Citadel General Assurance Co. v. Lloyds Bank Canada

Citadel General Assurance Co. v. Lloyds Bank Canada
Collection
Supreme Court Judgments
Date
1997-10-30
Report
[1997] 3 SCR 805
Case number
25189
Judges
La Forest, Gérard V.; Sopinka, John; Gonthier, Charles Doherty; Cory, Peter deCarteret; McLachlin, Beverley; Iacobucci, Frank; Major, John C.
On appeal from
Alberta
Subjects
Trust
Notes
SCC Case Information: 25189
Decision Content
Citadel General Assurance Co. v. Lloyds Bank Canada, [1997] 3 S.C.R. 805
The Citadel General Assurance Company and
the Citadel Life Assurance Company Appellants
v.
Lloyds Bank Canada and Hongkong Bank of Canada Respondents
Indexed as: Citadel General Assurance Co. v. Lloyds Bank Canada
File No.: 25189.
1997: May 20; 1997: October 30.
Present: La Forest, Sopinka, Gonthier, Cory, McLachlin, Iacobucci and Major JJ.
on appeal from the court of appeal for alberta
Trusts and trustees ‑‑ Breach of trust ‑‑ Liability of strangers to trust ‑‑ Knowing assistance ‑‑ Knowing receipt ‑‑ Insurance agent depositing premiums collected on insurer’s behalf into bank account ‑‑ Bank transferring funds to account of insurance agent’s parent company to reduce overdraft ‑‑ Whether bank liable for breach of trust on basis of knowing assistance or knowing receipt.
D sold insurance to auto dealers. After collecting the premiums, D paid commissions and settled any current claims under the policies. The balance of the premiums was remitted on a monthly basis to the appellant insurance companies, the underwriters of the policies. In December 1986, D and its parent company started banking with the respondents (the “bank”). D used one bank account for all its transactions. Through its senior officers, the bank was aware that insurance premiums were being deposited into that account. In May 1987, a “trip report” by one of the appellants’ employees indicated that D was reluctant to establish a trust account for the premiums but would do so if necessary. From June 1, D no longer settled claims under the insurance policies, with the result that the monthly premiums payable to the appellants increased significantly. In June the bank received instructions from the parent company’s signing officers, who were identical to D’s signing officers, to transfer all funds in D’s account to the parent company’s account at the end of each business day. In July and August, the transfer of funds between the accounts resulted in an overall reduction in the parent company’s overdraft. In late August D advised the appellants that the July and August premiums could not be remitted. It agreed to pay these outstanding receipts by way of promissory note. After D and its parent company ceased carrying on business, the appellants brought an action against the bank for the outstanding insurance premiums. They were successful at trial and judgment was entered against the bank. The Court of Appeal allowed the bank’s appeal and dismissed the appellants’ claim.
Held: The appeal should be allowed.
Per La Forest, Gonthier, Cory, McLachlin, Iacobucci and Major JJ.: The relationship between the appellant insurers and D was clearly one of trust. Under s. 124(1) of the Alberta Insurance Act, an agent who receives any money as a premium for an insurance contract from the insured is deemed to hold the premium in trust for the insurer. The promissory note was merely confirmation of the amount owed by D to the appellants and did not amount to a revocation of the trust. As well, the arrangement between them meets the three characteristics of a trust, namely certainty of intent, certainty of subject‑matter, and certainty of object. The fact that the trust funds in D’s account were commingled with other funds does not undermine the relationship of trust between the parties. Also, D’s actions in failing to remit to the appellants the insurance premiums collected on their behalf in July and August 1987 were clearly in breach of trust. Moreover, the appellants did not acquiesce in the breach of trust by asking for and receiving the promissory note from D.
There are three ways in which a stranger to a trust can be held liable as a constructive trustee for breach of trust: as a trustee de son tort; for “knowing assistance”; and for “knowing receipt”. The first type of liability is inapplicable to the present case since the bank never assumed the office or function of trustee. A stranger to a trust can be liable for breach of trust by knowingly assisting in a fraudulent and dishonest design on the part of the trustees. Assuming the present case falls under this “knowing assistance” category, it is clear that only actual knowledge, recklessness, or wilful blindness will render the bank liable for participating in the breach of trust. Since the bank had only constructive knowledge, it cannot be liable under the “knowing assistance” category of constructive trusteeship.
Liability on the basis of “knowing receipt” requires that strangers to the trust receive or apply trust property for their own use and benefit. By applying the deposit of insurance premiums as a set‑off against the parent company’s overdraft, the bank received a benefit and thus received the trust funds for its own use and benefit. The bank cannot avoid the “property” issue by characterizing the deposit of trust monies in D’s account as a debt obligation. A debt obligation is a chose in action and, therefore, property over which one can impose a trust. The receipt requirement in “knowing receipt” cases is best characterized in restitutionary terms. In this case the bank has been enriched at the appellants’ expense and thus, in restitutionary terms, there can be no doubt that the bank received trust property for its own use and benefit.
The second requirement for establishing liability on the basis of “knowing receipt” relates to the degree of knowledge required of the bank in relation to the breach of trust. While constructive knowledge is excluded as the basis for liability in “knowing assistance” cases, in “knowing receipt” cases, which are concerned with the receipt of trust property for one’s own benefit, there should be a lower threshold of knowledge required of the stranger to the trust. More is expected of the recipient, who, unlike the accessory, is necessarily enriched at the plaintiff’s expense. Because the recipient is held to this higher standard, constructive knowledge (that is, knowledge of facts sufficient to put a reasonable person on notice or inquiry) will suffice as the basis for restitutionary liability. This lower threshold of knowledge is sufficient to establish the “unjust” or “unjustified” nature of the recipient’s enrichment, thereby entitling the plaintiff to a restitutionary remedy. More specifically, relief will be granted where a stranger to the trust, having received trust property for his or her own benefit and having knowledge of facts which would put a reasonable person on inquiry, actually fails to inquire as to the possible misapplication of trust property.
On the issue of knowledge, it is clear from the trial judge’s findings that the bank was aware of the nature of the funds being deposited into, and transferred out of, D’s account. The bank knew that D’s sole source of revenue was the sale of insurance policies and that premiums collected by D were payable to the appellants. In light of the bank’s knowledge of the nature of the funds, the daily emptying of D’s account was in the trial judge’s view “very suspicious”. In these circumstances, a reasonable person would have been put on inquiry as to the possible misapplication of the trust funds. The bank should have inquired whether the use of the premiums to reduce the account overdrafts constituted a breach of trust. By failing to make the appropriate inquiries, the bank had constructive knowledge of D’s breach of trust. The bank’s enrichment was thus clearly unjust, rendering it liable to the appellants as a constructive trustee.
Per Sopinka J.: Subject to what was said in Gold, issued concurrently, La Forest J.’s reasons were agreed with.
Cases Cited
By La Forest J.
Referred to: Air Canada v. M & L Travel Ltd., [1993] 3 S.C.R. 787; Gold v. Rosenberg, [1997] 3 S.C.R. 767; Canadian Pacific Air Lines, Ltd. v. Canadian Imperial Bank of Commerce (1987), 61 O.R. (2d) 233; R. v. Lowden (1981), 27 A.R. 91; Bank of N.S. v. Soc. Gen. (Can.), [1988] 4 W.W.R. 232; Fletcher v. Collis, [1905] 2 Ch. 24; Selangor United Rubber Estates, Ltd. v. Cradock (No. 3), [1968] 2 All E.R. 1073; Agip (Africa) Ltd. v. Jackson, [1990] 1 Ch. 265, aff’d [1992] 4 All E.R. 451; Foley v. Hill (1848), [1843‑60] All E.R. Rep. 16; Fonthill Lumber Ltd. v. Bank of Montreal (1959), 19 D.L.R. (2d) 618; Lipkin Gorman v. Karpnale Ltd., [1991] 3 W.L.R. 10; Lac Minerals Ltd. v. International Corona Resources Ltd., [1989] 2 S.C.R. 574; Air Canada v. British Columbia, [1989] 1 S.C.R. 1161; In re Montagu’s Settlement Trusts, [1987] 1 Ch. 264; Polly Peck International plc v. Nadir (No. 2), [1992] 4 All E.R. 769; C.I.B.C. v. Valley Credit Union Ltd., [1990] 1 W.W.R. 736; Bullock v. Key Property Management Inc. (1997), 33 O.R. (3d) 1; Groves‑Raffin Construction Ltd. v. Bank of Nova Scotia (1975), 64 D.L.R. (3d) 78; Carl B. Potter Ltd. v. Mercantile Bank of Canada, [1980] 2 S.C.R. 343; Arthur Andersen Inc. v. Toronto‑Dominion Bank (1994), 17 O.R. (3d) 363, leave to appeal refused, [1994] 3 S.C.R. v; Glenko Enterprises Ltd. v. Ernie Keller Contractors Ltd. (1996), 134 D.L.R. (4th) 161; Cowan de Groot Properties Ltd. v. Eagle Trust plc, [1992] 4 All E.R. 700; El Ajou v. Dollar Land Holdings plc, [1993] 3 All E.R. 717; Royal Brunei Airlines Sdn. Bhd. v. Tan, [1995] 3 W.L.R. 64.
By Sopinka J.
Referred to: Gold v. Rosenberg, [1997] 3 S.C.R. 767.
Statutes and Regulations Cited
Bank Act, R.S.C., 1985, c. B‑1 [now repealed], s. 206(1).
Insurance Act, R.S.A. 1980, c. I‑5, s. 124(1).
Authors Cited
Birks, Peter. “Misdirected Funds: Restitution from the Recipient”, [1989] L.M.C.L.Q. 296.
Birks, Peter. “Overview: Tracing, Claiming and Defences”. In Peter Birks, ed., Laundering and Tracing. Oxford: Clarendon Press, 1995, 289.
Gardner, Simon. “Knowing Assistance and Knowing Receipt: Taking Stock” (1996), 112 L.Q.R. 56.
Halsbury’s Laws of England, vol. 48, 4th ed. London: Butterworths, 1995 (reissue).
Harpum, Charles. “The Stranger as Constructive Trustee” (1986), 102 L.Q.R. 114.
Millett, Sir Peter. “Tracing the Proceeds of Fraud” (1991), 107 L.Q.R. 71.
Pettit, Philip H. Equity and the Law of Trusts, 7th ed. London: Butterworths, 1993.
Underhill and Hayton, Law Relating to Trusts and Trustees, 14th ed. By David J. Hayton. London: Butterworths, 1987.
APPEAL from a judgment of the Alberta Court of Appeal (1996), 181 A.R. 76, 116 W.A.C. 76, 37 Alta. L.R. (3d) 293, [1996] 5 W.W.R. 9, 33 C.C.L.I. (2d) 241, [1996] A.J. No. 59 (QL), reversing a judgment of the Court of Queen’s Bench, [1993] A.J. No. 680 (QL), imposing a constructive trust on the defendant banks. Appeal allowed.
Eric F. Macklin, Q.C., and W. Scott Schlosser, for the appellants.
Donald R. Cranston and Stacy M. Neufeld, for the respondents.
//La Forest J.//
The judgment of La Forest, Gonthier, Cory, McLachlin, Iacobucci and Major JJ. was delivered by
1 La Forest J. -- This appeal concerns the liability of a bank for its customer’s breach of trust. The appellants, as beneficiaries of the trust, seek recovery for unpaid insurance premiums collected by the trustee and deposited with the respondent banks. The principal question in this appeal is this: Are the respondent banks liable as constructive trustees for the breach of trust committed by one of their clients? This question deals with the liability of strangers who participate in a breach of trust and, in particular, the degree of knowledge required for the imposition of liability as a constructive trustee.
I. Factual Background
2 The Citadel General Assurance Company and the Citadel Life Assurance Company (“Citadel”) are insurance companies which carried on business in Alberta. Beginning in 1979, Citadel’s business operations involved another Alberta corporation, Drive On Guaranteed Vehicle Payment Plan (1982) Limited (“Drive On”). As a wholly owned subsidiary of International Warranty Company Limited (“International Warranty”), Drive On sold consumer life, casualty, and unemployment insurance to auto dealers. The insurance premiums were collected by auto dealers at the time vehicles were sold and then remitted to Drive On. After collecting the premiums, Drive On paid commissions and settled any current claims under the policies. The balance of the premiums was remitted on a monthly basis to Citadel, the underwriter of the insurance policies. In early 1987, the premiums received during a calendar month were normally forwarded to Citadel at the end of the following month. This arrangement continued satisfactorily until August 1987 when Drive On defaulted on its payments to Citadel. As well, from 1979 until late August 1987, there was no written agreement between Citadel and Drive On.
3 In December 1986, the International Warranty Group of Companies, including Drive On and International Warranty, started banking with the now-amalgamated Lloyds Bank Canada and Hongkong Bank of Canada (hereinafter collectively called “the Bank”). During 1987, the only banker of Drive On was the Bank. Drive On used one bank account for all its transactions. The only deposits to that account were either insurance premiums collected from auto dealers or transfers of funds from International Warranty. Through its senior officers, the Bank was aware that insurance premiums were being deposited into Drive On’s account. During the period after April 1, 1987, Drive On’s account was usually in an overdraft position. On April 8, the Bank received instructions from International Warranty’s signing officers (who were identical to Drive On’s signing officers) to transfer funds between the International Warranty and Drive On accounts to cover overdrafts on either account.
4 Also in April 1987, the Presidents of Drive On and Citadel met to discuss their business relationship. As a result of the meeting, Citadel and Drive On agreed that a written agreement would be prepared to formalize their business relationship. It was also agreed that Drive On would no longer settle claims under the insurance policies. From June 1, 1987, Citadel assumed the adjudication and payment of all claims. As a result, the monthly premiums payable to Citadel were increased significantly. Also as a result of the presidents’ meeting, Citadel ordered a detailed examination of Drive On’s current procedures. A “trip report” was delivered by one of Citadel’s employees on May 14. The report found that Drive On was depositing insurance premiums in a general bank account which was not set up as a trust account. The report also indicated that Drive On was somewhat reluctant to establish a trust account but would do so if necessary.
5 On June 5, 1987, the Bank received instructions from International Warranty’s signing officers to transfer all funds in the Drive On account to the International Warranty account at the end of each business day. In July and August, the transfer of funds between the International Warranty and Drive On accounts resulted in an overall reduction in International Warranty’s overdraft.
6 On August 7, 1987, Drive On forwarded the June premiums to Citadel. In late August, Citadel first learned of Drive On’s financial difficulties. The President of Drive On advised Citadel that the July and August premiums could not be remitted. A new arrangement, effective September 1, was set in place whereby all premium monies would be forwarded directly to Citadel. With regard to the outstanding July and August receipts, Drive On agreed to pay Citadel by way of promissory note dated September 21, 1987. The note provided for monthly payments of $100,000. Drive On made a number of payments until it, and the other members of the International Warranty Group of Companies, ceased carrying on business in December. Citadel sued Drive On and the guarantor on the promissory note but has been unsuccessful in collecting anything. The parties agree that the outstanding amount payable to Citadel is $633,622.84.
7 Citadel brought an action against the Bank for the outstanding insurance premiums. At trial, Citadel was successful and judgment was entered against the Bank for $633,622.84: [1993] A.J. No. 680 (QL). The Court of Appeal allowed the Bank’s appeal and dismissed Citadel’s claim: (1996), 181 A.R. 76, 116 W.A.C. 76, 37 Alta. L.R. (3d) 293, [1996] 5 W.W.R. 9, 33 C.C.L.I. (2d) 241, [1996] A.J. No. 59 (QL).
II. Decisions Below
A. Court of Queen’s Bench of Alberta
8 The trial judge, Marshall J., found that a relationship of trust existed between Citadel and Drive On. This finding was based in part on s. 124(1) of the Insurance Act, R.S.A. 1980, c. I-5, which provides that an agent or broker who negotiates a contract of insurance with an insurer and receives insurance premiums for that contract is deemed to hold the premiums in trust for the insurer. As well, the trial judge found that the arrangement between Citadel and Drive On had the three certainties of a trust, namely, certainty of subject-matter, certainty of intent, and certainty of object. Further, the trial judge held that a breach of trust occurred when Drive On failed to remit the insurance premiums collected on Citadel’s behalf.
9 The trial judge stated that in order for the Bank to be liable as a stranger to the trust, the Bank must have had knowledge that the funds were trust monies or the circumstances must have required it to inquire before dealing with the money. In scrutinizing the evidence, the trial judge found that Drive On’s instructions to empty its account daily were “very suspicious” (para. 26), given the Bank’s knowledge that insurance premiums were being deposited in the account. As well, the trial judge concluded that the Bank, having received a benefit from Drive On’s breach of trust, was under a greater duty to explain its actions. Liability was imposed on the following basis (at para. 33):
The Bank had actual knowledge of the nature of the funds in the Drive On account and had an obligation to inquire about their position in the circumstances. The Bank shut its eyes in circumstances which should have caused it to inquire of its customer at least. It did not do so. The Bank had constructive knowledge and is a constructive trustee within the cases . . . .
The plaintiffs received judgment for $633,622.84.
B. Alberta Court of Appeal (1996), 181 A.R. 76
10 On appeal to the Alberta Court of Appeal, Kerans J.A., speaking for the court, began by noting, at p. 77, that there was “no serious difficulty with the finding of creation of the trust made by the trial judge”. As such, Kerans J.A. was willing to assume that a trust existed between Citadel and Drive On and that a breach of trust occurred.
11 In Kerans J.A.’s view, the real difficulty with the case was the imposition of liability on the Bank. More specifically, he disagreed with the trial judge’s conclusion that constructive knowledge was sufficient to render the Bank liable as a constructive trustee. Relying on this Court’s decision in Air Canada v. M & L Travel Ltd., [1993] 3 S.C.R. 787, Kerans J.A. concluded that only actual knowledge, recklessness, or wilful blindness could render the Bank liable for a breach of trust from which it received a benefit. This test was not met in the present case because, although the Bank had “shut its eyes” in the circumstances, the trial judge refused to find that the Bank was actually aware it was taking money in breach of trust. However, since Air Canada v. M & L Travel Ltd. was decided after the trial judge rendered judgment in the present case, the parties were invited to re-argue the facts before the Court of Appeal. Nonetheless, even after reconsidering the facts, Kerans J.A. concluded for the court at p. 78:
. . . we have come to the conclusion that we cannot say on the balance of probabilities that this bank, when it honoured the direction to pay, was aware that it was moving out money in breach of any trust between the defaulting company and the insurance company. We do not have any difficulty with the trial finding that the bank had some warning that this was the case. But that is not enough. Nor do we think this is an appropriate case in which to rely on wilful blindness.
The Court of Appeal accordingly allowed the Bank’s appeal and dismissed the claim.
III. Issues
12 As mentioned, one main question is raised on this appeal: Under what circumstances can the respondent banks be held liable as constructive trustees for the breach of trust committed by one of their customers?
IV. Analysis
A. The Nature of the Relationship between Citadel and Drive On
13 Before beginning my analysis regarding the liability of the Bank as a constructive trustee, I note that I have read the reasons of Iacobucci J. in Gold v. Rosenberg, [1997] 3 S.C.R. 767, a case also dealing with the liability of a bank for a breach of trust committed by one of its customers. I generally agree with Iacobucci J.’s approach in Gold and, indeed, consider it similar to my own in the present appeal.
14 There can be no doubt that the relationship between Citadel and Drive On was one of trust. In this Court, the parties did not dispute the existence of a trust relationship. Relevant to the arrangement between Citadel and Drive On is s. 124(1) of the Insurance Act, which provides:
124(1) An agent or broker who acts in negotiating, renewing or continuing a contract of insurance with an insurer licensed under this Act, and who receives any money or substitute for money as a premium for such a contract from the insured, shall be deemed to hold the premium in trust for the insurer.
From 1979 to 1987, Drive On, the insurance agent, was in the business of selling insurance policies underwritten by Citadel, the insurer. In negotiating insurance policies on Citadel’s behalf, Drive On collected insurance premiums from auto dealers, paid commissions, and settled current claims under the policies. However, on June 1, 1987, the arrangement was changed and the premiums collected by Drive On were to be forwarded without deductions for policy claims. However, even when Citadel assumed the adjudication of all claims, Drive On still acted as agent or trustee and Citadel remained the principal or beneficiary of the insurance premiums. Moreover, I agree with the trial judge that the repayment arrangements between Citadel and Drive On did not amount to a revocation of the trust. The promissory note dated September 21, 1987, was merely confirmation of the amount owed by Drive On to Citadel. By agreeing to have the promissory note prepared in its favour, Citadel did not revoke its beneficial interest in the insurance premiums.
15 As well, the arrangement between Citadel and Drive On meets the three characteristics of a trust, namely certainty of intent, certainty of subject-matter, and certainty of object; see Air Canada v. M & L Travel Ltd., supra, at pp. 803-4; Canadian Pacific Air Lines, Ltd. v. Canadian Imperial Bank of Commerce (1987), 61 O.R. (2d) 233 (H.C.), at p. 237. The arrangement in the present case was based on the collection of insurance premiums by the insurance agent, Drive On, and the remittance of these premiums, subject to adjustments, to the insurer, Citadel. The intent to create a trust clearly follows from this principal-agent relationship. The object of the trust is the insurer, Citadel. Finally, the insurance premiums constitute the subject-matter of the trust.
16 The fact that the trust funds in Drive On’s account were commingled with other funds does not undermine the relationship of trust between the parties. As Iacobucci J. wrote for the majority of this Court in Air Canada v. M & L Travel Ltd., supra, at p. 804, “[w]hile the presence or absence of a prohibition on the commingling of funds is a factor to be considered in favour of a debt relationship, it is not necessarily determinative”; see also R. v. Lowden (1981), 27 A.R. 91 (C.A.), at pp. 101-2; Bank of N.S. v. Soc. Gen. (Can.), [1988] 4 W.W.R. 232 (Alta. C.A.), at p. 238.
17 The intention of the parties in the present case was to create a trust relationship. That Drive On deposited the funds in a general bank account, as opposed to a special trust account, does not alter this intention. In May 1987, Citadel prepared a report of Drive On’s procedures. This report found that a trust account had not been set up by Drive On. However, the report also noted that Drive On would establish a trust account if required by Citadel. The report indicates, therefore, that the parties had turned their minds to the possibility of setting up a trust account to prohibit the commingling of funds. Even though the trust account was never established, the fact that the parties considered this possibility confirms that the relationship was viewed by Citadel and Drive On as one of trust.
B. The Liability of the Bank as a Stranger to the Trust
1. General Principles
18 Having found that the relationship between Citadel and Drive On was one of trust, it is clear that Drive On’s actions were in breach of trust. Quite simply, Drive On failed to remit to Citadel the insurance premiums collected on Citadel’s behalf in July and August 1987. Moreover, I agree with the trial judge that Citadel did not acquiesce in the breach of trust by asking for and receiving the promissory note from Drive On. By accepting the note, Citadel did not represent that it was acquiescing in the use of the funds by the Bank. Consequently, Citadel is not barred from bringing an action against the bank for breach of trust; see Fletcher v. Collis, [1905] 2 Ch. 24 (C.A.); P. H. Pettit, Equity and the Law of Trusts (7th ed. 1993), at p. 491. The question remains whether the Bank, as a stranger to the trust between Citadel and Drive On, can be liable as a constructive trustee.
19 There are three ways in which a stranger to a trust can be held liable as a constructive trustee for breach of trust. First, a stranger to the trust can be liable as a trustee de son tort. Secondly, a stranger to the trust can be liable for breach of trust by knowingly assisting in a fraudulent and dishonest design on the part of the trustees (“knowing assistance”). Thirdly, liability may be imposed on a stranger to the trust who is in receipt and chargeable with trust property (“knowing receipt”; see Air Canada v. M & L Travel Ltd., supra, at pp. 809-11).
20 To be liable as trustees de son tort, strangers to the trust must commit a breach of trust while acting as trustees. Such persons are not appointed trustees but “take on themselves to act as such and to possess and administer trust property”; see Selangor United Rubber Estates, Ltd. v. Cradock (No. 3), [1968] 2 All E.R. 1073 (Ch.), at p. 1095. This type of liability is inapplicable to the present case. The Bank never assumed the office or function of trustee; nor did it administer the trust funds on behalf of the beneficiary Citadel.
21 The two remaining categories of liability, namely “knowing assistance” and “knowing receipt”, relate to strangers to the trust who knowingly participate in a breach of trust. In Air Canada v. M & L Travel Ltd., supra, this Court considered the requirements for bringing a case within the “knowing assistance” category. In that case, the defendant travel agency collected funds from the sale of Air Canada tickets and held them in trust to be remitted to Air Canada. The funds were kept in the agency’s general bank account. The individual directors of the travel agency, who had personally guaranteed a demand loan, authorized the bank to withdraw funds from the general account to cover monies owing on the loan. A dispute arose between the directors with regard to misappropriation of funds. The bank sent demand notices to the directors and withdrew the full amount owing under the loan from the agency’s general account. As a result, Air Canada did not receive monies owed to it for ticket sales. The issue arose whether the appellant director, as stranger to the trust, was liable to Air Canada for the travel agency’s breach of trust.
22 This Court found the director liable for knowingly assisting in a breach of trust. The liability of the director was based on his knowledge of, and assistance in, a fraudulent and dishonest breach of trust on the part of the trustees. With regard to the knowledge requirement, Iacobucci J. wrote for the majority, at p. 811: “The knowledge requirement for this type of liability is actual knowledge; recklessness or wilful blindness will also suffice.” He expressly excluded constructive knowledge from this test. Iacobucci J. defined constructive knowledge, at p. 812, as “knowledge of circumstances which would indicate the facts to an honest person, or knowledge of facts which would put an honest person on inquiry”.
23 The Court of Appeal in the present case relied on the knowledge requirement set out in Air Canada v. M & L Travel Ltd., supra. Assuming the present case falls under the “knowing assistance” category, it is clear that only actual knowledge, recklessness, or wilful blindness will render the Bank liable for participating in the breach of trust. Constructive knowledge will not suffice. The trial judge’s conclusions regarding the knowledge of the Bank were as follows (at para. 33):
The Bank had actual knowledge of the nature of the funds in the Drive On account and had an obligation to inquire about their position in the circumstances. The Bank shut its eyes in circumstances which should have caused it to inquire of its customer at least. It did not do so. The Bank had constructive knowledge and is a constructive trustee. . . .
Kerans J.A. considered this passage from the trial judge’s reasons and concluded, at p. 77:
It is true that the judge used the words “shut its eyes”, but reading the passage in its entirety, it seems clear that the judge is refusing to say that the bank was actually aware that it was taking money in breach of trust, as opposed to what it should have known or what its duty was.
I agree with Kerans J.A. that the trial judge refused to make a finding of actual knowledge by the Bank. Rather, the trial judge restricted his findings to constructive knowledge, based on the Bank’s duty to inquire of its customer in the circumstances. Moreover, there was no finding of recklessness or wilful blindness as such. It follows from the trial judge’s findings that the Bank does not meet the knowledge requirement set out in Air Canada v. M & L Travel Ltd., supra. Since the Bank had only constructive knowledge, it cannot be liable under the “knowing assistance” category of constructive trusteeship.
24 The only basis upon which the Bank may be held liable as a constructive trustee is under the “knowing receipt” or “knowing receipt and dealing” head of liability. Under this category of constructive trusteeship it is generally recognized that there are two types of cases. First, although inapplicable to the present case, there are strangers to the trust, usually agents of the trustees, who receive trust property lawfully and not for their own benefit but then deal with the property in a manner inconsistent with the trust. These cases may be grouped under the heading “knowing dealing”. Secondly, there are strangers to the trust who receive trust property for their own benefit and with knowledge that the property was transferred to them in breach of trust. In all cases it is immaterial whether the breach of trust was fraudulent; see Halsbury’s Laws of England (4th ed. 1995), vol. 48, at para. 595; Pettit, supra, at p. 168; Underhill and Hayton, Law Relating to Trusts and Trustees (14th ed. 1987), at p. 357. The second type of case, which is relevant to the present appeal, raises two main issues: the nature of the receipt of trust property and the degree of knowledge required of the stranger to the trust.
2. Liability for Knowing Receipt
(a) The Receipt Requirement
25 Liability on the basis of “knowing receipt” requires that strangers to the trust receive or apply trust property for their own use and benefit; see Agip (Africa) Ltd. v. Jackson, [1990] 1 Ch. 265, aff’d [1992] 4 All E.R. 451 (C.A.); Halsbury’s Laws of England, supra, at paras. 595-96; Pettit, supra, at p. 168. As Iacobucci J. wrote in Air Canada v. M & L Travel Ltd., supra, at pp. 810-11, the “knowing receipt” category of liability “requires the stranger to the trust to have received trust property in his or her personal capacity, rather than as an agent of the trustees”. In the banking context, which is directly applicable to the present case, the definition of receipt has been applied as follows:
The essential characteristic of a recipient . . . is that he should have received the property for his own use and benefit. That is why neither the paying nor the collecting bank can normally be made liable as recipient. In paying or collecting money for a customer the bank acts only as his agent. It sets up no title of its own. It is otherwise, however, if the collecting bank uses the money to reduce or discharge the customer’s overdraft. In doing so it receives the money for its own benefit. . . . [Footnotes omitted.]
P. J. Millett, “Tracing the Proceeds of Fraud” (1991), 107 L.Q.R. 71, at pp. 82-83.
26 Thus, a distinction is traditionally made between a bank receiving trust funds for its own benefit, in order to pay off a bank overdraft (“knowing receipt”), and a bank receiving and paying out trust funds merely as agent of the trustee (“knowing assistance”); see Underhill and Hayton, supra, at p. 361.
27 In the present case, we saw, Drive On deposited trust funds, namely insurance premiums collected on Citadel’s behalf, in an operating account at the Bank. Drive On’s parent company, International Warranty, also had an account at the Bank. In April 1987, the Bank transferred funds between the Drive On and International Warranty accounts to cover overdrafts in either account. As well, in June, the Bank transferred the balance of any funds in the Drive On account to the International Warranty account on a regular basis. As a result of the transfers between the accounts in July and August, a net amount was transferred to the International Warranty account. This amount, which was in excess of the July and August premiums deposited by Drive On, was used to reduce International Warranty’s overdraft. Although the Bank was instructed by Drive On’s signing officers to make the transfers, the Bank did not act as mere agent in the circumstances. The Bank’s actions went beyond the mere collection of funds and payment of bills on Drive On’s behalf. The Bank, by applying the deposit of insurance premiums as a set-off against International Warranty’s overdraft, received a benefit. This benefit, of course, was the reduction in the amount owed to the Bank by one of its customers. It follows that the Bank received the trust funds for its own use and benefit.
28 In this Court, the respondents argued that they could not be liable on the basis of “knowing receipt” because they had not received the trust property. The respondents took the position, accepted by the authorities, that a bank deposit is simply a loan to the bank; see Foley v. Hill (1848), [1843-60] All E.R. Rep. 16 (H.L.); Fonthill Lumber Ltd. v. Bank of Montreal (1959), 19 D.L.R. (2d) 618 (Ont. C.A.), at p. 628. Accordingly, the deposit of money in Drive On’s account was characterized as a debt obligation owed by the Bank to Drive On. This debt obligation gave rise to a credit in Drive On’s favour. On instruction from its customer, the Bank simply transferred “credits” from Drive On’s account to International Warranty’s account. The transfer of credits had the incidental effect of reducing an overdraft in the International Warranty account. In other words, the transfers between the accounts in July and August simply amounted to an off-setting of debt obligations. In the respondents’ view, the Bank was not receiving trust property but simply transferring credits from one account to another.
29 The respondents’ arguments are not convincing. A debt obligation is a chose in action and, therefore, property over which one can impose a trust. This conclusion is supported by the House of Lords’ decision in Lipkin Gorman v. Karpnale Ltd., [1991] 3 W.L.R. 10. In that case, a firm of solicitors was authorized to operate a client’s bank account. One of the firm’s partners subsequently stole funds from the account and used them for casino gambling. Considering whether the solicitors could trace their client’s funds at common law, Lord Goff of Chieveley wrote, at pp. 28-29:
The relationship of the bank with the solicitors was essentially that of debtor and creditor; and since the client account was at all material times in credit, the bank was the debtor and the solicitors were its creditors. Such a debt constitutes a chose in action, which is a species of property; and since the debt was enforceable at common law, the chose in action was legal property belonging to the solicitors at common law.
The respondents cannot avoid the “property” issue by characterizing the deposit of trust monies in Drive On’s account as a debt obligation. The chose in action, constituted by the indebtedness of the Bank to Drive On, was subject to a statutory trust in Citadel’s favour. That same chose in action can also be the subject of a constructive trust in Citadel’s favour.
30 Nonetheless, the respondents’ arguments reflect a difficulty with the traditional conception of “receipt” in “knowing receipt” cases. In my view, the receipt requirement for this type of liability is best characterized in restitutionary terms. In Lac Minerals Ltd. v. International Corona Resources Ltd., [1989] 2 S.C.R. 574, at p. 669, I stated that a restitutionary claim, or a claim for unjust enrichment, is concerned with giving back to someone something that has been taken from them (a restitutionary proprietary award) or its equivalent value (a personal restitutionary award). As well, in Air Canada v. British Columbia, [1989] 1 S.C.R. 1161, at pp. 1202-3, I stated that the function of the law of restitution “is to ensure that where a plaintiff has been deprived of wealth that is either in his possession or would have accrued for his benefit, it is restored to him. The measure of restitutionary recovery is the gain the [defendant] made at the [plaintiff’s] expense.” In the present case, the Bank was clearly enriched by the off-setting of debt obligations, or transferring of credits between the Drive On and International Warranty accounts. That is, the amount due to the Bank was reduced. As well, the Bank’s enrichment deprived Citadel of the insurance premiums collected on its behalf. Moreover, the fact that the insurance premiums were never in Citadel’s possession does not preclude Citadel from pursuing a restitutionary claim. After all, the insurance premiums would have accrued to Citadel’s benefit. The Bank has been enriched at Citadel’s expense. Thus, in restitutionary terms, there can be no doubt that the Bank received trust property for its own use and benefit.
(b) The Knowledge Requirement
31 The first requirement for establishing liability on the basis of “knowing receipt” has been satisfied. The Bank received the trust property for its own benefit and, in doing so, was enriched at the beneficiary’s expense. The second requirement relates to the degree of knowledge required of the Bank in relation to the breach of trust. With regard to this knowledge requirement, there are two lines of authorities. According to one line of jurisprudence, the knowledge requirement for both “knowing assistance” and “knowing receipt” cases should be the same. More specifically, constructive knowledge should not be the basis for liability in either type of ca