheque to the BMP Account, Richards instructed his staff to verify that sufficient funds stood to the credit of the account of First National and that no holds had been placed on the Counterfeit Cheque. The RBC indicated that there were sufficient funds in First National’s account to pay the Counterfeit Cheque and that there were no holds placed on the Counterfeit Cheque. Richards also instructed his staff to fax a copy of the Counterfeit Cheque to the RBC to confirm the genuineness of the signatures on the Counterfeit Cheque.
[23] In the days following the deposit of the Counterfeit Cheque, Richards had a number of discussions with Hashka at the bank. Hashka informed Richards that BMP Global’s customer on the distribution deal was Summit Marketing and that they were dealing with a Mr. Danko. Richards made notes to this effect on a photocopy of the Counterfeit Cheque. The plaintiffs now claim that their contact was Newman.
[24] Hashka made numerous inquiries as to when the hold on the Counterfeit Cheque would be released and requested that the plaintiffs be permitted access to the Funds as soon as possible. Hashka also requested that Backman be permitted to withdraw $100,000 in cash from the BMP Account when the hold was released. However, Richards indicated that he would not permit such a withdrawal on the basis that it was not a normal business practise. Backman testified that he required $100,000 in cash in order to retire existing debts.
[25] On October 25, 2001, Richards attempted to follow up with the RBC to determine whether the Counterfeit Cheque had cleared in order to release the Funds to the plaintiffs as soon as possible. When Richards was unable to reach a representative of the RBC to verify that the Counterfeit Cheque had cleared, he extended the hold period to a full seven days.
[26] On October 26, 2001, Richards met with both Hashka and Backman. Richards explained that he was going to continue to hold the Funds because he had been unable to confirm with the RBC that the Counterfeit Cheque had cleared. Because the hold was going to extend over the weekend, Richards also arranged, in consultation with Backman and Hashka, to place the Funds into a GIC to allow the plaintiffs to earn interest. The Funds were deposited into a redeemable GIC on October 26, 2001.
[27] The hold on the Counterfeit Cheque was released on October 30, 2001, giving the plaintiffs access to the Funds, together with approximately $200 interest earned on the GIC.
E. Account Activity – October 30, 2001 – November 9, 2001
[28] When the seven day hold was released Hashka and Backman were allowed to deal with the Funds. On October 30, 2001, and over the next ten days, BMP Global made numerous payments from the BMP Account, including a number of payments to Hashka, Backman and 636651.
[29] With the exception of a payment of $3,000 to Raynier on October 30, 2001, all payments from the BMP Account to parties other than the plaintiffs between October 30, 2001 and November 9, 2001 were related to the payment of pre-existing debts incurred before their receipt of the Counterfeit Cheque. These debts existed entirely independently of the receipt by BMP Global of the Counterfeit Cheque and were not incurred in reliance on receipt of the Counterfeit Cheque.
[30] On November 7, 2001, Hashka requested the BNS to transfer USD $20,000 to an account at the Citibank in New York City payable to LMB Prestsquare, Advice A.U. Salamain. Both Hashka and Backman testified that they do not know LMB Prestsquare or A.U. Salamain. The wire transfer was processed on November 8, 2001, resulting in a debit to the BMP Account of $32,157.
[31] The other payments out of the BMP Account between October 30, 2001 and November 9, 2001, totalling approximately $790,000 related to the transfer of the Funds by BMP Global to other accounts operated by the plaintiffs. No financial statements or other documents have been produced to explain the basis upon which the Funds were distributed to the plaintiffs. The Funds were either disbursed by the plaintiffs, returned to the BMP Account or remained to the credit of the plaintiffs’ various accounts on November 9, 2001.
[32] One of the more significant payments out of the BMP Account, was the payment of a certified cheque dated November 2, 2001, payable to BMP Global in the amount of $300,000. This cheque was honoured by the BNS. It was deposited to the credit of an account opened by BMP Global at the Bank of Montreal. However, shortly after the account was opened, the Bank of Montreal closed the account. The deposit of $300,000 was returned to the BMP Account by way of a bank draft issued by the Bank of Montreal and deposited to the BMP Account on November 7, 2001.
[33] The plaintiffs also drew two cheques totalling $400,000 on the BMP Account dated November 5, 2001, payable to 636651, Hashka’s holding company. Backman and Hashka were not able to explain the purpose for which the numbered company was incorporated, except to say that it was incorporated pursuant to a recommendation by their lawyer and with the idea that it may be used to expand their business opportunities in Europe.
[34] Both cheques payable to 636651 were deposited and credited to account number 30460 00184 14 maintained by 636651 at the BNS (the “636651 Account”) between November 5, 2001 and November 7, 2001. Prior to the deposit of these items, the balance in the 636651 Account was zero. Of the $400,000 deposited to the 636651 Account from the Funds, $7,000 was subsequently paid out of the account. These funds were used for travelling expenses and to pay personal expenses incurred by Hashka.
[35] $70,000 of the Funds was transferred from the BMP Account to the account of Backman, numbered 30460 01059 88 (the “Backman Chequing Account”). Prior to the deposit of these funds, the balance in the Backman Chequing Account was $45.87.
[36] Of the $70,000 transferred into the Backman Chequing Account, approximately $52,000 was used by Backman to retire a number of outstanding debts incurred prior to the receipt of the Counterfeit Cheque, to pay day-to-day living expenses and to pay expenses incurred in relation to Backman’s home-based internet business (“PHP Business Concepts”). For example, Backman used approximately $20,000 from the Funds to retire debts owing on various credit cards which had been in collection for a period of time. None of the withdrawals from the Backman Chequing Account during the relevant time period were related in any way to the business of BMP Global or expenses incurred on behalf of BMP Global.
[37] Of the money paid out of the Backman Chequing Account, $3,000 was paid into a second account held by Backman, numbered 30460 01061 27 (the “Backman Savings Account”). Prior to the receipt of any of the Funds, the balance in the Backman Savings Account was $74.35. Of the $3,000 deposited to the Backman Savings Account from the Funds, $428.56 was used by Backman to pay amounts owing in respect of his internet business. The payments from the Backman Savings Account between October 30, 2001, and November 9, 2001, were not related to the business of BMP Global.
[38] Further, the amounts paid out of the Backman Accounts were amounts which would have been incurred by Backman even if the Counterfeit Cheque had not been received by BMP Global. No debts were incurred in reliance on receipt of the Counterfeit Cheque.
[39] $20,000 was transferred from the BMP Account to the account of Hashka, numbered 30460 00199 25 (the “Hashka Account”). Hashka testified that these funds were used by him to pay personal debts, unrelated to the business of BMP Global. Hashka also testified that the portion of the Funds transferred to the Hashka Account were used to pay day-to-day expenses and entertainment costs. No debts were incurred in reliance on receipt of the Counterfeit Cheque.
F. The Counterfeit Cheque and Steps taken by the Branch
[40] The Counterfeit Cheque was not returned by the RBC to the BNS through the clearing system operated by the Canadian Bankers Association.
[41] Rather, the RBC contacted Richards on November 9, 2001, to advise the BNS that First National did not issue the Counterfeit Cheque; inquired whether any of the Funds were still available; and requested the assistance of the BNS. Richards immediately froze the BMP Account as well as the Backman Chequing Account, the Backman Savings Account, the Hashka Account and the 636651 Account. The total amount frozen in the accounts on November 9, 2001 was, as follows:
Account |
Amount |
| BMP Account |
$350,188.65 |
| 636651 Account |
$393,000.00 |
| Backman Chequing Account |
$17,711.17 |
| Hashka Account |
$13,104.87 |
| Backman Savings Account |
$2, 645.79 |
| TOTAL |
$776,650.48 |
[42] According to the BNS, these amounts were frozen because they were directly traceable to the Counterfeit Cheque deposited to the BMP Account on October 22, 2001. Richards testified to the process involved in tracing these funds, as follows:
Q … how did you and your staff determine the amounts – that the amounts to the credit of the five accounts were from the First National Cheque?
A On the --- I started doing – At the very first day, we started to --- myself, I went through, looking at all the accounts. We had a printout of all the transactions for all of the accounts. And I was putting the deposits over from one account over to another, from the BMP Global, the money that went in, the monies that were paid out to the individual accounts of the Backmans and for Hashka and the numbered company. I was able to just show the trail of all the funds going over, all the funds that were being used. No other monies were actually put into the accounts. It was all BMP – It was all from BMP Global and it was all originated from that one cheque.
[43] The Recovered Amount was paid into the unpaid items account maintained by the BNS.
[44] After freezing the Recovered Amount, Richards attempted to contact Hashka and Backman but he was unable to reach them until approximately 11:00 a.m. When Richards managed to contact Hashka, he advised him of the situation and asked him to come to the Branch. Richards met with Hashka and Backman in the early evening on November 9, 2001. Richards explained that the Counterfeit Cheque was a fraud and requested assistance from Backman and Hashka to recover the portion of the Funds that had been disbursed by the plaintiffs, including USD $20,000 which had been wired to Citibank.
[45] Richards recorded the events around the deposit of the Counterfeit Cheque and the events of November 9, 2001, in a memorandum forwarded to Ms. Judie Wood ("Wood") of the BNS in Toronto on November 9, 2001. Richards testified that this memorandum provides an accurate summary of what had happened by the close of business on November 9, 2001.
[46] Also on November 9, 2001, Richards contacted a number of people within the BNS to advise them of the situation and the possible loss arising from the deposit of the Counterfeit Cheque. Richards contacted, among others, the following individuals:
(a) Mr. Ray Scheller ("Scheller"), the Regional Manager for Investigation and Loss Prevention for the BNS in Vancouver;
(b) Richards’ supervisor, the district vice-president; and
(c) Wood, the National Manager of the Shared Services Department (“Shared Services”) in Toronto (Shared Services is a division of the BNS that provides support to branches on a variety of operational issues. Wood was the manager within Shared Services responsible for branches in Western Canada, including the Branch).
[47] In turn, Wood informed her supervisor, Mr. Gordon Hyland ("Hyland"), the Senior Manager of Shared Services, about the Counterfeit Cheque.
[48] Upon being advised of the situation on November 9, 2001, Scheller took steps to issue a grid warning with respect to the Counterfeit Cheque. A grid warning is a form of communication between financial institutions by which they, through their corporate security departments, seek assistance and share information. In November 2001, all grid warnings in the Lower Mainland were issued by the corporate security office of the Bank of Montreal. This was done by agreement between the financial institutions to ensure consistency and uniformity in the grid warnings that were issued. Distribution of grid warnings is limited to corporate security offices of financial institutions in the Lower Mainland. On average, five to six grid warnings are issued each day.
[49] At approximately 11:45 a.m. on November 9, 2001, Scheller sent an e-mail request to Ms. Dawn Currie ("Currie") at the Bank of Montreal for a grid warning to be issued. Scheller explained the reason he requested a grid warning, as follows:
A …We had reasonable grounds to believe that a fraudulent cheque had been deposited into a Scotiabank account. The monies had been dispersed out of the account, and Scotiabank was in a loss position. And we were looking to recover the --- the dispersed funds out of the account.
[50] The form of grid warning requested by Scheller requested assistance from other financial institutions in confirming accounts held by the plaintiffs. Scheller’s e-mail request did not indicate that the plaintiffs were under investigation for fraud. At no time did Scheller indicate to the Bank of Montreal that the plaintiffs were under investigation for fraud.
[51] The only information included in the e-mail request was the names and addresses of the plaintiffs and, with respect to Backman, his date of birth. Scheller did not provide account details, social insurance numbers or other personal information about the plaintiffs.
[52] A grid warning was issued on November 9, 2001, by the Bank of Montreal. The first line in the grid warning read:
Scotiabank requests the assistance of all Financial Institutions in confirming accounts for the following companies and individuals. Subjects are presently under investigation for fraud.
[53] The grid warning then listed the corporate and personal plaintiffs by name as well as Backman’s wife. The grid warning included at its end a notice of confidentiality which provided as follows:
This message is intended only for the use of the individual or entity to which it is addressed and may contain information that is privileged, confidential and exempt from disclosure.
[54] Although Scheller received a copy of the grid warning, he did not notice the additional sentence added to the grid warning suggesting that the plaintiffs were under investigation for fraud.
H. Events between November 9, 2001 – November 16, 2001
[55] Following the initial steps taken by Richards and Scheller on November 9, 2001, to (i) freeze the plaintiffs’ accounts and pay the Recovered Amount into the unpaid items account maintained by the Branch; and, (ii) request the issuance of a grid warning, the Counterfeit Cheque was primarily the responsibility of Shared Services. Both Wood and Hyland were involved in dealing with the Counterfeit Cheque, including return of the Recovered Amount to the RBC.
[56] A review of the plaintiffs’ bank accounts indicated that a majority of the Funds were accounted for as having been disbursed by the plaintiffs to third parties (and, therefore unrecoverable) or recovered by Richards and held in the unpaid items account at the Branch. As a result, Scheller’s continued involvement was limited to attempts to recover the amount of the USD $20,000 wire transfer sent to Citibank on November 8, 2001.
[57] Richards continued to be involved as a point of contact with the plaintiffs and to provide information to Shared Services. During the week of November 12, 2001, Richards had a number of conversations with Hashka, both in person and over the phone. Hashka and, on one occasion, Ms. Debra Backman, Backman's wife, requested that the freeze on the Hashka and Backman accounts be released so that payroll and other items could be processed through the accounts.
[58] In response to Hashka’s request, Richards made inquiries as to whether he could remove the frozen status on the Hashka and Backman accounts. However, he was advised by Shared Services to maintain the freeze on the accounts for the time being.
[59] On November 16, 2001, an amount of $902.46 was deposited to the Hashka Account, representing employment income earned by Hashka. Because the freeze on the Hashka Account was maintained, Hashka was not permitted access to these funds until November 29, 2001, when the freeze on the plaintiffs’ personal accounts was removed.
[60] While only a small deposit was made to the Backman Chequing Account and the Backman Savings Account (the “Backman Accounts”) during this time ($48.06), a number of cheques drawn on the Backman Accounts and automatic withdrawals with respect to Backman’s internet business were returned because the Backman Accounts were frozen. Backman testified that he arranged for the payment of these items through other means. The only service charges or late fees incurred by Backman with respect to these items was $13.50. Backman testified that the return of items related to his internet business did not have an affect on his business with respect to sales or income.
[61] In addition to the discussions concerning payroll and the freeze on Backman and Hashka's personal accounts, Richards inquired whether Hashka had had any contact with Newman and whether BMP Global would be returning any portion of the USD $20,000 transferred to Citibank, given that the Counterfeit Cheque was fraudulent. Hashka indicated that BMP Global would not return any funds to the BNS. Further, Hashka explained that after November 9, 2001, they had been unable to contact Newman about the Counterfeit Cheque.
[62] On November 16, 2001, Raynier wrote to Richards to set out his understanding of the facts. No further details were provided with respect to the alleged distribution agreement, or Newman. Rather, Raynier set out a possible theory of what had happened, without any additional facts, and requested information from Richards. Raynier did not complain about the restraint of the Recovered Amount but requested that Richards reconsider the frozen status placed on Backman and Hashka's accounts.
[63] Richards forwarded the November 16, 2001, correspondence from Raynier to Shared Services, noting that he had not yet received a copy of an affidavit from the RBC with respect to the veracity of the Counterfeit Cheque.
I. The Statutory Declaration and November 19, 2001 Indemnity Agreement
[64] On November 19, 2001, Richards received a fax from Shared Services enclosing a letter, an indemnity agreement (the “Indemnity Agreement”) and statutory declaration (the “Statutory Declaration”) from the RBC. The fax cover sheet accompanying these documents indicated that the Indemnity Agreement was being reviewed by the BNS legal department.
[65] The Statutory Declaration dated November 9, 2001, sworn by Mr. Stephen Smith, the President of First National, provided, in part, as follows:
[First National] did not issue, authorize the issuance of, create or authorize the creation of the cheque referred to in the above paragraph. The said cheques are not cheques of [First National], but are Counterfeit or Cloned cheques.
[First National] has not benefited directly or indirectly from the proceeds of the said Counterfeit Cheque.
[66] Both Hyland and Scheller testified that the Statutory Declaration provided by the RBC is the standard form used between financial institutions to establish the authenticity or lack of authenticity of an item. Hyland was satisfied, based on the Statutory Declaration and the absence of any explanation from Backman and Hashka as to the validity of the Counterfeit Cheque, that the Counterfeit Cheque was a fraudulent item. Similarly, Scheller testified that after receipt of the Statutory Declaration, he had no doubt that the Counterfeit Cheque was an entirely fraudulent item.
[67] In the Indemnity Agreement, the RBC represented and warranted that the Counterfeit Cheque was, in fact, counterfeit. The RBC requested that the Recovered Amount be restrained to give the RBC an opportunity to initiate a court proceeding. As set out earlier, Shared Services indicated to Richards that the Indemnity Agreement was being reviewed by the BNS legal department.
[68] On November 19, 2001, Richards wrote to Shared Services with respect to a discrepancy that he had noticed between the recitals in the Indemnity Agreement and the facts. Richards pointed out that the Recovered Amount had been recovered, not only from the BMP Account, but also from four other accounts operated by the plaintiffs. In addition, Richards pointed out that a number of bill payments were reversed to recover the funds which comprised the Recovered Amount.
[69] On November 20, 2001, one day following his receipt of the Indemnity Agreement and Statutory Declaration, Richards wrote to Raynier, enclosing a copy of the Statutory Declaration from First National. In addition, Richards explained the steps taken by the BNS from November 9, 2001 to the date of the letter, as follows:
Being notified that the cheque presented by your clients was involved in a possible illegal activity all of the proceeds remaining from the deposit of the cheque were held for the benefit of all parties involved in the matter, including your clients. We have asked your clients questions regarding who sent the cheque and the disposition of the funds from the account to aid us in the investigation of this situation. We have not made any presumptions regarding their involvement with the cheque we just have a lot of questions.
J. Communications with Raynier – November 21, 2001 – December 3, 2001
[70] On November 21, 2001, Raynier wrote to Richards setting out a number of questions with respect to the Statutory Declaration, and other matters. In addition Raynier wrote: “I confirm that you will not release the frozen funds to any party until the origins and authenticity of the cheque in question is resolved”. There is no mention of a court order, or any other court proceeding by Raynier, and Richards testified that he did not make any assurances to Raynier, or to the plaintiffs that he would not release the Recovered Amount until the authenticity of the Counterfeit Cheque was determined.
[71] Richards provided a copy of Raynier’s letter to Shared Services under cover of letter dated November 22, 2001. At the same time, Richards indicated to Shared Services that he would like to have the new statutory declaration and indemnity agreement in place so that he could respond to Raynier’s letter. Richards also notified Shared Services that he would be away from the Branch between November 23, 2001, and November 28, 2001. Richards indicated that he would keep in touch with the Branch but that he did not want to burden them with dealing with Raynier or make any moves that would compromise the BNS’ position. Richards explained that his comments in this regard were motivated simply by the fact that there would be no manager at the Branch during his absence and no staff available to deal with the situation at hand. He said that he did not want to burden his staff with this issue.