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Appeal court sides with lawyer in fraud dispute

|Written By Robert Todd

The Ontario Court of Appeal has sided with a lawyer who successfully sued a bank after it cashed a $429,000 cheque drawn from his trust account for a client who was duped into a fraudulent house purchase.

“I guess the lesson is that everyone needs to be extra vigilant,” says Martin Sclisizzi, Borden Ladner Gervais LLP partner and counsel for real estate lawyer Satwant Singh Khosla

“It used to be that you could count on a cheque being good. Now you almost have to count on a cheque being bad. It’s sad to say, but I think that’s the reality of it.”

The appeal court agreed with Superior Court Justice Frances Kiteley, who in November 2008 ruled in favour of a summary-judgment motion from Khosla.

In March 2006, Paul Reviczky - who was 88 years old at the time - rented a home to a fraudster, according to Kiteley’s November 2008 decision in Khosla v. Korea Exchange Bank of Canada. In April 2006, the fraudster posed as one of Reviczky’s family members and listed the property for sale through an illegal power of attorney.

The fraudster accepted a purchase offer from an individual represented by Khosla, according to Kiteley. The transaction closed in May 2006, with HSBC Bank Canada advancing funds loaned by the purchaser to Khosla, who put the funds into his trust account at Royal Bank of Canada.

Khosla then made a cheque payable to Reviczky for $429,481, certified by RBC.

A month earlier, the fraudster had opened an account at the Korea Exchange Bank of Canada under the name “Aaron Paul Reviczky,” Kiteley wrote. The fraudster forged Reviczky’s signature and deposited the cheque into that account, and withdrew the money before the fraud was uncovered.

Khosla later issued a statement of claim that alleged KEBOC was liable for damages of $429,481 for conversion after “collecting the cheque on a forged and unauthorized endorsement,” said Kiteley.

The judge sided with Khosla, stating, “Even if I accept for purposes of the motion that Khosla was in a better position than KEBOC to detect the fraud and that KEBOC exercised due diligence, KEBOC’s defences to the claim for conversion cannot succeed. KEBOC is strictly liable to Khosla for conversion.”

The bank appealed that decision, arguing that Khosla was “in a better position to detect and prevent the fraud than the appellant bank, even though the respondent knew nothing of the fraud and even if he was not negligent,” according to the Court of Appeal decision of Justices Stephen Goudge, Eileen Gillese, and David Watt.

The appeal court ruled against all of the bank’s arguments, and said the matter was “exactly” the same as the 1996 case Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce.

“In that case, the Supreme Court of Canada made clear that where a bank receives a cheque on which the payee’s endorsement has been forged and then collects it and pays out the proceeds to someone not rightfully entitled to possession of it, the collecting bank converts the cheque and is liable in tort to the drawer.”

KEBOC’s lawyer, Avrum Slodovnick of Solmon Rothbart Goodman LLP, says the bank is considering the option of seeking leave to appeal at the Supreme Court of Canada.

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