Part 34 published on 01/05/11
Manager misappropriated funds of condominium corporation. However, corporation’s bank was not liable
The corporation’s manager, RPS, misappropriated approximately $370,000 of the corporation’s funds, for the manager’s own purposes. The Court awarded judgment against RPS for breach of contract, conversion and breach of trust. The Court also awarded judgment against the principal of the management firm (William Garland). The Court held that Mr. Garland was a “constructive trustee”. However, the Court dismissed the corporation’s claim against its bank, the Royal Bank of Canada (RBC).
The bank account in question was opened in the name of the manager, as a trust account. The funds were misappropriated by way of internet banking transfers (not by way of cheques). Even though the amounts involved exceeded the manager’s $100.00 authority for cheque-signing (on the account), the Court held that the bank could have no reason to question the authority for the internet transfers. The Court’s decision included the following:
“RPS had opened current accounts both for its own business and for its clients’ business in its name at RBC. Some of those accounts involved trust funds. There was therefore nothing unusual in the manner in which RPS opened the account from RBC’s prospective or that, even though it was for the plaintiff’s business, it was in RPS’ name and had access to internet banking.”
“Further, there is no evidence that at any time during the operation of the account, RBC had notice of any issues or concerns in respect of its operation or the operation of any other RPS’ bank account that may have given rise to a suspicion by RBC of breach of trust by RPS.”
“There is no evidence that any of the cheques written on the account were not signed in accordance with the signing authority provided to RBC. While there were clearly internet transfers from time to time, no signatures where required to carry them out. From RBC’s viewpoint, the transfers could have been carried out by the (condominium corporation) or by RPS with authority. In the absence of a duty to inquire, RBC has no obligation to monitor the Account.”
[Editorial Notes:
- This case shows the potential danger posed by internet banking. If internet banking is contemplated, authority to access the account must be carefully considered. And there is a further question: Does the manager have exclusive authority to set up the internet banking arrangements in the first place?
- There was no discussion, in the case, of Section 115(2) of the Condominium Act 1998. That section states that a condominium corporation must maintain accounts “in its name”. But does Section 115(1) also permit trust accounts for the corporation (for example, in the name of the corporation’s manager)? This case says that trust accounts (in the manager’s name) are perfectly acceptable. But, again, the Court did not specifically address Section 115(2).
- Fidelity bonding (for persons handling corporation funds) can provide valuable protection against these sorts of losses.
- Misappropriation will of course normally be detected by the corporation’s auditors; but the audits are generally only once a year. Misappropriation “between audits” obviously won’t be detected (until the next audit).]