Endorsement Suit

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The following small claims court case was initiated by a senior who was victimized by telemarketing fraud. She is going after the bank which she feels did not properly monitor the endorsement process while handling her bank drafts which were cashed by the telemarketers.

An additional case is presented on another page.


APPENDIX "A"

Superior Court

(Toronto Small Claims Court)

B E T W E E N:

ELSA HORVATH

Plaintiff

- and -

BANK OF MONTREAL

Defendant

C L A I M

The Plaintiff claims against the Defendant:

A declaration that the Defendant are obligated to indemnify the plaintiff in respect of a loss, more particularly described herein;

Rescission of any contract between the Horvath and the Defendant and repayment of her monies remitted in relation thereto;

In the alternative, damages against the Defendant for breach of contract, breach of collateral contract, negligence, breach of fiduciary duty, breach of statute, and negligent misrepresentation in the amount of $6,000;

Further, or in the alternative, exemplary damages against the Defendant for breach of fiduciary duty, negligence, breach of contract, breach of collateral contract, and breach of statute in the amount of $6,000;

Interest pursuant to the Courts of Justice Act, R.S.O. 1990, c. c.43 and amendments thereto

Costs of her action on a solicitor-client scale plus Federal Goods and Services Tax;

Such further and other relief as to this Honourable Court may deem just.

THE PARTIES

The plaintiff Elsa Horvath ("Horvath") is a senior citizen, in the Province of Ontario.

Bank of Montreal ("BOM") is a Bank registered pursuant to the Laws of Canada with offices at 100 King Street West, 1st Canadian Place, 2nd floor, Toronto, Ontario, M5X 1A3, fax number 867-7191. At all material times, the plaintiff was a customer of BOM.

THE SALE OF BANK DRAFT SERVICES

For many years, BOM developed and provided to the public a method of transferring money from one party to another party through is commonly referred to as "bank drafts" ("Bank Draft Services.")

Bank drafts sold by BOM require the purchaser pay a fee for BOM’s service. In addition, BOM profited by lending out to borrowers the cash paid by the purchaser until such time that the payee of the bank draft managed to encash the draft.

BOM sold its Bank Draft Services to the plaintiff on the basis that only the payee would be able to receive the monies entrusted by the plaintiff.

BOM developed and marketed its Bank Draft Services with the intention of increasing sales and improving its profitability.

In soliciting the plaintiff to use bank drafts, BOM made representation ("Representation") which were designed to solicit the plaintiff and thus induce the plaintiff to use its Bank Draft Services.

At material times, BOM represented that only the proper payee would be able to encash the draft and at all times thereafter, BOM’s Bank Draft Services would provide a trustworthy method of transmitting the plaintiff’s funds to a proper corporate citizen.

The Representations were made to solicit plaintiff with the intention that such Representations are relied upon. In fact the Representations were relied upon and did induce the plaintiff to purchase BOM’s bank drafts.

BOM knew that bank drafts were a favorite tool of fraudulent telemarketing operators. The Defendant had a duty and failed in its duty to properly train its staff with respect to handling suspicious bank drafts. Only a small minority of the Defendant’ staff actually understood how fraudulent telemarketers were using bank drafts. Hence, at the time of contracting, and at material times, BOM’s staff was unable to explain and identify the misuse of bank drafts by fraudulent telemarketers. In addition:

The systems in use at BOM lacked sufficient controls to prevent staff from seizing suspicious bank draft activities.

BOM had a duty and failed in its duty to require its staff to explain to the plaintiff how bank draft endorsements worked and that the plaintiff’s monies could be paid out to a party whose name differed from that of the payee.

Although it was an implied term of the contract that BOM would check the endorsement for validity, it in fact did not do so.

BOM’s failure to warn the plaintiff of the possibility of the Bank Draft Services system allowing payments to unauthorized parties and fraudulent telemarketers were a consequence of BOM’s ignoring of concerns voiced by its own security staff and managers, to the detriment of the plaintiff.

Some of BOM’s tellers and sales staff were not fully aware of the loopholes in the bank draft system and thus could not adequately warn the plaintiff about the potential loss of the her monies.

In 1997, the plaintiff contracted with BOM to deliver her funds with the amounts of:

$3,434 to Lighthouse Direct International via a bank draft;

$800 to "L.D.I. 2340" via a money order;

$900 to "S.M.S." via a money order

At the time the plaintiff purchased the bank drafts/money orders, she had an expectation that the Defendant, the encashing institutions, and the integrity of the cheque-clearing system would protect her funds from being encashed by unauthorized parties.

The plaintiff’s bank drafts/money orders named one payee as "Lighthouse Direct International." However, the Defendant delivered the plaintiff’s funds to "L.D.I.", an unauthorized party. L.D.I. has no colour of right to the plaintiff’s money.

L.D.I. is not the registered user of the particular business name of "Lighthouse Direct International." Drafts encashed by L.D.I. were forgeries within the meaning of the Bills of Exchange Act.

Valid endorsement(s) by the encashing party were missing from encashed bank draft(s)/money order(s) that are the subject of her proceeding.

The endorsements by the encashing party consist of numbers, which do not match the payee’s name(s).

At all material times, the plaintiff was not in a position to detect the invalid endorsement(s) or seek redress from the encashing parties, who were known only to the Defendant.

Due to the fact that bank drafts were not returned to the plaintiff, She was in no position to be able to detect the fraud nor seek immediate redress from BOM from the unauthorized payment(s) made to the encashing parties.

The plaintiff states and the fact is that BOM acted without authority by making payment of the invalidly-endorsed draft(s)/money order(s) from the plaintiff’s funds held in trust by BOM.

In the alternative, the plaintiff states and the fact is that BOM was negligent in having withdrawn funds from the plaintiff’s trust monies without making inquiries of the encashing parties’ endorsement(s), which were invalid.

In the circumstances, BOM had specific knowledge that the Horvath was elderly and the bank draft(s)/money order(s) purchased would unreasonably reduce her bank account.

The Defendant, member of the Canadian Payments Association ("CPA") is required to follow the CPA’s rules and by-laws.

The plaintiff pleads that CPA rules prevail over common law: Bank of Nova Scotia v Toronto Dominion Bank [2000] O.J. No. 1829 Court File No. 99-CV-169831SR Ontario Superior Court of Justice the Honourable Cameron J. releasedMay 26, 2000.

The endorsements on the draft(s)/money order(s) that are the subject of this proceeding do not meet the requirements of the Canadian Payments Association of which the Defendant is member. In particular, the CPA’s by-laws define "endorsement" as "a signature."

The plaintiff pleads that the markings by the encashing party do not constitute "a signature" under the CPA’s by-laws, and in particular, that these markings differ from the stated payee(s) on the draft(s)/money order(s).

The Defendant knew, or ought to have known, that L.D.I. had no rights to the name, "Lighthouse Direct International," and thus should have returned the plaintiff’s bank draft(s)/money order(s) to the encashing institution.

The plaintiff issued written Notice(s) to the Defendant.

The plaintiff inquired with the Defendant as to the particulars of the encashing institution and the recipient of her funds.

However, the Defendant did not respond to the plaintiff’s inquiries or provided incomplete responses.

The plaintiff was not in a position to acquire the reference books necessary to decipher the endorsement and cheque clearing and transit marking codes on her bank drafts/money orders. However, the Defendant has the knowledge to translate these endorsement codes and markings.

The Defendant is a member of the Canadian Payments Association ("CPA") and subscribes to the CPA’s by-laws. The Defendant breached the CPA’s by-law with respect to the requirement for the presence of the payee’s recipient’s signature constituting a proper endorsement for encashment.

DUTY OF CARE:

The plaintiff pleads that at the time BOM made the representations:

The Representations were made by BOM in order to induce the plaintiff to purchase BOM’s Bank Draft Services.

BOM knew or ought to have known that the plaintiff, being an unsophisticated consumer and a person not possessed with technical knowledge concerning the operation of bank drafts would rely upon the reputation, integrity, and soundness of the banking system in her decision to purchase bank drafts.

The Representations did in fact induce the plaintiff to purchase BOM’s Bank Draft Services.

For the following reasons the plaintiff pleads that BOM owed to the plaintiff the following duties of care (the "Duties of Care"):

To ensure that the Representations were accurate.

Not to make negligent or false Representations.

To disclose to the plaintiff any of the material negative facts or drawbacks to its Bank Draft Services including the possibility that the funds may be encashed by a party whose name differed from that of the payee.

To disclose to the plaintiff the problems other telemarketing victims have had with bank drafts.

To disclose to the plaintiff the fact that its bank draft system has been the primary route for $100M going annually to fraudulent Montreal telemarketers.

To provide sufficient warning to the plaintiff when circumstances allow parties to encash payments through the use of forged or unauthorized endorsements.

To adequately train its tellers and sales staff with respect to the marketing of its Bank Draft Services and to supervise the conduct of its sales staff in selling its services.

To ensure that in the written and oral presentations, material facts effecting the risk, advantages and disadvantages of its Bank Draft Services were not omitted or concealed.

To act with reasonable care in the preparation of staff training manuals and in the formation of the training program used to deal with elderly customers who purchase bank drafts and money orders.

To ensure that the training materials provided to its branches for distribution to potential new sales staff was not deceptive and would provide the plaintiff with correct information to make any informed decision.

FIDUCIARY DUTIES:

The plaintiff Further, pleads that BOM was fiduciaries of the plaintiff and in addition to the Duties of Care as fiduciaries owed to the plaintiff the following fiduciary duties ("Fiduciary Duties"):

To act in good faith and in the best interest of the plaintiff.

To ensure that the Bank Draft Services sold to the plaintiff were in the best interest of the plaintiff.

To ensure that the audit/review of endorsements for validity were in the best interest of the plaintiff.

REPRESENTATIONS ARE IMPLIED TERMS OF THE CONTRACT AND
ARE A COLLATERAL AGREEMENT WITH THE PLAINTIFF:

The plaintiff Further, pleads that the Representations, having been made by the BOM to induce the plaintiff to purchase bank drafts and having so induced the plaintiff to purchase bank drafts, constitute implied terms of the Bank Draft Services entered into between the plaintiff and BOM and constitute a collateral agreement between BOM and the plaintiff when the plaintiff purchased the bank drafts that are the subject of her proceeding.

MISREPRESENTATIONS

The plaintiff alleges that BOM’s Representations with respect to its Bank Draft Services were false. The BOM’s actual audit of endorsements were inconsistent with or contrary to BOM’s Representations and were inconsistent with its duties under to the Canadian Payments Association.

The plaintiff alleges that BOM knew or ought to have known that its Bank Draft Services would not always insure payment to a proper payee.

The plaintiff pleads that the Representations by BOM was made negligently and in breach of the Duties of Care and Fiduciary Duties and in breach of the implied terms of the contract and the collateral agreement and the following are the particulars of the misrepresentation ("Misrepresentations") known to the plaintiff:

BOM failed to disclose or concealed the fact that Montreal telemarketers in defrauding seniors f requently used its Bank Draft Services.

BOM failed to disclose or concealed the magnitude of the laxity existent within the banking system, which allowed fraudulent Montreal telemarketers to use the Bank Draft Services.

BOM knew or ought to have known (and concealed such knowledge) that BOM would not challenge invalid/forged endorsements until such time that fraudulent telemarketers would be long gone and the encashing account closed.

BOM knew or ought to have known (and concealed such knowledge) that the safety and security of its Bank Draft Services were inconsistent or contrary to the plaintiff’s expectations.

BOM failed to bring to the attention of the plaintiff, or concealed, the material terms of how bank drafts are negotiated between banks and the liabilities of BOM with respect to the time limits of challenging invalid endorsements.

BOM failed to disclose that they were warned by police authorities and its own internal security staff to screen purchases of its Bank Draft Services to elderly customers, but did not, for fear of reducing its sales to competitors.

BOM concealed from the plaintiff that its bank drafts could be encashed by a party that was not a proper payee named in the draft and that such methods were often used by Montreal telemarketers to defraud the elderly.

The plaintiff pleads that BOM was aware or ought to have been aware of the Misrepresentations at the time they were made. In the alternative if BOM and its employees were not so aware, (which is denied) BOM was in further, breach of its Duties of Care in failing to adequately train its sales staff and to disclose to its sales staff and employees the fact that the Representations being made by them were Misrepresentations.

The plaintiff pleads that BOM’s Representations were made with reckless abandon as to be fraudulent. In particular, BOM did not hold an honest belief in the purported security of audits on endorsements.

The Plaintiff further, pleads that the Misrepresentations constitute a false, misleading and deceptive consumer representation within the meaning of section 2 of the Business Practices Act R.S.O. 1990 c. D. 18 and plead that as a consequence, the Plaintiff is entitled to the relief as set out below. The Plaintiff pleads and relies upon section 2 and 4 of the Business Practices Act.

The Plaintiff Further, pleads that the misrepresentations constitute a false and/or misleading representation within the meaning of Section 52 (1) and (2) of the Competition Act R.S.C. 1985 c. C-34.

The Plaintiffs further, plead and rely upon Section 52 (4) of the Act. In addition, as a result of the aforesaid breach of the Competition Act, the Plaintiffs seek damages as set out in Section 36(1) of the Competition Act.

In addition and in the alternative, the Plaintiff pleads that the Misrepresentations constitute a false and/or misleading representation within the meaning of Section 74.01 (1) (a), (b) and (c) of the Competition Act.

DAMAGES AND RESCISSION

The Plaintiff pleads that it is entitled to the following relief from BOM arising out of BOM’s breaches of Duty of Care, Fiduciary Duties, implied terms of the contract, collateral agreements and requirements as aforesaid:

The Plaintiff pleads that had She had known the true nature of the Bank Draft Services She would not have purchased it. She does not have the security of the Bank Draft Services that was promised to him. She is entitled to rescission and the return of all monies paid to BOM pursuant to it.

In addition, or in the alternative, the Plaintiff has suffered substantial damages. The Plaintiff therefore claims from BOM damages equivalent to the monies paid under the BOM’s Bank Draft Services.

The Plaintiff alleges that BOM’s Representations used to induce the Plaintiff to enter into the contract formed an essential term of contract which the Defendant BOM has breached.

The Defendant BOM only gave the Plaintiff partial and half-truths, imposing a duty of full disclosure on the Defendant BOM.

The Plaintiff pleads and relies on Negligence Act, R.S.O 1990, c. N.1.

The Plaintiff pleads that the aforesaid conduct of the Defendant BOM, amounts to conduct that is callous, high-handed, intentional, wrongful, outrageous, and shows a wanton disregard to her rights, thereby entitling an award of punitive, exemplary and/or aggravated damages.

The plaintiff entrusted BOM with her monies at all material times.

The Defendant was a trustee of the plaintiff’s funds at all material times.

The plaintiff pleads that BOM has a liability under the doctrine of conversion.

Further, the Defendant had the "last clear chance" to warn the plaintiff, and thus, prevent her loss.

In the alternative, the plaintiff pleads that the Defendant was willfully blind to the activities of Lighthouse Direct International and therefore liable for the plaintiff’s loss.

Further, and in the alternative, the Defendant’ failure to assist the plaintiff with Further, information as to the recipients and encashing institutions prevented the plaintiff from pursuing other avenues of recovery.

The plaintiff’s loss would not have occurred had the Defendant properly trained their clerical and counter staff. The defendant failed to perform or supervise all the necessary tasks required for the opening of new bank accounts, thus allowing notorious Montreal telemarketing boiler-rooms to acquire a means for which to deposit monies from victims. The defendant and/or its contracting parties and agents should have noticed that the encashing party was a new business and that there were discrepancies in the encashing party’s credit bureau report that indicated that something was amiss given the numerous other bank credit checks being conducted, indicating that the encashing party was jumping from bank to bank.

The Defendant has in-house staff and programs designed to prevent telemarketing fraud.

The Defendant are aware of the seriousness of telemarketing fraud in which the Defendant’ facilities are used by boiler-room operators to encash their illegal proceeds.

The Defendant’ knew, or should have known, that their in-house staff and programs dealing wit h telemarketing fraud are inadequate.

The Defendant failed in their duty to the plaintiff:

To ensure that the Defendant’ staff reductions -- which were calculated by the Defendant to increase their profits -- would not result in the loss complained of in her claim.

To ensure that the Defendant’ office procedures, manpower, and staff training would ensure that the draft payment went to the proper recipient.

To provide the plaintiff with the necessary information to pursue her claim against the unauthorized recipients of the plaintiff’s monies.

The plaintiff Further, pleads that the Defendant could have prevented her loss:

Had the Defendant acted quickly to reverse the drafts that the recipient would have been charged back; and,

Had the Defendant disseminated information received from police authorities such as Phonebusters to their staff; and,

Had the Defendant adhered to the CPA’s by-laws; and,

Had the Defendant abided by their ‘know thy customer’ obligations; and,

Had the Defendant taken proper steps when dealing with Quebec companies that encash large quantities of bank drafts from non-Quebec customers; and,

Had the encashing institution taken proper credit checks on the payee(s); and,

Had the Defendant checked payee(s) against police databases.

Telemarketing fraud against the elderly and vulnerable members of society is a practice that has been universally condemned.

The Defendant’ lack of proper training for their staff resulted and continue to result in about $100 million dollars lost annually by elderly victims to fraudulent telemarketers.

The Defendant is in a unique position to serve public Bank Draft Services and prevent telemarketing fraud against the elderly.

The plaintiff asks for exemplary damages to force the Defendant to take steps to restore the integrity of the cheque-clearing system, and in the name of public interest.

The plaintiff is entitled to rescind the contract with the BOM on the grounds that the BOM has violated several unfair practices provisions of the Business Practices Act, R.S.O. 1990, c.27 (the "BPA.") The plaintiff further, relies on the parol evidence abrogation provisions of the BPA.

Further, and in the alternative, the plaintiff pleads that there was no meeting of the minds.


 

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