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A bank is defrauded. The fraudster pays, and the bank traces, the money to a third party. The bank wants its money back and the third party wants to keep it. This was the subject of Cuthbert v. TD Canada Trust, a 2010 decision of the Ontario Superior Court of Justice

The Fraud 

RBC was the mortgagee in five fraudulent mortgages. It advanced $450,000 in aggregate and, upon a lawyer’s direction, it advanced the funds not to the fraudster, but to a third party (TP). We cannot determine from the reasons for decision whether the fraudster was found and convicted, but the lawyer, who acted for both RBC and the fraudster, was convicted.

RBC traced its mortgage money to TP’s account at TD. However, by the time RBC was able to act, only $112,000 remained in the account. TD returned the money to RBC, subject to an indemnification agreement. RBC commenced an action against the fraudster, other parties, and TP. It ultimately discontinued its action against TP because TP was elderly and had no assets that RBC could seize.

However, once RBC discontinued the action and once TP realised that TD had transferred the $112,000 from his account, he brought an action against TD for the return of what he claimed was his money. After TD joined RBC pursuant to the indemnification agreement, the real fight was between TP and RBC.

Motion 

TP brought a motion for summary judgment. He said that there was no genuine issue requiring a trial because his case was bulletproof. RBC was so unimpressed with TP’s evidence that it brought its own motion for summary judgment.

A party is able to obtain summary judgment (i.e. a judgment after a motion and without a trial), if it can demonstrate that there is no genuine issue requiring a trial. This type of motion had been constrained to all but the clearest cases. However, with a recent change in the Rules of Civil Procedure, judges now have the ability to weigh evidence, evaluate credibility, and draw reasonable inferences from the evidence, powers that they did not previously have on the motion.

Mistake of Fact 

Normally a person who pays money under a mistake of fact is entitled to its return. However, the person receiving those funds has a number of defences. The payee may keep the money if:

a)   The payor intended to pay the payee in all events or is deemed in law to have intended it;

b)   The payment was made for good consideration, in particular if the payment was made to discharge a debt that the payor or another person owed to the payee; or

c)   The payee changed his position in good faith.

RBC claimed that it paid the funds by mistake. It advanced funds on the assumption that the mortgages were valid. TP argued that RBC did not issue the funds by mistake. It wanted to and did advance the mortgage money. The fact that the lawyer directed the funds to TP was merely a valid negotiation of a proper cheque.

The judge agreed with RBC regarding this issue – because TP’s argument was a stretch. Accordingly, RBC passed the payment-by-mistake hurdle.

Consideration 

Since the first and third defences did not apply, TP’s claim of consideration was the real battleground for the motion.

TP claimed that the fraudster had paid all of the money to him to repay loans that TP had advanced to the fraudster as part of the fraudster’s mortgage brokering business. Presumably, the fraudster was to invest the money and repay the principal and interest to TP.

TP’s counsel had argued that whether TP kept records or engaged in questionable business practices was irrelevant because RBC led no evidence that controverted TP’s evidence that he had loaned money to the fraudster. This was not a good strategy. If one can show someone is lying, then that, in effect, controverts the evidence. One does not need other direct evidence. 

The judge summed up the evidence, better than we can do it, as follows:

“Cuthbert’s testimony about the loans lacks internal consistency and credibility. He has no records to support his testimony, except bank drafts that bear no relationship to the amounts of the repayment. The loan advances were not made to the person he says borrowed the money; nor were the repayments made by the person he says borrowed the money. He was unable to provide any contact information for the borrower. He has no records and no receipts. He could not provide a credible or consistent account of where he obtained the money to make the loans. His explanation was either misleading or he misled the Trustee in Bankruptcy. He told the Trustee in Bankruptcy that he had no assets and testified he did not tell him about prior receivables of $195,000 he claims were ultimately repaid by the funds obtained through the mortgage fraud. The undisputed documentary evidence regarding the payments to Cuthbert’s account is compelling and is inconsistent with Cuthbert’s evidence. Finally, the undated letter and promissory note produced in this litigation for the first time, despite his obligation to produce all relevant documents in the mortgage fraud action, are self-serving and inconsistent with his evidence about the loans, his 2003 documentation and the undisputed bank drafts. The documents were obviously created after the fact.” 

Result 

The judge held that there was no need for a trial to resolve the issue of consideration. TP’s evidence lacked any credibility. TP had given no consideration for the money he had received and therefore had no right to its return.