Executive Summary: Key Legal and Evidentiary Issues

• Whether a defrauded bank (RBC) can recover traced proceeds of fraud from innocent recipients whose accounts hold frozen funds.
• Extent to which repayment of a pre-existing debt, without any new value given at the time of transfer, satisfies the “good consideration” defence under the Simms/B.M.P./Arrow line of authority.
• Application of constructive trust, tracing, and knowing receipt principles when recipients initially receive stolen funds innocently but later become aware of the fraud.
• Interpretation of the second defence in B.M.P. (discharge of a debt) in circumstances where frozen funds never in fact discharged the alleged underlying debt.
• How prior case law (City of Saskatoon v. Doe, Arrow, B.M.P., Sarhan, Holmes v. Amlez) shapes the competing claims between a fraud victim and innocent downstream recipients.
• Determination of entitlement to costs between RBC and 2356660 Ontario Inc., including the effect of a pre-agreed lump-sum costs figure linked to success on the motion.

Background and facts

The proceedings arise from a sophisticated counterfeit cheque fraud that exploited a lawyer’s trust account and multiple banking institutions. Royal Bank of Canada (RBC) commenced an action on April 3, 2024, to trace and recover the proceeds of counterfeit cheque fraud after discovering that forged or counterfeit cheques had been deposited into the trust account of lawyer Kurt Anthony Sunn at RBC. The total proceeds from the counterfeit cheques amounted to approximately $7,290,000, all of which were transferred from Mr. Sunn’s RBC trust account to an account held by 122 Laird General Partner Inc. at Bank of Montreal (BMO). 122 Laird was controlled by Adrian Johannsen, who had produced the fraudulent cheques to Mr. Sunn.

Within a few days, specifically on or about March 26 and 27, 2024, RBC discovered that the cheques were counterfeit or forged and reversed the amount in Mr. Sunn’s trust account, leaving the trust account in an overdraft position. Interbank tracing then revealed that the funds had been dispersed from the 122 Laird account to a range of other accounts. Two particular downstream accounts became central to this decision: an account held by 2356660 Ontario Inc. (235) at BMO, and an account held by Cindy and Thomas Tong at Canadian Imperial Bank of Commerce (CIBC). The funds in those accounts were frozen by the relevant banks in late March 2024 while investigations proceeded.

Specifically, $120,000 traceable as fraud proceeds (the BMO Funds) was identified in the 235 account at BMO, and $11,500 traceable as fraud proceeds was sent to the Tongs’ CIBC account, of which $2,669 remained frozen (the CIBC Funds). Both sets of funds were directly traced back to the original counterfeit cheques processed through the Sunn trust account and the 122 Laird account. By a June 17, 2024 order, the court had already authorized disclosure by RBC, BMO, TD, and CIBC to facilitate tracing of the stolen money, and it was ultimately undisputed that both the BMO Funds and CIBC Funds were proceeds of fraud.

The evidentiary record for the motions was structured on a series of agreed facts. All parties accepted that 235 and the Tongs were innocent recipients at the time they received the transfers; they had no knowledge that the funds were proceeds of fraud. 235 understood from Mr. Johannsen that the $120,000 represented repayment of a pre-existing loan owed to it by Rank Experiences Inc., a company controlled by Johannsen. Similarly, the Tongs believed the $11,500 they received from the 122 Laird account was a partial repayment of a pre-existing loan owed to them personally by Johannsen. Both 235 and the Tongs therefore characterized themselves as legitimate creditors who had simply received loan repayments.

However, by the end of March 2024, 235 knew its account had been frozen and became aware that the BMO Funds were believed to be fraud proceeds. The Tongs, at some later but unspecified time, also learned that the CIBC Funds were tied to the fraud and remained frozen. There was no dispute that both the BMO Funds and CIBC Funds had remained frozen in their respective accounts from that point onward. A separate live dispute concerning the validity of the loan alleged by 235 was acknowledged but left for another day, as 235 had withdrawn its own summary judgment motion before the hearing of these motions.

Motions before the court

Two motions were heard together. First, RBC sought an order requiring that the BMO Funds ($120,000) held in 235’s BMO account be repaid to RBC as the defrauded party. Second, Mr. Sunn sought an order that the remaining CIBC Funds ($2,669) held in the Tongs’ CIBC account be returned to RBC (in effect, as part of making RBC whole for the fraud that had been run through his trust account). Both motions turned on whether RBC, as a victim of fraud, could reclaim the traced funds in priority to the innocent recipients, or whether the innocent creditors could keep the funds on the basis that they had been paid in discharge of pre-existing debts and had given good consideration.

In the course of the litigation, 235 also initially filed a separate summary judgment motion seeking to resolve its position definitively but withdrew that motion at the hearing. As a result, the court confined itself to deciding the entitlement to the BMO Funds and CIBC Funds on the agreed record before it, leaving any broader issues regarding 235’s underlying loan claim to be addressed in future steps if necessary.

Legal framework and authorities considered

The court framed the dispute within the law of restitution, constructive trust, tracing, and mistake of fact in the context of fraudulently obtained funds. The principal authority relied on for the overall framework was City of Saskatoon v. Doe, which had summarized the applicable principles where fraudulently diverted payments are traced into the hands of downstream recipients who claim to have acted innocently and to have given value. That line of reasoning draws on two main approaches: constructive trust (including knowing receipt principles) and recovery of money paid under a mistake of fact.

Central to the analysis was the test derived from Barclays Bank v. Simms, as adopted and developed by the Supreme Court of Canada in B.M.P. Global Distribution Inc. v. Bank of Nova Scotia and considered by the Ontario Court of Appeal in Arrow ECS Norway AS v. John Doe. Under these authorities, a payor who has paid money under a mistake of fact is prima facie entitled to its return. The claim can be defeated, however, if the recipient establishes one of three core defences: that the payor intended the recipient to have the money regardless of the mistake or is otherwise precluded from raising the mistake; that the recipient gave good consideration; or that the recipient has changed its position in good faith in reliance on the payment.

The second of these defences—the “good consideration” defence—was at the heart of 235’s and the Tongs’ arguments. They pointed to the example cited in Simms and quoted in B.M.P. and Arrow, where repayment of a debt can constitute good consideration: if the money is paid to discharge, and does discharge, a debt owed to the payee or a principal on whose behalf the payee is authorized to receive payment. The innocent recipients argued that because they were creditors of Johannsen (or a company he controlled) and had received the funds as loan repayments, they should be treated as bona fide recipients for value and thus entitled to retain the money in priority to RBC.

The court also considered Holmes v. Amlez International Inc., which articulates the doctrine of knowing receipt in the context of constructive trust: even if property is received innocently, once the recipient becomes aware—actually or constructively—that it is trust property (or, in this setting, fraud proceeds), the recipient comes under an obligation to restore it. Sarhan v. Chojnacki was relied on by the Tongs, but the court found it of limited assistance because it predated Saskatoon v. Doe and Arrow, focused heavily on knowledge and complicity in fraud, and operated under a different agreed framework for the disposition of funds.

Application of the law to the facts

The key issue became whether the BMO Funds and CIBC Funds were in fact paid in discharge of any debt and whether any good consideration or change of position defence was available. The court closely examined the language from Simms and B.M.P. that 235 and the Tongs relied upon. The text does not merely refer to repayment of a debt in the abstract; it stipulates that the money must be paid “to discharge, and does discharge” a debt. This wording, the court emphasized, implies that something of value must actually be given or surrendered in connection with the payment, such that the recipient’s position is materially altered.

In this case, the BMO Funds and CIBC Funds never actually discharged any debt in a practical sense because both amounts were frozen shortly after receipt and have remained frozen ever since. Neither 235 nor the Tongs surrendered any rights or changed their position in reliance on the funds. They did not release Johannsen from his underlying obligations, give up security, or provide new value at the time of the transfers. The loans that they assert had been made to Johannsen or his related companies were made long before, and the mere historical fact that they were creditors was not enough to constitute consideration in connection with the specific transfers now in dispute.

Thus, while 235 and the Tongs were indeed owed money and believed themselves to be receiving legitimate repayments, the court held that this alone is insufficient to engage the second defence under B.M.P. Without an actual discharge of the debt or a real change of position, they remained, in effect, holders of property that was traceable fraud proceeds for which they had provided no contemporaneous value. Because they had no knowledge of the fraud at the time of receipt but subsequently became aware that the funds were tainted, the principles of knowing receipt and the restitutionary framework required that they restore the funds to the defrauded party.

The court also rejected the suggestion that Sarhan v. Chojnacki altered this outcome. That decision turned on different agreed assumptions, particularly that funds would remain with the recipient unless complicity in fraud was established. Here, the applicable modern authorities (Saskatoon v. Doe, Arrow, B.M.P., and Simms) provided a clear two-stage test and a defined set of defences. On that framework, 235 and the Tongs simply did not meet the requirements for a bona fide purchaser for value without notice or an equivalent position.

Outcome and orders

Having found that the funds in question were traceable proceeds of fraud and that no defence of good consideration or change of position was available, the court concluded that RBC, as the victim of the fraud, and Mr. Sunn, whose trust account had been misused and left in overdraft, were entitled to the return of the frozen funds. The motions brought by RBC and by Mr. Sunn were therefore granted. As a result, the $120,000 BMO Funds held in the 235 account and the $2,669 CIBC Funds held in the Tong account were ordered to be returned to RBC, restoring a portion of the substantial losses initially caused by the counterfeit cheque scheme.

On the issue of costs, no costs were sought as against Mr. and Mrs. Tong in recognition of their status as innocent but ultimately unsuccessful recipients. By contrast, RBC and 235 had agreed in advance that costs would be payable to the successful party in a fixed amount. In light of the court’s conclusion in favour of RBC and Mr. Sunn, 235 was ordered to pay costs to RBC in the agreed sum of $13,500 within 30 days. Thus, the successful parties in this decision are RBC and Mr. Sunn, and the total amount ordered in favour of the successful party, on the record before the court and for your purposes here, is $13,500 in costs.