Bank of Montreal v. Henry Morgan, [1993] 2 CTC 6

Haines, J.:—The defendant is a lawyer. In 1982 he opened two accounts with the plaintiff bank which he designated as his general and trust accounts. Early in June, 1989 the bank received a requirement to pay” naming the defendant as a tax debtor. Under the provisions of that document the bank was required to remit to the Receiver General any money it was holding for the benefit of Mr. Morgan to a maximum of $90,059.79.

On June 15,1989 and after the bank had received the "requirement to pay", Mr. Morgan presented a cheque drawn on the trust account and payable to himself in the amount of $3,845.69. The bank honoured the cheque and paid Mr. Morgan the money.

Revenue Canada discovered this transaction when it examined the bank's records and took the position in a letter to the bank dated July 18, 1989 that those funds should have been remitted to Revenue Canada. Subsequently Revenue Canada issued a notice of assessment to the bank dated September 1, 1989 requiring payment of $3,845.69 for failure to comply. The bank acceded to the demand and forwarded the funds.

On August 15 and August 25, 1989 Mr. Morgan's wife presented two separate cheques. Both cheques were drawn on the trust account and endorsed by the payee Henry Morgan. Mrs. Morgan added her endorsement, presented the cheques and received cash of $3,486.15. Revenue Canada subsequently served the bank with a further notice of assessment requiring remittance of that amount. The bank sought legal advice and filed a notice of objection. On March 29, 1990 the assessment was confirmed but the bank appealed to the Tax Court of Canada and was recently successful in having that assessment withdrawn.

Following receipt of the confirmation of the second assessment dated March 29, 1990, the bank took the extraordinary step of freezing Mr. Morgan's accounts. It also froze his wife's account and that of a numbered company that had been the subject of an earlier requirement to provide information and documents” issued by Revenue Canada.

It was the evidence of Dennis Carty, the manager of the Bank of Montreal branch where Mr. Morgan had opened these accounts, that the four separate accounts were frozen from April 9, 1990 until April 19, 1990. During that period two cheques were presented on the trust account and returned as "funds not cleared”. The first cheque payable to the treasurer of the village of Bayfield in the amount of $332.20 was date April 9, 1990. The second cheque for $400 was dated April 11,1990 and payable to two of Mr. Morgan's clients. By letter dated April 12, 1990 the solicitor for the Bank of Montreal advised Mr. Morgan of the bank's action, demanded reimbursement of the funds the bank had been required to remit to Revenue Canada and required the payment of funds to cover the second notice of assessment. Mr. Morgan responded with a letter dated April 18, 1990, objecting strenuously to the action taken by the bank, demanding the accounts be "unfrozen" and advising the bank that its failure to do so would result in him taking legal action to assert his rights and recover damages.

By letter dated April 23, 1990 the solicitors for the bank advised Mr. Morgan that the accounts of Mrs. Morgan and the numbered company had been released. In the same letter Mr. Morgan was advised that the bank would no longer honour any cheques drawn on his trust account that were payable to him and that all other transactions on that account would be reviewed by the branch manager before clearance.

The Bank of Montreal seeks repayment of the $3,845.69 it remitted to Revenue Canada as well as pre-judgment interest thereon. Mr. Morgan counterclaims for damages arising out of the bank's refusal to honour the cheques that were presented during the period of time the account was frozen.

Mr. Morgan disputes his liability to Revenue Canada but admits that he has filed no objection or appeal. I am satisfied that as of June, 1989 Mr. Morgan had an outstanding liability to Revenue Canada of $90,059.79.

Claim

The bank's position is straightforward. Mr. Delorey acknowledges that a mistake was made when Mr. Morgan was given the $3,845.69 by one of the tellers but argues that Mr. Morgan has been unjustly enriched in that his clients money has been applied to reduce Mr. Morgan's tax liability. Mr. Morgan agrees that there was a mistake but submits that it was made when the bank acceded to the demand made by Revenue Canada. A mistake which he says is confirmed by the successful appeal of the second notice of assessment. He argues that this was a mistake of law and the bank is not entitled to recover the money it paid out. He relies on the case of Barish and Co. v. The Gap (Rural Municipality No. 39), [1925] 3 D.L.R. 738, [1925] 2 W.W.R. 518 (Sask. C.A.), where the plaintiffs had paid property taxes for which they were not liable under the mistaken belief that they were the registered owners of the land. When the mistake was discovered, they attempted to recover the amount they had paid from both the registered owner and the municipality. They were unsuccessful against the municipality because they had commenced their action for recovery of the money outside the applicable limitation period. The Court also held that the defendant registered owner was not required to reimburse the plaintiffs. In reaching that conclusion the Court relied on the principle that a voluntary payment of another's debt, made without request and under no legal liability or compulsion, gives no claim for the money paid against a person whose debt is discharged. It was found that neither the plaintiffs nor the defendant was originally liable to pay the taxes as the evidence disclosed that the plaintiff was not the owner and the defendant had not been assessed for the property. In disposing of the appeal Haultain, C.J.S. says at page 740 D.L.R. (W.W.R. 520):

In order to charge the defendant with debt for money paid for his use, the plaintiffs must show that, being liable to pay, they have paid money which the defendant was ultimately liable to pay, in consequence of which the defendant has been discharged of his liability. In the present case there was no such liability on the part of either party.

In my view the facts of the case before me clearly meet the test enunciated by the learned Chief Justice. The payment made by the bank was not voluntary. It was made under compulsion of a notice of assessment issued by Revenue Canada to discharge a liability for which Mr. Morgan was ultimately responsible.

The plaintiff is therefore entitled to judgment against the defendant for $3,845.69 together with pre-judgment interest from November 9, 1989 when that amount was remitted to Revenue Canada.

Counterclaim

There is no doubt that an action for damages does lie for wrongful refusal to honour cheques drawn upon an account with sufficient funds to pay them. Such a refusal is a breach of contract that can attract an award of substantial damages even in the absence of proof of special loss. (see Smith et al. v. Commonwealth Trust Co. (1969), 10 D.L.R. (3d) 181, 72 W.W.R. 201 (B.C.S.C.) at pages 187-88 (W.W.R. 208-09)). Mr. Morgan admits that he proved no special damage but submits that he is still entitled to substantial damages for embarrassment and damage to reputation that would necessarily follow from the bank's wrongful refusal to honour cheques drawn against his trust account.

Although the bank was obliged to honour cheques properly presented, it was, in my view, forced to take the extraordinary action it did in order to protect itself from incurring additional liability as a result of the manner in which Mr. Morgan was conducting his business. Although the conduct of the bank in returning the two cheques in question may constitute a technical breach of its contract with the defendant, I am not satisfied on the evidence before me that Mr. Morgan has made out any case for damages resulting from injury to his reputation or credit. Under the circumstances he is entitled to nominal damages only which I fix at one dollar. It follows that I am satisfied that there are no circumstances in this case that would warrant an award of punitive damages.

There will be judgment accordingly. I would be pleased to hear submissions on costs and the appropriate rate for pre-judgment interest on a date convenient to the parties to be arranged through the office of the trial co-ordinator.

Action allowed.