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Posted on December 1, 2005 | Posted in Collections

In our August 2005 newsletter, we reviewed the Ontario Court of Appeal decision in Canada Trustco Mortgage Company v. Pierce Estate.

In that case, the wife of a deceased borrower had sued the bank, claiming that the bank negligently loaned money to the borrower and ought to have informed him that he did not come within the bank’s own lending guidelines. The borrower, who was bi-polar, used the funds to purchase stocks on margin and lost all of his money, including the money borrowed. The Court of Appeal held that there was no special relationship between the bank and the wife and that, therefore, there could be no tort of negligent misrepresentation.

The borrower’s estate moved for leave to appeal this decision to the Supreme Court of Canada, a motion that the court recently dismissed.

Contemporaneously with this decision, the Ontario Superior Court of Justice rendered a 2005 decision in Bank of Montreal v. Witkin, dealing with allegations of negligence and breach of fiduciary duty. These cases seem to be coming out of the woodwork.


The bank had loaned $432,000 to the borrower. The borrower agreed that, with interest, he owed $497,000; the only issue was whether the borrower should be able to set off against the indebtedness damages of $1.1 million that he claimed against the bank in his counterclaim.

The borrower was an experienced chartered accountant and chartered business valuator, who had practised for over 30 years and was a senior officer of a mid-sized regional accounting firm before his retirement. After his retirement, he acted as a consultant and, it seems, an investor.

A businessperson, Megna, was experiencing financial problems, resulting in his loans being in default with the bank. The borrower wanted to invest with Megna, but needed to make a deal with the bank for forbearance or a takeout of its position. The borrower was aware that a purchaser in a previous sale was suing Megna for alleged fraud and misrepresentation, but the borrower had been satisfied with Megna’s explanation and believed in Megna’s integrity.

Ultimately, the bank officials met with Megna and the borrower. At this meeting, the borrower asked whether the bank knew anything to indicate that fraud was involved in the previous Megna transaction or knew any other reason for the borrower not to invest with Megna. The bank informed the borrower to perform his own due diligence.

Relying on the bank not telling him anything was wrong, the borrower invested $300,000 of his own money and $800,000 from his corporation to repay the bank and provide other working capital. The borrower lost his entire investment. The borrower alleged that the bank knew that Megna had provided fraudulent and improper information to the bank concerning Megna’s net worth and that the bank failed to tell the borrower of this. He alleged that the bank expressly or impliedly represented that Megna was not involved in any acts of fraud or misrepresentation.


We realise that facts, which seem obvious after a trial, may not have been so obvious before the trial. However, in this case, we still have to wonder why there was a defended action at all.

A breach of a duty of care is one of the prerequisites for a finding of negligence. The bank had initially refused to meet with the borrower and when the officials did meet with him, the meeting was “without prejudice” (i.e. for the purpose of settling their claims against Megna). The judge therefore held that the bank had no duty of care to the borrower.

Further, to support a claim for negligent misrepresentation, there has to be a representation. The judge found that the bank officials never specifically represented anything to the borrower. At best, they were silent in the face of his questions and silence is not a representation.

Finally, to have a negligent misrepresentation, there has to be a representation that is false. The trial judge found, as a determination of fact, that the bank had no knowledge of any fraud or misrepresentation on the part of Megna.

Failure to prove any one of the necessary ingredients of negligent misrepresentation results in a failure to prove the tort. The borrower failed to prove all of them.

Fiduciary Duty 

When in doubt, always throw in an allegation of a breach of fiduciary duty. Allege that the bank has a duty to ignore its own self-interest and conduct itself solely in furtherance of your interests.

Unless the facts are very special, banks are not fiduciaries of customers; it is a normal contractual business relationship. The trial judge held that there were no indicia that the bank somehow became a fiduciary for the borrower. The very purpose of the bank officials in this case was to collect a bad debt; it was not to aid the borrower. Further, the borrower was a sophisticated business valuator and hardly had the vulnerability that is the hallmark of a fiduciary relationship.


Even if the borrower could prove one of his allegations, did the borrower have the right to set off the damages against the money he owed to the bank? Part of the counterclaim related to $800,000 that the borrower’s corporation loaned Megna. The corporation was not a party to the action. The borrower could easily have joined it; the borrower did not do so because the borrower was worried that the bank would pursue its claim, not just against the borrower, but against the corporation. The judge pointed out, quite correctly, that the borrower could not have it both ways. If the bank could not claim against the corporation because the corporation was not a party, the corporation could not claim against the bank in the bank’s action and the borrower, who was a party, had no standing to make any claim on behalf of the corporation.

The judge also noted that there was no connection between $282,000 of the bank’s loans and the Megna investments because the bank had advanced those funds to the borrower before Megna came on the scene. Therefore, there could be no setoff against this aspect of the claim. In this regard, we suggest that the judge was incorrect. If she had allowed the counterclaim, the damages that the borrower had claimed would have been converted into debt and two debts can always be set off against each other.


Every claimant has a duty to act reasonably in order to mitigate (i.e. reduce) its damages. A plaintiff cannot sit back and do nothing, watch the damages grow, and claim for full compensation from the defendant.

The judge stated that if she had decided that the borrower had a cause of action, she would have reduced his damages by 90% because of his failure to mitigate his damages. He was told to perform due diligence regarding Megna. He did not do it. Accordingly the judge would have awarded only 10% of the $300,000 that the borrower himself had lost investing with Megna.


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