Andersen (Arthur) Inc. v. Toronto-Dominion Bank et al., (1994) 71 O.A.C. 1 (CA)

• Judge: Grange, McKinlay and Abella, JJ.A.
• Court: Court of Appeal (Ontario)
• Case Date: March 07, 1994
• Jurisdiction: Ontario
• Citations: (1994), 71 O.A.C. 1 (CA)

Andersen Inc. v. TD Bk. (1994), 71 O.A.C. 1 (CA)

MLB headnote and full text

Arthur Andersen Inc., in its capacity as Lien Trustee (plaintiff/respondent) v. The Toronto-Dominion Bank (defendant/appellant) and Municipal Financial Corporation et al. (third parties/respondents)

Municipal Financial Corporation (plaintiff/respondent) v. Toronto-Dominion Bank et al. (defendants/appellant/respondents) and Stolp Building (Bridlethorn) Corporation et al. (third parties/respondents)

(C13913; C13914; C13915; C13916)

Indexed As: Andersen (Arthur) Inc. v. Toronto-Dominion Bank et al.

Ontario Court of Appeal

Grange, McKinlay and Abella, JJ.A.

March 7, 1994.

Summary:

In 1982, a developer, involved in many real estate projects, opened several accounts with the Toronto-Dominion Bank. By 1986 there were numerous separate projects with separate accounts. In an attempt to limit the administrative burdens, the Bank suggested a mirror system of accounting. Under the system the Bank would deposit in or withdraw from the mirror account an amount equal to the debit or credit balance in the corresponding designated account. As a result the accounts would offset each other and there would be a balance of zero at the end of the day. The agreement also established a concentration account which was used to balance the mirror accounts and represented the net balance of all the projects. The designated accounts were maintained to show the financial state of each separate project, but did not represent the financial affairs between the Bank and the particular company. In 1990, the real estate market collapsed and there were major overdrafts in the system. A meeting in November 1990 disclosed that the developer was having cash flow problems. In early 1991, the Bank refused to extend credit or honour cheques and advised the developer that the agreement would be terminated in 30 days or upon the occurrence of an overdraft. When the developer wrote cheques that would have caused an overdraft the Bank terminated the system. At the date of termination there was approximately $10,500,000 in the designated accounts. Andersen Inc., the lien trustee under the Construction Lien Act, sued for this amount, claiming that the accounts seized and set off were trust funds. Municipal claimed as a beneficiary. The Bank claimed that upon termination none of the credit balances in the designated accounts existed, because it had been transferred through the mirror accounts to the concentration account, which had a net balance between $244,000 and $251,000. The trial judge held that at the termination of the agreement each company was entitled to the balance in its designated account. The judge found that the Bank breached the agreement and that the conduct of the Bank amounted to a breach of trust and ordered the bank to pay into court $10,500,000. The Bank appealed.

The Ontario Court of Appeal, Abella, J.A., dissenting, allowed the appeal, set aside the trial judge's decision and ordered a reference to determine the amount owed by the Bank to Andersen Inc. The court dismissed Municipal's claim.

Banks and Banking - Topic 2805

Bank accounts - Agreements respecting - Mirror accounting system - A developer and a bank entered into an agreement that established a mirror accounting system - Under the system the designated accounts were offset by the mirror accounts so there was a zero balance at the end of the day - The concentration account was used to balance the mirror accounts - The trial judge held that the agreement provided only for notional transfers and the real funds remained in the designated accounts - The Ontario Court of Appeal held that under the agreement the debits and credits in the mirror accounts and the transfers from those accounts to the concentration account were real - See paragraphs 20 to 35.

Banks and Banking - Topic 3124

Bank deposits - Duties of banks respecting deposits - Duty of inquiry - [See both Mechanics' Liens - Topic 7525 ].

Banks and Banking - Topic 3312

Bank deposits - Trusts - Constructive trusts - [See second Mechanics' Liens - Topic 7525 ].

Contracts - Topic 7430

Interpretation - Ambiguity - Admissibility of extrinsic evidence - A developer and a bank entered into an agreement whereby a mirror accounting system was set up incorporating the various designated accounts for the separate projects - The trial judge held that there were two possible alternative interpretations of the agreement and admitted extrinsic evidence - The Ontario Court of Appeal stated that the court must first consider the contract "in its factual matrix", and then decide whether there are two possible interpretations of the contract - The court held that after reviewing the contract in the context of its execution there was only one possible meaning and therefore any extrinsic evidence was irrelevant - See paragraphs 18 to 19.

Contracts - Topic 7431

Interpretation - Ambiguity - Choice between alternative interpretations - [See Contracts - Topic 7430 ].

Contracts - Topic 7433

Interpretation - Ambiguity - Contra proferentem rule - A developer and a bank entered into an agreement whereby a mirror accounting system was set up incorporating the various designated accounts for the separate projects - The trial judge held that the agreement was ambiguous and applied the contra proferentem rule - The Ontario Court of Appeal held that there was no ambiguity and the contra proferentem rule did not apply - The court also suggested, without determining, that the rule only applied where there was no opportunity to modify the agreement before its execution - See paragraphs 15 to 17.

Evidence - Topic 2401

Presumptions - Specific presumptions - Inference from failure to call available evidence - A developer and a bank entered into an agreement whereby a mirror accounting system was set up incorporating the various designated accounts for the separate projects - During the trial, the bank did not call the account manager who suggested using the mirror system - The trial judge drew an adverse inference against the bank that the manager's evidence would have been helpful to the developer - The Ontario Court of Appeal held that there were no grounds on which the trial judge could draw such an inference as there was no suggestion that the bank had acted dishonestly - The court stated that the bank had no reason to call the manager - See paragraph 25.

Mechanics' Liens - Topic 7525

Trust fund - Bank deposits - Duty of bank - A developer had separate accounts for its numerous projects - On the advice of the bank it set up a mirror accounting system - The lien trustee sued the bank for, inter alia, breach of trust - The Ontario Court of Appeal stated that the bank could only be liable for a breach of trust where there had first been a breach by one of the trustees - The court stated that "in the absence of sufficient facts or circumstances indicating that there is a good possibility of trust beneficiaries being unpaid, there is no duty of inquiry on a bank to determine whether the trades have been paid or will be able to be paid" - See paragraphs 40 and 44.

Mechanics' Liens - Topic 7525

Trust fund - Bank deposits - Duty of bank - A developer had separate accounts for its numerous projects - On the advice of the bank it set up a mirror accounting system - The lien trustee sued the bank for, inter alia, breach of trust - Although the developer had been overdrawn on various occasions, it assured the bank that the trades were being paid - The Ontario Court of Appeal held that the bank had a duty to inquire about the status of the trades once the developer indicated cash flow problems and by failing to inquire the account manager was wilfully blind - The court held that the bank was liable for breach of trust by making use for its own benefit of money held in trust for trade creditors after that point - See paragraphs 40 to 55.

Cases Noticed:

McClelland and Stewart v. Mutual Life Assurance Co. of Canada, [1981] 2 S.C.R. 6; 37 N.R. 190; 125 D.L.R.(3d) 257, refd to. [para. 15].

Hillis Oil and Sales Ltd. v. Wynn's Canada Ltd., [1986] 1 S.C.R. 57; 65 N.R. 23; 71 N.S.R.(2d) 353; 171 A.P.R. 353; 25 D.L.R.(4th) 649, refd to. [paras. 15, 93].

Delisle v. Bulman et al. (1991), 54 B.C.L.R.(2d) 343 (S.C.), refd to. [paras. 18, 78].

Claiborne Industries Ltd. et al. v. National Bank of Canada et al. (1989), 34 O.A.C. 241; 69 O.R.(2d) 65 (C.A.), dist. [para. 25].

Troup (John M.M.) Ltd. v. Royal Bank of Canada, [1962] S.C.R. 487, refd to. [para. 42].

Air Canada v. M & L Travel Ltd., Martin and Valliant, [1993] 3 S.C.R. 787; 159 N.R. 1; 67 O.A.C. 1, refd to. [para. 51].

Liebig (H.W.) & Co. v. Leading Investments Ltd., [1986] 1 S.C.R. 70; 65 N.R. 209; 14 O.A.C. 159, refd to. [para. 78].

Canada Square Corp. et al. v. VS Services Ltd. et al. (1981), 34 O.R.(2d) 250 (C.A.), refd to. [para. 78].

TransCanada Pipelines Ltd. v. Northern & Central Gas Corp. (1983), 41 O.R.(2d) 447 (C.A.), refd to. [para. 78].

Prenn v. Simmonds, [1971] 3 All E.R. 237 (H.L.), refd to. [para. 78].

Reardon Smith Line Ltd. v. Hansen-Tangen; Hansen-Tangen v. Sanko Steamship Co., [1976] 3 All E.R. 570 (H.L.), refd to. [para. 78].

Andrea Schmidt Construction Ltd. v. Glatt et al. (1980), 28 O.R.(2d) 672 (C.A.), refd to. [para. 90].

Potter (Carl B.) v. Mercantile Bank of Canada, [1980] 2 S.C.R. 343; 33 N.R. 175; 41 N.S.R.(2d) 573; 76 A.P.R. 573, refd to. [para. 91].

Dominion Bank v. Fassel and Baglier Construction Co., [1955] O.W.N. 709 (C.A.), refd to. [para. 91].

Perlmutter Shore Ltd. v. Bank of Montreal (1981), 34 O.R.(2d) 577 (H.C.J.), refd to. [para. 91].

Groves-Raffin Construction Ltd. v. Canadian Imperial Bank of Commerce, [1975] 2 W.W.R. 97 (B.C.S.C.), refd to. [para. 91].

Consolidated-Bathurst Export Ltd. v. Mutual Boiler and Machinery Insurance Co., [1980] 1 S.C.R. 888; 32 N.R. 488; 112 D.L.R.(3d) 49; [1980] I.L.R. 1-1176, refd to. [para. 93].

Statutes Noticed:

Bank Act, R.S.C. 1985, c. B-1, sect. 206 [paras. 40, 59]; Schedules I, II [para. 61].

Condominium Act, R.S.O. 1990, c. C-26, sect. 53(1) [para. 61].

Construction Lien Act, R.S.O. 1990, c. C-30, sect. 8 [para. 90]; sect. 10, sect. 11, sect. 12 [para. 53].

Authors and Works Noticed:

Anson, W.R., The Law of Contract (25th Ed. 1979), p. 151 [paras. 15, 93].

Crawford and Falconbridge, Banking and Bills of Exchange (8th Ed. 1986), pp. 784 to 785 [paras. 13, 92]; 793 [para. 90].

Fridman, G.H.L., The Law of Contract (2nd Ed. 1986), p. 445 [para. 93].

Counsel:

H. Lorne Morphy, Q.C., and Laurence A. Pattillo, for the appellant, Toronto-Dominion Bank;

Brian M. Morris and James Klein, for the respondent, Arthur Andersen Inc.;

Malcolm M. Mercer and Andrew M. Shaughnessy, for the respondent, Municipal Financial Corp.;

Barry Greenberg and Steven H. Sinukoff, for the respondent, Stolp Building (Bridlethorn) Corp.

This appeal was heard on July 19 to 23, 1993, before Grange, McKinlay and Abella, JJ.A., of the Ontario Court of Appeal.

The following judgment of the Court of Appeal was released on March 7, 1994, and the following opinions were filed:

Grange and McKinlay, JJ.A. - see paragraphs 1 to 64;

Abella, J.A., dissenting - see paragraphs 65 to 95.