Good rule of thumb: don’t knowingly assist in someone else’s breach of trust; you’ll be liable too. Whether a financial institution fell afoul of this general principle is the central issue in Pardhan v Bank of Montreal, 2012 ONSC 2229, recently certified as a class proceeding.
Salim Damji raised $77 million from investors in a fraudulent scheme. He ended up in jail but most of the money has yet to be recovered. Damji deposited the ill-gotten gains in various accounts with the Bank of Montreal (BMO). The plaintiffs alleged that Damji held their ‘investments’ on trust for them and that BMO knowingly assisted him in siphoning assets offshore. BMO argued that (1) a knowing assistance (KA) claim must be predicated on a ‘genuine’ trust, (2) actual rather than constructive knowledge of the breach would be required and (3) s 437 of the Bank Act precludes a KA claim by a non-customer against a bank. The motion judge rejected all three arguments: (1) as long as there was an intent by the settlor of the trust that the funds would be held on trust, a KA claim could be made out (Damji’s bona fides were irrelevant); (2) the requirement is actual knowledge, but this includes recklessness or wilful blindness and the pleadings were adequate on this point; (3) s 437 may shield a bank from liability in certain circumstances, but not clearly here. It was not plain and obvious that the plaintiffs’ claim would fail. The plaintiffs’ claim that BMO was in knowing receipt of funds resulting from a breach of trust was also viable, as were their negligence claims (although the latter seemed to be on the ‘general and sweeping’ side). The other elements of the certification test were satisfied, the net result being a green light to the action.
[Link available here].