David Baines
Sun
In a decision released last week, B.C. Supreme Court judge Bruce Cohen invoked a piece of jurisprudence that should strike fear into the heart of any reasonable person: “If the law drives us to accept what one might consider an absurd result, we must accept that.”
Well, it is a fair bet that the Bank of Nova Scotia is not about to accept the absurd result in the case of a customer who deposited a cheque for $904,563. When the bank found out the cheque was counterfeit, it quite naturally scooped the funds out of the customer’s accounts. According to Cohen’s ruling, it had no right to do so.
The net result is that the bank is out $904,563 and the customer has received a $904,563 windfall by successfully negotiating a bogus cheque. This is an absurd result in itself, but consider also the implications for ordinary bank customers: the only way banks can guard against this sort of loss in future is to hold payment on cheques for the 30, 60 or more days it takes to confirm their legitimacy. So unless the decision is overturned on appeal, you may find yourself waiting for weeks after presenting a cheque before the bank will allow you to actually withdraw the money.
The case involves two Bank of Nova Scotia customers, Audie Hashka and Paul Backman, who owned a private company called B.M.P. Global Distribution which was involved in a very sketchy business, indeed.
BMP distributed a line of non-stick bakeware manufactured by another company called Pantec Technologies. There was no written agreement between the two companies. Despite the absence of a formal agreement, BMP sold U.S. distribution rights to a person named Sunn Newman for $1.2 million in September 2001. Hashka admitted the figure was pulled out of thin air. Nobody bothered with financial statements, projected cash flow statements, business or marketing plans.
The background of Newman was also a mystery. Asked what he knew of him, Backman said: “Only that he was a sharp-looking guy that seemed like he had a lot of potential.” Curiously, given they hardly knew each other, they didn’t bother drawing up a written distribution agreement.
Despite these rather tenuous dealings, in October 2001 Hashka and Backman received a $904,563 cheque, payable to BMP, representing a down payment on the distribution deal. There was no covering letter, just the cheque.
The cheque was drawn a Royal Bank account in the name of a company called First National, and the sender of the cheque was a person named “E. Smith.” Hashka and Backman said they didn’t know either party.
On Oct. 22, 2001, the two men presented the cheque to the Bank of Nova Scotia branch at 10th and Langley in Burnaby. At the time, there was only $59 in BMP’s account. If the Royal Bank returned the cheque for insufficient funds, the bank would be in big trouble. So the manager quite naturally refused to give them any credit until the cheque cleared.
First National had the required funds in its account. By Oct. 30, 2001 the cheque had cleared and the bank released the hold. Then calamity struck.
On Nov. 9, Royal Bank officials contacted the Bank of Nova Scotia and advised that their customer, First National, had told them the cheque was counterfeit.
By this time, Hashka and Backman had spent some of the money to pay bills. In one mysterious transaction, Hashka had transferred $20,000 US to an account at Citibank in New York, payable to LMP Prestsquare, as per the advice of A.U. Salamain. Both men said they didn’t know either party.
The balance of the money — a total of $776,650 — remained in BMP’s account or had been transferred to other accounts run by the two men at the same branch.
Bank of Nova Scotia officials froze the accounts and began asking questions, but Hashka had no answers. He said he had tried to contact “Newman” about the counterfeit cheque, but had been unsuccessful.
At the request of the Royal Bank, the bank froze the remaining funds and remitted them to the Royal Bank.
Hashka and Backman, represented by lawyers Paul Jaffe and Justis Raynier, said they didn’t know the cheque was fraudulent, and there was no proof that they did know. They argued that once the cheque was settled (that is, paid by the Royal Bank), the Bank of Nova Scotia was at no risk and had no right to the funds.
Judge Cohen concurred. He said that if the bank wanted to seize the funds for the benefit of the Royal Bank, it should have sought a court order. But it didn’t, so he ordered them to return the funds.
Ross McGowan, a lawyer with Borden Ladner Gervais, was not involved in this case, but he does legal work for most of the major banks. He is too polite to call the result absurd, rather he calls it a “highly unusual and remarkable outcome.” He says counterfeit or altered cheque cases are often presented to banks. He deals with “at least once a month, and more often once a week.” Last Tuesday, he said, he had three such cases. To make the system work, he said, banks need to be permitted to charge back these cheques.
“The first implication of this decision, if allowed to stand, is that those persons who have negotiated counterfeit or materially-altered cheques . . . would receive windfall proceeds from the commission of a fraud, and that simpy cannot be allowed to stand,” he said.
“The second implication is that it would severely curtail the ability of financial institutions to allow access to funds from cheques.”
He said that, due to sophisticated counterfeit methods, it is impossible for banks to determine whether cheques are bogus. Only the customer can determine that, and that takes time.
“If this decision is allowed to stand, there would be no reasonable way to process cheques without 60 or 90-day holds. Imagine what that would do to customers.”
© The Vancouver Sun 2005