But I spent the money already!
Posted in Banking, Fraud

There is a card in Monopoly that reads “Bank error in your favour” and which entitles you to keep the $200 wrongly credited to your account.   Banks can make errors.  Banks are also frequently the victims of fraud.  The result of this is often that a lucky customer’s account suddenly has a much larger balance.  However, unlike Monopoly, when this occurs, the bank will do all it can to recover those funds.  The account holder deals with those bonus funds at his or her peril.

The B.C. case of Royal Bank of Canada v. B.M.P. Global Distribution, 2011 BCSC 458 provides a recent example of just such a situation.  It is also the end (almost) of a dispute that began almost ten years ago and which has been up to the Supreme Court of Canada once already.  Mr. Hashka and Mr. Backman, the principals of B.M.P. Global, received a cheque for $776,000 which they maintained was payment for certain distribution rights (for a product they had no right to).  They deposited the funds into BMP’s account.  After the bank’s hold on the account was lifted, they immediately transferred most of the funds to other bank accounts.  Eventually, it was determined that the cheque was counterfeit.  The drawee bank tried to reverse the deposit.  A large amount of the subject funds were frozen in the secondary accounts but a considerable amount had already been spent by Messrs. Hashka and Backman retiring pre- existing personal and corporate debts.  There was no evidence these gentlemen knew of the fraud.  They claimed entitlement to the funds, despite the fraud, on the grounds that they had changed their position in good faith reliance on the bona fides of the cheque and their bank’s release of the hold on the B.M.P. Global account.

In seeking to recover the funds, the drawee bank relied, among other things, on the doctrine of mistake of fact.  It was on this ground that the Court granted the bank judgment for the spent funds.  Where a paying party makes a payment under a mistake of fact (the cheque was real) which causes that party to make a payment (the drawee bank credits the depositing customer’s account), then the paying party (the drawee bank) is entitled to recover the money paid unless:

  • the payer intended the payee to have the money at all events, whether the fact be true or false(whether the cheque was counterfeit or not), or is deemed in law to do so;
  • the payment is made for good consideration, such as where the money is paid to discharge and does discharge a debt owed to the payee by the payer or by a third party by who he is authorized to discharge the debt; or
  • the payee has changed his position in good faith, or is deemed in law to have done so.

The Court found that the pre-existing debts that had been paid with the counterfeit cheque funds existed independent of the receipt of those funds.  The debts were not incurred in reliance on the receipt of those funds.  As a result, they had to be paid back.  In what might be taken as a skeptical view of the good faith of Messrs. Hashka and Backman, the Court went on to find that in any event they had spent these funds in circumstances where they could not have had a “legitimate expectation” of entitlement to the subject funds.  In short, their explanation of the underlying facts was not sufficiently credible.

So, if your account balance rockets skyward because of a “bank error”, think twice before you go ahead and spend any of that money.  If you do, you will likely be liable to pay it back when the error is discovered.


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