Executive Summary: Key Legal and Evidentiary Issues

• The case examines whether Toronto-Dominion Bank owed a duty of care to two investors whose funds were used to repay a customer's fraudulent overdraft.
   
• Constructive versus actual knowledge of fraud emerged as the central issue distinguishing the negligence claim from the equitable and restitutionary claims.
   
• Expert evidence addressed whether a reasonable bank would have conducted enhanced due diligence before accepting the disputed funds.
   
• Ontario and other Canadian case law on whether the tort of conversion extends to funds held in a bank account played a significant role in the court's analysis.
   
• Claims of contributory negligence and contributory fault raised questions about the plaintiffs' own diligence before investing.
   
• Punitive damages were sought but required proof of an independent actionable wrong beyond the underlying claims.
   

Facts of the case

1442422 Ontario Limited ("144") and Jokada Inc. ("Jokada") together invested $17.8 million with Nestig Inc. ("Nestig") based on representations by Nestig's principal, Stephen Heimbecker, that the money would be used for mortgage investments. Unknown to 144 and Jokada, Heimbecker instead used the funds to satisfy an unauthorized overdraft in his personal accounts at The Toronto-Dominion Bank ("TD Bank"), an overdraft caused by a cheque kiting scheme he had perpetrated. TD Bank had already commenced an action against Heimbecker and Nestig over the scheme and obtained a Mareva injunction freezing their accounts before it received the plaintiffs' funds. After receiving the money, TD Bank obtained consent orders varying the injunction to permit the repayment and discontinuing its action. On October 13, 2022, Jokada wired $1 million to the trust account of Heimbecker's lawyer, Raymond Wrubel, and the following day, October 14, 2022, 144 wired $16.8 million to Nestig's TD Bank account, pursuant to a Participation Agreement under which the total mortgage project was valued at $20.8 million. Both 144 and Jokada received fees under the agreement, $1,393,800 and $93,549 respectively. Neither had knowledge of the cheque kiting fraud, the overdraft, or the Mareva injunction at the time they advanced their funds. After learning of a rumoured lawsuit against Heimbecker involving a similar investment, Magarelli (144's principal) and Fielding (Jokada's principal) investigated and discovered the TD Bank action and a separate action by another investor, Bradley Grant. Heimbecker eventually admitted the fraud in early 2023. 144 and Jokada sued TD Bank on theories of negligence, knowing receipt, conversion, unjust enrichment, and money had and received, withdrawing claims of fraudulent conveyance and fraudulent preference at trial.

Policy and legislative provisions at issue

Central to the analysis was TD Bank's internal Enterprise AML/ATF Policy effective May 24, 2022 (the "2022 AML Policy"), which required business lines to maintain risk-based customer due diligence procedures, with enhanced due diligence required for customers identified as higher risk. The 2022 AML Policy also permitted account closures based on risk and required filing suspicious activity reports. The court found this policy was engaged once Heimbecker's conduct raised multiple "red flags," including the cheque kiting scheme itself, misrepresentations about repayment, and the suspension of Nestig's mortgage broker licence by the Financial Services Regulatory Authority of Ontario. The Proceeds of Crime (Money Laundering) and Terrorist Financing Act and related Criminal Code provisions were also relevant to whether TD Bank should have treated the transaction as a money laundering risk. The Participation Agreement between 144, Jokada, and Nestig was likewise significant, as it had been amended so that funds could not be released to underlying borrowers without Magarelli's consent, a term the court found supported the plaintiffs' belief that further diligence would occur before funds left Nestig's control.

Reasoning and analysis

On negligence, the court held that a duty of care from TD Bank to 144 and Jokada would arise only if TD Bank had actual knowledge of Heimbecker's fraud, since constructive knowledge alone is insufficient in this context. Actual knowledge can be established through willful blindness or recklessness, but the court found the evidence fell short of the "clear probability" of fraud required for either standard, particularly given that Heimbecker had already legitimately repaid $3 million of the overdraft before the funds in question were accepted. Without a duty of care, the negligence claim failed and the standard of care was not addressed. The knowing receipt claim required only constructive knowledge, a lower threshold, and the court found TD Bank had failed to obtain answers to the reasonable inquiries its own AML Policy required once Heimbecker's risk profile changed, establishing liability. On conversion, the court sided with a line of Ontario and British Columbia authority holding that funds held in a bank account can be the object of the tort, rejecting TD Bank's reliance on a differing English House of Lords approach and a Saskatchewan Court of Appeal decision that left the question open. For unjust enrichment, the court found TD Bank was enriched and 144 and Jokada correspondingly deprived, and that TD Bank's proposed juristic reason, repayment of a valid debt owed by Heimbecker, addressed the wrong relationship, since no juristic reason existed between TD Bank and the plaintiffs themselves. Because liability was established on other grounds, the money had and received claim was not decided. The court also rejected TD Bank's arguments for reducing damages through contributory negligence or contributory fault, finding Heimbecker's fraud was not reasonably foreseeable to 144 and Jokada and that established Ontario authority does not extend contributory fault principles to the restitutionary torts at issue. Finally, the punitive damages claim was dismissed because no independent actionable wrong was established to meet the high threshold for such an award.

Ruling and overall outcome

The court dismissed the negligence claim and the claim for punitive damages but found TD Bank liable to 144 and Jokada for knowing receipt, conversion, and unjust enrichment, with no reduction for contributory negligence or fault. As the measure of damages, the parties agreed on the amount each plaintiff invested less the fees they received. Consequently, TD Bank was ordered to pay $15,406,200 to 144 and $906,451 to Jokada, plus pre-judgment interest on both amounts. Costs were left to be resolved by submissions if the parties could not agree.