While it is routine for money to flow from condominium corporations to their managers for payment of regular management fees, there are few valid reasons for other such transfers. It is, for instance, completely improper for a management firm to “borrow” its clients’ funds to finance its own operations or to “lend” funds to its other condo clients.
A recent Ontario Superior Court decision highlights precisely such a scenario and brings several important lessons for condominium directors.
In 2005, York Region Condominium Corporation No. 890 (better known as Pacific Mall in Markham) brought a lawsuit for damages against its property manager, RPS Resource Property Services Ltd. (“RPS”) and William Garland (“Garland”) who was RPS’s principal, for breach of fiduciary duty, breach of trust, conspiracy, fraud and breach of their obligations under the Condominium Act, 1998.
The condo also named Royal Bank of Canada (“RBC”) and sought damages for breach of contract, negligence and conversion.
The trial took place over several days in June 2010 and the ruling was released this month. The full decision is now reported here. We will reproduce some of the highlights here, but time-starved readers can skip to the bottom to see the important lessons.
After hearing all the evidence, the court’s findings about the unauthorized transfers were as follows:
 [RPS’s senior accountant] Sivaneswaran testified that when he first joined RPS in 2000, it was RPS’ practice whenever it or Daniels Associates, Garland’s other company, needed money, to take an advance from the client accounts and then return the monies at a later time when RPS or Daniels had money. Sivaneswaran said that the decisions as to which account would be accessed and how much money would be taken were always made by Garland.
 RPS began taking trust money from the Account in 2003 and utilizing it for its own operational purposes or to pay back other clients. The money was withdrawn from the Account from time to time and placed in another RPS account at RBC by internet transfer carried out by Sivaneswaran. It was shown on the Account’s monthly bank statement provided by RBC by the notation “WWW”. Sivaneswaran posted the amount withdrawn to the Plaintiff‘s books as a pre-paid expense. The total amount withdrawn in 2003 was in excess of $400,000.00.
 Throughout 2003, RPS also transferred money back into the Account from time to time by internet transfer. Prior to the end of 2003, RPS ensured that all of the monies it took from the Account during the year had been returned in order that when the Plaintiff’s auditors audited its 2003 financial statements, there would be no discrepancy between what RBC confirmed was the Account balance at the end of the year and what the Plaintiff’s banking records for the Account showed.
 RPS’ use of the Account to fund its operations and re-pay clients continued in 2004. Between February and October, 2004, RPS transferred by internet transfer a total of $408,381.47 from the Account to its operating account and payroll account, one of its trust accounts and two client accounts at RBC. In November 2004, RPS transferred into the Account $38,000.00, leaving a shortfall of $370,381.47 as was subsequently determined by [Condo’s new manager] in early 2005, when he was finally able to obtain some financial information from RPS.
 Sivaneswaran’s email to [the men who purchased RPS] on November 19, 2004, that $408,000.00 was required for the Plaintiff was an attempt by Garland and Sivaneswaran to obtain the money necessary to deposit into the Account before the Plaintiff’s yearend to avoid detection by the Plaintiff’s auditors. The failure to deposit that money together with the Plaintiff’s decision to terminate RPS’s services in early January 2005 very shortly led to [condo’s new manger’s] discovery of the misappropriated money.
Interestingly, were it not for these precise circumstances, the condo board likely would not have discovered the unauthorized transfers, and this practice would have continued year after year.
On these facts, the court drew the following conclusions against RPS:
 By transferring monies from the Account to other accounts held by it at RBC, either for its own benefit or the benefit of other clients, RPS was in breach of its Management Agreement with the Plaintiff, as amended by the Board’s banking resolution of November 28, 2002. RPS had no authority to deal with any of the Plaintiff’s funds in the Account over $100 without the signature of the president, secretary, treasurer or a director of the Plaintiff.
 I am also of the view that RPS’ actions in wrongfully transferring the Plaintiff’s funds from the Account for its own purposes constituted conversation of the Plaintiff’s property: Boma Manufacturing Ltd. v. Canadian Imperial Bank of Commerce.
 More importantly, by transferring the monies from the Account for its own use, RPS committed a clear breach of trust. Section 115(1) of the Condominium Act, 1998, supra, provides, in part, that a person who receives money on behalf of or for the benefit of a condominium corporation shall hold the money in trust for the performance of the condominium corporation’s duties and obligations.
 Apart from s. 115 of the Condominium Act, 1998, it is clear from the evidence of Sivaneswaran and Garland (read in from his discovery) that at all material times RPS knew that all monies received by it on the Plaintiff’s behalf and deposited to the Account were trust funds belonging to the Plaintiff.
 As a result, it is my view that RPS knew by transferring monies from the Account from time to time for its own use or benefit, it was in breach of trust. Notwithstanding that RPS took the monies with the intention of returning them and did so during 2003, its actions throughout constituted a clear breach of trust.
 Accordingly, RPS is liable to the Plaintiff for breach of contract, conversion and breach of trust in the amount of $370,381.47.
Turning to the liability of Garland, the principal of RPS, the court summarized the legal test for establishing liability of a third party and then applies those tests to the facts at hand:
 Accordingly, in order for Garland to be liable to the Plaintiff for breach of trust, the evidence must establish that Garland knowingly participated in the breach. As noted, the Plaintiff must prove that RPS’ breach of trust was fraudulent and dishonest and that Garland had actual knowledge of the trust and the breach or was wilfully blind or reckless in respect of it.
 Was RPS’ breach of trust fraudulent and dishonest? In Air Canada, supra, at para.59, Iacobucci J. adopted the following description of fraud and dishonesty in connection with a trustee’s breach of trust: “the taking of a risk to the prejudice of another’s rights, which risk is known to be one which there is no right to take.”
 RPS knew that the monies in the Account were trust monies. By transferring monies from the Account to itself or other clients to cover shortfalls in its business, RPS took a risk to the prejudice of the Plaintiff. Further, given the terms of the Management Agreement, as amended by the November 28, 2002 banking resolution, RPS knew that it had no right to take such risk. Accordingly, I have no hesitation in concluding that RPS’ breach of trust in this case was fraudulent and dishonest.
 Further, because Garland knew the monies in the Account were trust monies belonging to the Plaintiff and authorized and directed them to be used by RPS to cover shortfalls in other areas of its business in direct contravention of RPS’ agreement with the Plaintiff, I find that Garland not only had actual knowledge of RPS’ breach of trust but he also enabled the breach of trust to occur.
 Accordingly, based on knowing assistance, Garland is personally liable to the Plaintiff as a constructive trustee for breach of trust in the amount of $370,381.47.
With this, the condo was awarded $370,381 against the management firm for breach of contract, conversion and breach of trust and also against the firm’s principal, Garland, for a similar amount for breach of trust.
The court then turned to the condo’s claim against the bank. The condo claimed that the bank was a constructive trustee or, alternatively, that the bank had converted the condo’s funds.
What is most useful in the following passages is the way in which the court dealt with the account operation agreement, signature cards and internet banking. Further, the court sets out the importance of what information is given and when by the account holder.
 There is no evidence that RBC ever assumed the office or functions of trustee in respect of the monies in the Account or administered the monies in the Account on behalf of the Plaintiff. At all times RBC acted as a banker and administered RPS’ bank accounts including the Account on behalf of RPS. Accordingly, RBC cannot be liable to the Plaintiff as a trustee de son trot.
 Nor in my view can RBC be held liable to the Plaintiff as a constructive trustee based on knowing receipt. As noted, the relationship between RBC and RPS was one of administering RPS’ bank accounts, including the Account. There was never any lending or overdraft facility between RPS and RBC. Over the two and a half year period that the Account was operated by RPS, RBC never received or applied any monies from the Account for its own use or benefit.
 The third and final way in which RBC can be liable to the Plaintiff for breach of trust is based on “knowing assistance”. As already noted, in order for RBC to be liable for breach of trust based on knowing assistance, the Plaintiff must prove that RPS’ breach of trust was fraudulent and dishonest, that RBC had actual knowledge of the trust and the breach (or was wilfully blind or reckless to it) and that it participated in it.
 As previously discussed, it is my view that RPS’ breach of trust in this case was fraudulent and dishonest.
 Apart from deemed knowledge of the trust pursuant to s. 115(1) of the Condominium Act, 1998, supra, RBC concedes that it had actual knowledge that the Account was a trust account.
 It is clear from the evidence that RBC did not have any indication, let alone actual knowledge, of RPS’ breach of trust until June, 2005. Ms. Wendy Sprung, the relationship account manager for RPS at RBC, testified that the first time RBC became aware of any issues in respect of the operation of RPS’s account relating to the Plaintiff was in June 2005 when RBC was contacted by Mr. Pais on behalf of the Plaintiff.
 RPS’ bank accounts were operated by RPS and were not monitored by the Bank. The monthly account statements were compiled at the Bank’s data centre and sent directly to RPS without Ms. Sprung ever seeing them. In accordance with the provisions of the Financial Services Agreement between the Bank and RPS, RBC relied on RPS to advise it if there were any mistakes or irregularities in the operation of the Account based on the account statements. At no time prior to June, 2005, did RBC receive any indication that there was any issue or irregularity in respect of the operation of the Account.
 The Plaintiff submits that when RBC received the signature cards for the Account that indicated that RPS only had authority to sign cheques up to $100 they should have made reasonable inquiries of RPS and/or the Plaintiff to determine whether RPS had unlimited authority to access the Account through internet banking. By failing to make any such inquiries, RBC must be found to have constructive knowledge of RPS’ subsequent breaches of trust. In support of its position, the Plaintiff relies on A&A Jewellers Ltd. v. Royal Bank of Canada.
 A&A Jewellers is a knowing receipt case. In that case, RBC had a lending relationship with the trustee companies who committed the breach of trust. Pursuant to that relationship, RBC utilized trust monies from the accounts to repay loans. In this case, as noted, there was no lending relationship between RPS and RBC and RBC never received any trust funds from the Account for its own use or benefit.
 Accordingly, whether the signature card and the RPS banking resolution that RBC received at the time that RPS opened the Account were sufficient to give rise to a duty on RBC to inquire whether there were any restrictions on RPS’ internet banking need not be determined. Such an inquiry is only relevant to the issue of constructive knowledge which is not sufficient to establish liability for knowing assistance.
 The Plaintiff further submits that by throwing the signature cards in a file and not looking at them, RBC was wilfully blind to RPS’ breach of trust. It is not accurate to say that RBC simply threw the signature cards in a drawer and never looked at them. Ms. Sprung’s evidence is that they were utilized by RBC when someone sought to negotiate a cheque drawn on the Account at a branch of RBC. They were not, however, utilized in respect of internet banking.
. . .
 As noted, prior to June 3, 2005, when RBC received Mr. Pais’ letter, there is no evidence it had any knowledge of facts that would cause it to suspect that RPS’s operation of the Account was in breach of trust.
 RBC knew that RPS’ business was administering property on behalf of clients, some of whom were condominiums. There is no evidence that prior to the Account being opened in November 2002, RBC had any information of any concerns or impropriety in the way RPS conducted its business or operated its bank accounts for itself or its clients. RPS had opened current accounts both for its own business and for its clients’ business in its name at RPC. Some of those account involved trust funds. There was therefore nothing unusual in the manner in which RPS opened the Account from RBC’s perspective or that, even though it was for the Plaintiff’s business, it was in RPS’ name and had access to internet banking.
 Further, there is no evidence that at any time during the operation of the Account, RBC had notice of any issues or concerns in respect of its operation or the operation of any other RPS’ bank account that may have given rise to a suspicion by RBC of breach of trust by RPS.
 There is no evidence that any of the cheques written on the Account were not signed in accordance with the signing authority provided to RBC. While there were clearly internet transfers from time to time, no signatures were required to carry them out. From RBC’s viewpoint, the transfers could have been carried out by the Plaintiff or by RPS with authority. In the absence of a duty to inquire, RBC has no obligation to monitor the Account: Bank Act, s. 437(3) and (4); Arthur Andersen Inc. v. Toronto-Dominion Bank.
 Accordingly, on the evidence, I am unable to find that RBC was wilfully blind or “deliberately ignorant” to RPS’ breach of trust.
 Similarly, there no evidence that establishes RBC was reckless to the extent that it would amount to actual knowledge of RPS’ breach of trust.
 In the absence therefore of actual knowledge, wilful blindness or recklessness, RBC cannot be held liable to the Plaintiff for breach of trust on the basis on knowing assistance.
 Nor, in my view, can the Plaintiff’s claim against RBC for conversion succeed. In 373409 Alberta Ltd. (Receiver of) v. Bank of Montreal, Major J., on behalf of the Court, noted at para. 10 that a lending institution’s liability in conversion is predicated upon a finding both that payment upon a cheque was made to someone other than the rightful holder and that such payment was not authorized by the rightful holder. Neither circumstance exists in this case.
 Accordingly, for the above reasons, it is my view that the Plaintiff’s action against RBC fails and must be dismissed.
The condo’s entire claim against the bank was dismissed, and the condo will presumably be held responsible to pay some of the bank’s legal costs. It is also noteworthy that this corporation’s claim against the bank prompted the bank to make a claim back against each of the condo directors alleging that the loss arose by the directors’ negligence. This surely complicated the case and increased the costs.
Here are some of the lessons to be learned from this unusual case:
1. If a condominium management firm or manager deals improperly a condo corporation’s money, it can and will be held to account in a court of law.
2. Succeeding in court is not necessarily a victory. After spending five years and untold thousands in legal fees and hours of board’s time, this condo corporation made a large recovery from its manager, but will likely not recover 100 cents on the dollar.
3. Prevention is always a superior option. Condominium corporations must exercise proper oversight of their finances and the acts of their managers. The board should insist on receiving and scrutinizing the bank statements and cancelled cheques each month. It is of no assistance to wait until the annual audit or quarterly reconciliation since almost all bank account operation agreements provide only a short 30 day window for account holders to notify the bank of errors or to seek reversal of fraudulent transactions. With the passage of 30 days, that ability is lost. Importantly, the 30 day period begins to run once the bank delivers the statement, usually to the manager and usually monthly. Time is of the essence.
4. Banks should not be expected to exercise any appreciable degree of oversight, initiative or even common sense as to what goes on in their clients’ accounts unless they are expressly told by the account holder. While banks have deep pockets, courts have traditionally upheld the account operation agreements that shield the banks from most obligations or liabilities.
5. Online banking is convenient but highly risky. While signature cards offer some protection for cheque-signing, there are no comparable controls that regulate internet banking, making it very hard to recover unauthorized transfers made by internet banking. See this January 2010 entry for more tips on minimizing risk in your bank accounts.
6. Condo boards should ensure that their property management firm always carries sufficient fidelity insurance naming the condo as an insured party. This will help ensure a recovery even where the manager or the firm is unable to pay and helps avoid the need to bring (and lose) an ill-advised action against the bank.
It is not too late for condo boards to make a new year’s resolution to tighten up the financial controls over their corporations’ finances. Talk to your auditors today.