Introduction
Recently, the Government of Alberta clawed back money it had paid to individuals on the basis of mistake. The government determined that these individuals had been ineligible to receive the money. This story attracted attention because the government was demanding the return of money from people who had passed away.
The story raised the question of whether, and under what circumstances, one can demand the payback of money by others. It turns out that this question was addressed last year by the British Columbia Court of Appeal in International Longshore & Warehouse Union Local 502 v. Ford, 2016 BCCA 226 (CanLII), http://canlii.ca/t/grthf. This article describes that decision.
Facts
Robert Ford was a former union treasurer who embezzled some $1.7 million over seven years from his employer to support a gambling addiction. He was able to exploit a longstanding careless practice at work where blank cheques were signed in advance by the other officer.
This is an important case because it clearly stands for the proposition that every joint bank account holder may be required later to repay money that was mistakenly or fraudulently paid into it. He deposited almost $900,000 of this loot into two bank accounts he held jointly with his wife at the time, Teressa Prentice. The rest of the money was probably squandered through gambling. Since Ford was also managing the family finances, Prentice did not know about the stolen money intermixed with their joint accounts and used for regular expenditures.
The union obtained a civil judgment ordering Ford to repay the full amount he stole. Since that was unlikely to happen, the union turned to recover it from Prentice. It demanded Prentice pay back the $900,000 that she “had and received” on the basis that the law says it would be unjust for her to keep it.
In response, Prentice questioned the amount, said the claim was too late, and blamed the union’s lax accounting controls. Her main argument, however, was that she was an innocent joint bank account holder who was unaware of her husband’s fraud.
Judicial Decision
Prentice lost on summary trial of the case. She appealed to the British Columbia Court of Appeal. The case turned on whether Prentice had actually developed a detrimental reliance on the stolen funds. If she had genuinely thought that it was her money and had significantly and in good faith materially changed her circumstances to enjoy it, she would be entitled to keep it: Storthoaks v. Mobil Oil Canada Ltd., (SCC, 1976) http://canlii.ca/t/1z6hj.
The change in position defence will more likely succeed when the payor makes the demand for repayment several years after the mistaken or fraudulent payment is made, ..The principle, which originates 170 years ago in England, is that it is unfair to force someone who received money mistakenly through no fault of her own (or in this case, dishonestly from someone else) to repay it if she had already changed her life circumstances in reliance upon it. Years later, how could the law reasonably ask her to pay it back? Otherwise, as the old case stated, “it is against conscience to retain it.”
The change in circumstances defence requires an exceptional and material expenditure or financial commitment incurred in good faith in reliance upon the extra money. Ordinary spending of the money to pay down debts and cover expenses will not qualify.
Upon reflection, it is challenging to imagine instances which will meet these tests of ‘change of position.’ Most people receiving a windfall will have a legal obligation to pay it back when asked.
One qualifying scenario might be where, soon after learning of a windfall, someone surrendered a well-paying job and retired. Or, liquidated a business and distributed the proceeds to family members in the expectation that he or she would live off the newly-discovered windfall. Maybe, seeing the extra money, he or she adopted eight children or gave it to the local hospital which spent it on new equipment!
The change in position defence will more likely succeed when the payor makes the demand for repayment several years after the mistaken or fraudulent payment is made, when the recipient’s “position has so changed that it would be inequitable in all the circumstances to require him to make restitution” [Lipkin Gorman v. Karpnale Ltd [1991] 2 A.C. 548].
The change in circumstances defence requires an exceptional and material expenditure or financial commitment incurred in good faith in reliance upon the extra money. All four British Columbia judges could see no indication that Prentice had made any significant new expenditures, commitments or decisions as a result of this windfall money in her account. She did not know about the windfall in her joint account so she could not have changed her position based on that money. Even after discovering it, she admitted she did not rely upon the tainted money and she never spent it after she learned about it.
Prentice was unable to rely upon the change of position defence. In what must have seemed like double victimization or being forced to assist a reckless union, the Court ordered her to pay the money back. As it turned out, the union had received some settlement money from its auditor. The Court sent the question of whether this should offset Prentice’s liability to be determined by the trial judge.
Conclusion
When a person or corporation mistakenly pays money into the account of another, or has money stolen from it, it has a prima facie right to recover that money. The recipient of the windfall money can assert a defence of ‘change in position’ by proving a dependence on that money – that one has already relied to one’s detriment on those funds. This could be shown by having undertaken new projects or financial obligations dependent on the misappropriated money.
This is an important case because it clearly stands for the proposition that every joint bank account holder may be required later to repay money that was mistakenly or fraudulently paid into it. It does not matter that the recipient was blameless and innocent, or that the person made the payment carelessly.
This cases offers several lessons. On the payor side, you see the hazards of ignoring cheque-signing and financial controls, and the advantage of immediately demanding payback of misappropriated money. On the payee side, if your account seems too plump to be true, it might not be your money. Or, if you discover a windfall in your account, only if you quickly change your position might you be able to keep it.
Otherwise, no free lunch. No money for nothing.
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