International Law

Canadian Freezing Orders When Fraud Occurs

By Rick Rein

On April 2, 2009, the Supreme Court of Canada decided in BMP Global Distribution, Inc. v. Bank of Nova Scotia, 2009 SCC 15 (BMP), the bank is prima facie entitled to recover money paid to a customer by mistake of fact such as a forgery since the account agreement implicitly incorporated common law. The court also determined that the bank could trace the funds through the accounts held by parties related to the customer. Passing through the bank's clearing systems does not break the chain of possession of the funds or eliminate the ability to trace.

This decision is significant because banks are frequently the target of creditors seeking to prevent debtors from dissipating funds which the creditors claim as their own. Court decisions have articulated the importance of a bank complying with valid court orders as soon as it is served.

For instance, in Customs and Excise Comm. v. Barclays Bank PLC, (2006) 4 All E.R. 256,Barclays Bank received by fax two freezing orders and took steps to comply. But, the customers were able to transfer funds out in less than three hours using a "faxpay" system, which allowed withdrawals without reference to a branch. The Court decided that the bank didn't owe a duty to the claimant to stop the fund transfer, but only a duty to the court to comply with the freezing order, along with a duty to its customers under the account agreement.  The bank was not liable because there was no allegation that it willfully ignored or failed to comply with the order.

Moreover, the Bank Act provides that a garnishing order against a bank must be served on the branch where the account is located. In Univar Canada, Ltd. v. PCL Packaging Corp, 2007 BCSC 1605, the B.C. Supreme Court held that even though the account to be garnished was located at a branch outside the jurisdiction, the court could still issue a pre-judgment garnishing order because the bank is located in British Columbia and the location of the account is not determinative of jurisdiction to issue an order.

Hence, a Canadian bank's obligations when served with freezing or garnishing orders are to comply with the order from a court that has jurisdiction over that bank.

Full post as published by International Asset Recovery Law Blog on April 13, 2009 (boomark / email).