Introduction

What duties do financial institutions potentially owe to third-party investors when their banking systems are used in an allegedly fraudulent scheme? Why can it be problematic to attempt to add a defendant on the basis of similar, if not the same, facts and claims as asserted against previously named defendants?

The decision of the Alberta Court of Queen’s Bench in Ramias, as Representative Plaintiff v. Jerry Johnson et al. addresses two applications in the context of a proposed class action: (1) an application by a financial institution defendant to strike the claims against it; and (2) an application by the plaintiff to add three financial institutions to the action on the basis of the same claims made against the defendant and other previously named defendants. In determining these applications, the court considered the issue of the duties that financial institutions may owe third-party investors when their clients use their banking systems in a fraudulent scheme.

The two applications were brought pursuant to two different rules of civil procedure — Rules 129 and 132. Each rule imposes a separate legal standard, evidentiary requirement and burden of proof. The defendant’s failure to have the claims against it struck and the plaintiff’s failure to have the financial institutions added are partially attributable to the differences between these two rules.

Facts

This case involved allegations of securities investment fraud against the individual defendant Jerry Johnson. It was alleged that Johnson had solicited and received money from the plaintiff and the proposed class for investment purposes between June 2004 and July 2006, but that Johnson was actually operating a Ponzi-type scheme and had unlawfully converted the funds for his own use. Johnson entered into a settlement agreement with the plaintiff.

The Statement of Claim alleged that Johnson had used the defendant’s (and other named financials institutions’) banking services to carry out his fraudulent investment scheme.

With respect to the defendant and the claim sought to be advanced against the financial institutions by way of amendment to the Statement of Claim, the plaintiff alleged that the pattern of Johnson’s banking activities constituted suspicious circumstances that ought to have led the financial institutions to make reasonable investigations regarding Johnson’s activities, and that such investigations would have disclosed Johnson’s fraudulent scheme and prevented the loss to the plaintiff and the members of the proposed class. The plaintiff also alleged that the financial institutions were negligent, or knowingly assisted or participated in Johnson’s dishonest breach of fiduciary duties on a number of enumerated grounds, including providing banking services to Johnson for compensation and failing to notify authorities of Johnson’s suspicious banking activities in violation of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, SC 2007 c. 17.

With respect to the defendant’s application to strike the claim against it, the test to be met was whether it was "plain and obvious" that the pleadings failed to disclose a cause of action. There were two claims against the defendant: (1) the claim of knowing assistance; and (2) the claim of negligence.

In considering the claim of knowing assistance against the defendant as pled, Martin J. held that the requisite elements had been pled and that it was not plain and obvious that the claim would fail.

Martin J. held that the claim of negligence ought to be considered as two separate claims: one that alleged the defendant’s actual knowledge of Johnson’s fraudulent scheme and one that alleged the defendant ought to have known that Johnson was conducting fraudulent activities. She also held that the claim that a financial institution had actual knowledge of a client’s fraudulent scheme and was thereby potentially negligent was a novel cause of action that is not obviously doomed to fail, as actual knowledge of a client’s fraudulent activities may create a relationship of sufficient proximity to give rise to a duty of care and actual knowledge may also change the policy considerations. As such, the determination of whether a financial institution’s actual knowledge of a customer’s fraudulent scheme was sufficient to warrant a finding of a duty in favour of third parties was left to be determined at trial. Martin J. reached the contrary conclusion with respect to the claim that the defendant ought to have known that Johnson was conducting fraudulent activities, as it is impossible to claim that financial institutions owe a general duty of care to their clients’ third-party investors, and struck that claim.

The plaintiff’s proposed amendment to the Statement of Claim was simply to add the financial institutions on the basis of the allegations in regard to knowing assistance and negligence, as asserted against the defendant and the other defendant financial institutions. As it was the plaintiff’s application, the burden was on the plaintiff to meet the legal test set out in Hunter Financial Group Ltd. v. Maritime Life Assurance Company, 2007 ABQB 263, which requires, inter alia, some evidence to support any new facts of substance alleged.

The claim against the financial institutions based on negligence arising from what the financial institutions ought to have known was not held to disclose a triable issue on the same grounds that led to it being struck out as a claim against the defendant.

An essential element of the remaining proposed claims against the financial Institutions of knowing assistance and the novel claim of negligence was the financial institutions’ actual knowledge of Johnson’s fraudulent activities. On an application to amend a Statement of Claim, the applicant must lead evidence to demonstrate a reasonable cause of action. In this case, the plaintiff was unable to satisfy that requirement, as the evidence presented, even on the lowest evidentiary standard, failed to establish any actual knowledge of the financial institutions. Martin J. refused to add the financial institutions as defendants.

Martin J.’s decision not to add the financial institutions is in contrast to her decision not to strike the same claims against the defendant. The difference in her decisions on essentially the same issue — whether the facts supported the claims against the financial institutions of knowing assistance and negligence — can be partially attributed to the different evidentiary requirements of the two rules pursuant to which the applications were made. In the application to strike the claim, there was an assumption that the facts as pled were true, while in the application to amend the Statement of Claim, the applicant had to lead evidence to demonstrate a reasonable cause of action.

This decision illustrates the importance of identifying all possible defendants prior to the commencement of litigation. Further, this decision reinforces the position that a financial institution does not have a general duty of care to third parties.