National Bank of Greece (Canada) v. Bank of Montreal, docket T-981-98

        

     Date: 19990924

     Docket: T-981-98

Ottawa, Ontario, the 24^th day of September, 1999

Present: The Honourable Mr. Justice Pelletier

BETWEEN :

     NATIONAL BANK OF GREECE (CANADA)

     Applicant

     - and -

     BANK OF MONTREAL

     Respondent

     - and -

     CANADIAN PAYMENTS ASSOCIATION

     Intervener

     REASONS FOR ORDER and ORDER

[1]      This case provides an insight into the system which processes the millions of cheques and other negotiable instruments which Canadians exchange daily. Because of the enormous amount of money which changes hands every day through cheques (and other forms of funds transfer which are not relevant to this case), an efficient system of settling accounts between institutions which deal in cheques is necessary. Every day a bank will take in millions of dollars in cheques drawn on a variety of other banks at the same time as all the other banks are accepting cheques drawn on the first bank. It is necessary for these transactions to be processed (cleared) and for the funds to be transferred to the parties entitled to them (settlement). The institution responsible for seeing that this happens is the Canadian Payments Association (the "CPA"), a creation of the Canadian Payments Association Act , R.S., 1985, c. C-21 (the "Act"). All banks are required to be members of the CPA.

[2]      The CPA operates clearinghouses through which cheques are routed for clearing and settlement. Clearing occurs when the transactions are accounted for as between the member banks of the CPA. At the end of a clearing day, all cheques drawn on a particular bank (the drawee) and presented for payment that day will have been posted as amounts owed by the drawee to the banks who accepted the cheques ("the negotiating banks"). But at the same time, the drawee bank will itself have accepted millions of dollars worth of cheques drawn on other banks. So at the end of the day, a particular bank will owe a series of other banks millions of dollars and will itself be owed millions of dollars by a series of banks. These accounts are settled daily by the settlement system, which operates through the Bank of Canada. The settlement system is intended to move the necessary funds from those who owe money to those who are owed money. Some banks have a clearing account with the Bank of Canada through which their accounts are settled daily. If they are a net creditor, their account is credited and if they are a net debtor, funds are withdrawn from their account. The role of the Bank of Canada is to act as croupier, taking from those who owe for distribution to those who are owed. The end result should be that at the end of each banking day, all transactions are current, both from the point of view of accounting for the transactions (clearing) and from the point of view of settlement of accounts between all parties to the system (settlement).

[3]      However, not all banks have a settlement account with the Bank of Canada¹. Obviously if the system is to work, there must be a way to provide funds to and receive funds from each bank which is in the system. As a result, banks who do not have a settlement account with the Bank of Canada ("indirect clearers") are required to have a settlement account with a bank which does have such an account ("direct clearers"), who is then known as the indirect clearer"s clearing agent. Other banks then deal with the indirect clearer"s agent for cheque processing. All of the indirect clearer"s settlements occur with its clearing agent which then treats these transactions as its own for purposes of its clearing account with the Bank of Canada.

[4]      As a matter of commercial efficacy, these clearing and settlement transactions must occur as close to the date the cheque is negotiated as possible. Delay has the potential to result in the failure of transactions where a change in circumstances intervenes between the negotiation date and the clearing and settlement date. In other words, the sooner after negotiation a cheque is processed, the more likely it is that there will be funds in the account to pay the cheque, and the easier it is for the drawer to reconcile its books. There is therefore a premium upon timely processing of items through the system.

[5]      This case shows what happens when a cheque is not processed promptly. The National Bank of Greece ("NBG") had a customer, L.D.O., who paid a $50,000 account by means of a cheque drawn on the NBG. The person who accepted the cheque ("the payee"), R.C.L., deposited it in their account at the Bank of Montreal ("BMO"). BMO credited their customer"s account for the $50,000 and forwarded the cheque to the NBG"s clearing agent, the Royal Bank of Canada (RBC). The cheque reached RBC on April 24, 1997 on which date, RBC debited the NBG"s settlement account $50,000.

[6]      At the end of that day, therefore, the state of accounts between the parties is as follows:

1-      R.C.L. has been credited $50,000.

2-      BMO"s settlement account at the Bank of Canada has been credited $50,000.

3-      RBC"s settlement account at the Bank of Canada has been debited $50,000.

4-      NBG"s settlement account with RBC has been debited $50,000.

[7]      Conspicuously, what has not happened is that L.D.O."s account has not been debited the amount of the cheque. This is because this happens at the bank level and not at the clearing system level. In the ordinary course of events, the cheque would come to the attention of the drawee bank within a very few days of being cleared. In this case, for reasons which were not made clear, the cheque remained with RBC until May 22, 1997 when it was forwarded to NBG without any advice as to the customer or the transaction. NBG made certain inquiries but it was not until one day later that it was able to identify the customer and the transaction.

[8]      Unfortunately, L.D.O."s account did not have sufficient funds to cover the cheque. NBG, in contravention of the Rules, put the cheque back into the system as an NSF cheque. It now worked its way back through the system and all the previous entries were reversed. At the end of that clearing day, the state of accounts between the parties was as follows:

1-      RBC credited the NBG"s clearing account $50,000

2-      RBC"s settlement account with the Bank of Canada was credited $50,000

3-      BMO"s settlement account with the Bank of Canada was debited $50,000

[9]      When the cheque returned to BMO"s branch, it debited R.C.L."s account the $50,000 which it had previously been credited. Predictably enough, this last transaction caused something of a commotion, and as a result, a complaint was made about the NBG to the CPA. The basis of the complaint was that NBG had put an NSF cheque back into the system more than one day after the cheque came to the attention of a bank officer having authority to deal with the cheque, contrary to s.5 of Rule A4 of the Clearing Rules.

[10]      The clearing and settlement systems are not intended to accommodate adjudication of disputes about the validity of transactions. They are meant to provide for rapid and accurate accounting and settlement between banks. However, it is obvious that some of the items put through the system will not be honoured due to lack of funds or other reasons. Rule A4(5) provides that such items can only be returned through the clearing system no later than "the business day following receipt by the first organizational unit of the drawee that is able to make or act upon a decision to dishonour an item" ("the one day rule"). The rationale for this rule was not the subject of evidence or comment by counsel but presumably it is intended to put parties back in their original positions as soon as possible, so that the damage from detrimental reliance on the NSF cheque is minimized. But when timeliness, as defined by the one day rule, is not possible, then the NSF cheque is to be handled on a bank to bank basis rather than through the clearing system. Bank to bank clearing and settlement requires each bank to justify the adjustments it seeks. But if an item is put back through the system, the adjustments are made automatically. By putting the NSF cheque back through the system NBG balanced its clearing account at BMO"s expense.

[11]      The Act allows the CPA to make bylaws governing the operation of the clearing and settlement system.

18. (1) The Board may make by-laws

18. (1) Le conseil peut prendre des règlements administratifs portant sur :

...

...

(c) for the administration and management of the business of the Association;

c) la conduite des affaires de l"Association;

(d) respecting clearing arrangements and related matters;

d) les accords de compensation entre les membres et questions connexes;

(e) respecting settlements and related matters;

e) les paiements et questions connexes;

...

...

(g) establishing penalties to be paid by members for failure to comply with the by-laws and rules; and

g) les amendes exigibles des membres en cas d"infraction aux règles et aux règlements administratifs;

Bylaw No. 3 is the clearing bylaw. The provisions which are relevant to this dispute are the following:

     ITEMS ACCEPTABLE FOR CLEARING

14.01 General - Only those payment items specified in the Rules may be exchanged through the clearing. Payment items exchanged through the clearing shall be payable on demand or otherwise conform to the Rules as to value date, be drawn on or payable through a Member, be endorsed or guaranteed as specified in section 15.02 and in the Rules, be of a class specified in accordance with section 14.02 and otherwise conform with the requirements of the Rules.

     EFFETS ACCEPTABLES POUR FINS

     DE COMPENSATION

14.01 Généralités -_ Seuls les effets de paiements indiqués dans les Règles peuvent s"échanger par l"intermédiaire de la compensation. Les effets de paiement qui s"échangent par voie de compensation seront payables à vue ou se conformeront, en ce qui concerne la date de valeur, aux modalités prévues dans les Règles; ils seront tirés sur un membre ou payables par l"intermédiaire de celui-ci, endossés ou garantis comme le stipulent les Règles et l"article 15.02 du présent Règlement; ils appartiendront à l"une des catégories d"effets de paiement décrites à l"article 14.02 et seront conformes aux exigences établies dans les Règles.

     RETURN OF ITEMS

19.01 - Return of Items. Through the Clearing - Payment items received through the clearing may be returned for the reasons set out in the Rules. Members returning, through the clearing, items received through the clearing, shall do so only in the manner set out in the Rules.

     RETOUR DES EFFETS

19.01 - Retour des effets par la compensation - Les membres qui retournent par l"intermédiaire de la compensation des effets reçus par l"intermédiaire de la compensation le feront de la manière établie dans les Règles.

Rule A4 deals with Returned and Redirected Items.

Introduction      1.      (a)      This Rule outlines procedures, timeframes and responsibilities whenever an Item is exchanged through the Clearing for payment and payment is refused or cannot be obtained, and where the Drawee returns or redirects the item through the Clearing..

(b)      Nothing in this rule precludes a Drawee or a Negotiating Institution from exercising its rights and seeking recourse outside of the Clearing. Before taking such actions, however, it is recommenced that consideration be given to exercising any options available under Rule A6 or Rule A9.

     ...

Reason for return      4.      Subject to the following exceptions, an Item may be returned through the Clearing by the Drawee if, for any reason, the Item cannot be paid:

     Difference in Words

and Figures          (a)      No Item shall be returned for the reason that the "words and figures differ" where the difference is less than ten dollars ($10); and

Certification before      (b)      A Drawee may not return an Item that it certified before the Item was introduced into the Clearing, unless the Item is returned for the reason that an endorsement is forged, missing or incomplete or for the reason that the Item has been materially altered subsequent to certification.

Time Limitation      5.      Subject to section 6, each Item being returned through the Clearing shall

for Return           be returned by the Drawee no later than the business day following receipt by the first organizational unit of the Drawee that is able to make or act upon a decision to dishonour an item.

Exceptions      6.      Notwithstanding section 5, the following exceptions to the time limitation for returning an Item apply:

Forged Endorsement      (a)      There is no time limitation if an Item is being returned through the Clearing for the reason "Forged Endorsement". However, where a Returned item contains both a "forged signature" and a "forged endorsement", the Item shall be returned in accordance with section 5;

Items Certified          (b)      There is no time limitation if the Drawee certifies the Item for

for Return              The purpose of return after receiving it through the Clearing.

Post-Dated Items          (c)      An item may be returned for the reason "post-dated" up to an including the day prior to the due date; and

Duplicate Payment      (d)      Where both an original and a photocopy have been paid, the second Item paid shall be returned, for the reason "Payment Stopped", together with supporting explanation for the return.

Claims against      9.      Where the Negotiating Institution considers that the Drawee did not return

Drawee              an item in accordance with sections 5 or 6, it may declare the Item to be in dispute pursuant to Rule A6 and require the Drawee to reimburse it for:

(a)      the amount of the Item; and

(b)      the interest on the Item pursuant to Rule J10.

    

A framework for dealing with disputes arising out of the operation of the system is provided for in Rule A6.

     ITEMS IN DISPUTE

Introduction      1. This Rule outlines the procedures by which a Negotiating Institution may place an Item in dispute, and the means by which the dispute can be resolved.

Definitions      2. In this Rule,

         [omitted]

Scope          3. The procedures set out in this Rule shall:

(a) Apply to each Member, Eligible Non-Member and any other Drawee; and

(b) not apply to Shared Electronic Point-of-Service Payment Items Rule E1 ), or EDI Payment Items (Rule E3 ), or electronic Remittances (Rule H6).

Notice          4. A Negotiating Institution that disputes a Returned Item shall give notice in writing to the Drawee Branch within 60 days following receipt of the Returned Item by the Branch that originally received the Item on negotiation or deposit. The notice shall state the reason for the dispute.

Item in          5. The Item in Dispute shall not be cleared back to the Drawee Branch but shall be held

Suspense      by the Negotiating Institution pending resolution of the dispute.

Acknowledgment      6. The Drawee Branch shall acknowledge in writing the notice of dispute within ten

         Business Days following its receipt.

Failure to      7. Where the dispute cannot be resolved at the local level it should be escalated to

Resolve          the appropriate authority within the Institution.

NCC          8. Where the dispute cannot be resolved at the level referred to in section 7, the dispute

Representative      may be referred to the respective parties" representatives on the CPA National Clearings

         Committee (NCC).

Dispute          9. Where the dispute cannot be resolved at the level referred to in section 8, it may be

Resolution      referred to a dispute resolution panel of representatives from member institutions for a

Panel          determination of whether the CPA Act, by-laws and rules have been correctly followed. The process outlined in Rule A9 applies as applicable and, the parties shall be bound by the decision of the dispute resolution panel but shall have recourse through Arbitration or the courts.

Arbitration      10. Where the foregoing procedures do not resolve the dispute, after 60 days of the

         notice of dispute the parties may proceed to Arbitration pursuant to Rule A9.

Interest          11. A claim for loss of interest on float shall be calculated pursuant to Rule J10, except that

         interest shall be calculated from the date of the notice of dispute.

[12]      When BMO realized what had happened with respect to the R.C.L. transaction it complained to the CPA which struck a compliance panel to adjudicate the dispute. The panel ruled that NBG had breached the rules and ordered NBG to make restitution to BMO in the amount of $50,000.

In conclusion, the Panel finds that NBG has breached CPA Rules by returning cheque #316 through the clearings, contrary to section 5 of Rule A4. Pursuant to paragraph 8(2)(b) of Rule A11, the Panel orders NBG to make restitution to BMO in the amount of $50,000.00 (the value of cheque #316) plus interest. Interest costs are to be calculated in accordance with Rule J10 as of the date BMO placed the item in dispute (apparently May 26, 1997) until the date restitution is made.

[13]      NBG seeks to set aside the compliance panel"s decision on the ground that BMO either had recourse to its customer, in which case it suffered no loss or it proposes to credit its customer with the amount of the transaction as a goodwill gesture, in which case it is simply acting as a collection agent for its customer. In either case, according to NBG, BMO is advancing a claim which its client ought to be pursuing in the courts.

[14]      It is clear that clearing and settlement rules and bylaws do not create rights and obligations on the part of banks to their customers². Any rights and remedies created by the rules are between banks and the CPA.

[15]      The compliance panel purported to order NBG to pay $50,000 to BMO by reason of its failure to comply with the Rules. The non-compliance is said to be the putting of the dishonoured cheque into the clearing system more than one day after it was received by an officer of the NBG with the authority to deal with the transaction. Since the cheque in question was in limbo somewhere within RBC for several weeks, it is clear that one more day did not materially affect the circumstances in which BMO and NBG found themselves with respect to their customers. The difficulty, however, is NBG"s use of the clearing systems to return the item rather than dealing directly with BMO.

[16]      I find that the compliance panel"s decision should not be disturbed. The panel was fully justified in finding that NBG was in breach of the Rules.

[17]      The real issue is the order for restitution. The panel purported to apply a common sense, non-legal use of the phrase.

Section 8 of Rule A11 outlines the sanctions that a Compliance Panel may impose in the event it is determined that a CPA member has not complied with the Rules. The Panel acknowledges that the only available monetary sanction is set out in paragraph 8(2)(d) of Rule A11, which authorizes the Panel to impose "an order requiring the making of restitution to any Member that has suffered a loss as a result of the acts or omissions of a Member under the jurisdiction of the CPA".

With respect to the use of the word "restitution" in paragraph 8(2)(b), it is the view of this Panel that the term is used in its ordinary sense (i.e., as a measure of damages, compensation) and not in the sense of strict legal principles embodies in "the law of restitution". This interpretation is supported by the language of the Rule (i.e., "an order requiring the making of restitution").

...

In conclusion, the Panel finds that NBG has breached CPA Rules by returning cheque #316 through the clearings, contrary to section 5 of Rule A4. Pursuant to paragraph 8(2)(b) of Rule A11, the Panel orders NBG to make restitution to BMO in the amount of $50,000.00 (the value of cheque #316) plus interest. Interest costs are to be calculated in accordance with Rule J10 as of the date BMO placed the item in dispute (apparently May 26, 1997) until the date restitution is made.

     Section 8 of Rule A11 reads as follows:

8. (1)      Where the General Manager or the Compliance Panel determines that a Member of the CPA has contravened or not complied with the CPA Act;, by-laws or rules, the General Manager or the Compliance Panel may impose any one or more of the sanctions described in subsection (2) against the Member.

(2)      The sanctions that may be imposed pursuant to subsection (1) are:

(a)      a cease and desist order;

(b)      a reprimand;

(c)      take whatever actions that may be necessary to effect the removal of a member from the Board of Directors or any committee of the Board;

(d)      an order requiring the making of restitution to any Member that has suffered a loss as a result of the acts or omissions of a Member under the jurisdiction of the CPA;

(e)      in addition to any action that may be taken by the Board pursuant to paragraph 12.02 of By-law No. 1, a Member that fails to pay any dues or fees on the day on which such dues or fees are payable shall pay a penalty, calculated in accordance with a resolution of the Board, which penalty shall not exceed one-eighth of one per cen t of the amount payable for each day that the payment is overdue (s. 2 of CPA By-law No. 5);

(f)      a notice to the Member that such of its membership rights in the Association as specified in the notice may be suspended after 30 days from the time the notice was given unless the failure is rectified within such 30-day period (s. 12.01 of CPA By-law No. 1); or

(g)      suspend any right of a Member arising out of the CPA Act, by-laws or rules, or the imposition of any terms and conditions on the retention of any such right, subject to subsection (f) above.

The obvious intent of the use of the word restitution in this context is to put a bank which has been financially disadvantaged by another bank"s non-compliance in the same position in which it would have been, had the first bank complied with the Rules. It ensures that members do not profit from non-compliance with the Rules.

[18]      NBG says that an order for restitution should not be made because BMO will simply credit the funds to its client. BMO could not realistically claim the funds for itself when it"s customer has been debited $50,000.00. It has no loss, the customer does. The result is that BMO is simply using the compliance system to collect money for its customer.

[19]      There is much merit to the argument that the clearing and settlement system is not a proper forum for adjudicating disputes which are fundamentally disputes between banks" customers. A bounced cheque is not a problem between banks: it is a problem between bank customers who have their own remedies. Members should not be allowed to use the CPA system to give customers access to a collection process which would not otherwise be available to them. The difficulty with this argument is that it does not take into account self-serving behaviour. It does lie in the mouth of a bank to misuse the system to avoid a loss, and then to argue that the rules are not intended to deprive it of the profit of its non-complying behaviour. In my view, a member who gains an unfair advantage by its breach of the rules should be required to disgorge that advantage without requiring another bank to elect whether it would stand on its strict legal rights with its customer or absorb the loss itself.

[20]      For these reasons, NBG"s application is dismissed with costs to be assessed.

     O R D E R

     The applicant"s application is dismissed with costs to be assessed.

     "J. D. Denis Pelletier"

     Judge

__________________

¹      This is strictly a function of the volume of business which a bank does.

²      National Slag v. CIBC et al. (1985), 19 D.L.R. (4d) 383 (Ont. C.A.).