In the recent decision Pardhan v. Bank of Montreal (2013 ONSC 355), the Ontario Divisional Court dismissed motions for leave to appeal orders of Madam Justice Horkins certifying two related class actions. Among the many issues considered by the Divisional Court, Justice Lederer affirmed Justice Horkins’ determination that a bank may be potentially liable in negligence for its customer’s fraud based on constructive knowledge alone.
Salim Damji (“Damji”) perpetrated a fraud, defrauding his victims of more than $77 million through a fictitious investment scheme. Damji operated his fraud through a numbered Ontario company named “Cash Plus” and a series of BMO bank accounts. All of the money the proposed class members deposited into the corporate BMO account of Cash Plus and Damji’s personal BMO accounts were dispersed to offshore gambling establishments.
One of the victims of the fraud, Pardhan sued BMO and sought to certify his lawsuit as class action against BMO on behalf of the class individuals whose investments were flowed through Cash Plus and Damji’s personal BMO accounts. Pardhan claimed that BMO was liable to the class in knowing assistance in breach of trust, knowing receipt of trust monies and in negligence.
Justice Horkins in 2012 certified the class action against BMO arising from the fraud perpetrated by Damji. BMO brought motions for leave to appeal orders of Justice Horkins. The Divisional Court dismissed the defendants’ motions. Justice Lederer, writing for the Divisional Court affirmed Justice Horkins’ decision of certification on the grounds that: 1) the pleading discloses a cause of action; and 2) the claims of the class members raise common issues.
One of the issues considered by Justice Ledererm, which would have important implications for fraud litigation, is whether the claim disclosed a reasonable cause of action in negligence. Justice Lederer engaged in the two-part test of negligence established in Anns v. Merton London Borough Council. He found that the relationship between BMO and the plaintiffs in this situation did not fall within any category of cases where it had been established that a prima facie duty of care can or cannot exist. The question becomes whether this is a situation where a new duty of care should be recognized. Justice Lederer upheld Justice Horkins’ decision that the facts of the plaintiffs’ case were compelling enough to justify finding a prima facie duty of care based on BMO’s constructive knowledge. The court decided that it was not “plain and obvious” that the claim of negligence based on constructive knowledge will fail. The court concluded that the ultimate determination of the existence of a duty of care and any policy considerations that would negate any prima facie duty of care should be left to the trial judge.
For more information:
Justice Lederer’s decision can be read here.
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