In Gescoro inc. v. Notaire Francis-Pierre Rémillard, the Québec Superior Court ruled that a notary's cheque remitted to a fictitious vendor who had stolen the identity of an individual, in order to perpetrate a mortgage fraud in a property sale, can be reversed through the cheque clearing process because of the forged endorsement appearing on the cheque by the person who had used the property owner's stolen identity.
In her recently released reasons for judgment, Justice Corriveau recognizes that in matters of forged endorsement, the risk of strict liability clearly lies with the party who agreed to negotiate the forged cheque and was not its holder in due course, as provided by subsection 55 (1) of the Bills of Exchange Act ("BEA") and Rule A4 of the Canadian Payments Association ("CPA") Rules.
This decision is important, because it recognizes a novel way of undoing a fraudulent payment transaction where the proceeds concerned would otherwise have disappeared, particularly as a result of the cheque being cashed through a cheque cashing agency. The Court regarded this business as being somewhat risky by nature, always entailing the risk of losses, which must be borne by the agency, in this case by Gescoro.
The fraud that occurred in this case resulted from the sale of an immovable property, made without the knowledge of its owner who was the victim of identity theft. In addition, an unknown accomplice acting as purchaser obtained a mortgage loan that was title-insured by Stewart. The proceeds of the loan transited into the trust account belonging to the notary, who then issued a cheque on his trust account at the Bank of Montreal ("BMO"), payable to the order of the vendor.
Subsequently, the person who had usurped the identity of the vendor fraudulently endorsed the cheque and cashed it at the Plaintiff's cheque cashing agency (exchange bureau), whose accounts were held at the Toronto-Dominion Bank ("TD").
Upon discovery of the fraud, Stewart indemnified the mortgage lender under the title insurance policy and then asked the notary to take all the necessary measures to ensure that the cheque was returned for clearing, on the basis of a forged endorsement. The cheque transaction was reversed and TD returned the proceeds to BMO.
As a result, the Plaintiff exchange bureau instituted action against the notary to recover the proceeds of the cheque and tried to convince the Court that under section 55 of the BEA, it was a holder in due course at the time the instrument was cashed, notwithstanding the forged endorsement.
The Court did not accept the argument that the notary's intention at the time of the transaction was to issue the cheque to the fictitious vendor, rightly holding that the notary had mistakenly believed he was dealing with the real property owner.
The Court also found that the endorsement was forged and irregular pursuant to subsection 48(1) of BEA, which clearly provides that a forged endorsement does not confer any rights upon the holder.
In finding that the Plaintiff exchange bureau had to assume the loss, pursuant to the BEA and clearing rules, the Court also mentioned that such a loss was perhaps part and parcel of the risk or cost of doing business in that industry, particularly when large sums of cash are involved.
This decision reinforces the principle that the CPA Rules on fraudulently endorsed cheques are intended to protect the payor from irregular activity.