April 11th, 2011
In the case of Royal Bank of Canada v. Ankur Rastogi , the Ontario Court of Appeal held that RBC could not freeze the accounts of its client at its subsidiary, RBC Direct Investing, pending the determination of its lawsuit against the client. It further held that funds being held by another financial institution pursuant to a notice under the Bank Act (Canada) should be released.
RBC alleged that Mr. Rastogi, an employee of RBC, misused his position as an employee to establish an arbitrage scheme trading Canadian and US dollars at employee rates and that he made about $700,000 in doing so to RBC’s detriment. Some of the money ended up in RBC Direct Investing accounts and other funds were deposited into another account at the Toronto-Dominion Bank, which is unaffiliated with RBC.
RBC did not seek any interim relief against Mr. Rastogi. Instead, it froze his accounts at RBC and RBC Direct Investing. The Toronto-Dominion Bank also froze his accounts pursuant to a Bank Act notice it received from RBC.
RBC Direct Investing did not assert any claims against Mr. Rastogi. As such, the Court of Appeal held that it was not entitled to freeze Mr. Rastogi’s accounts and approved of the reasons of the motion judge on this point, who held: “[RBC Direct Investing] has no legal basis, in set off or otherwise, for freezing his account and holding onto his funds, absent a court-granted injunction, which in all likelihood would not be granted on these facts.”
As to RBC’s position that it could rely on its claim for a tracing order, the Court of Appeal held that the funds frozen at the Toronto-Dominion Bank should be released “absent an injunction or some other court order or at least some proof of legal entitlement to justify any further retention by the TD Bank of the depositor Rastogi’s funds,” which was not the case.
Even though Mr. Rastogi brought his initial motion under the interim recovery of personal property provisions of the Ontario Rules of Civil Procedure, the motion judge effectively granted summary judgment on those points as he could not find that a bank balance, which is a debt owed by a bank to its customer, constituted personal property.
On the appeal of the issue of whether summary judgment should have been granted in the first instance, the Court of Appeal held that the mere fact that RBC was advancing a claim for restitution of the funds held in the RBC Direct Investing and Toronto-Dominion Bank accounts did not give it any right to interfere with Mr. Rastogi’s property pending a determination of the merits of that claim. It held, “[i]f RBC had concerns about the disputed property disappearing before trial, it could have sought an interlocutory injunction.”
The Court of Appeal found that RBC had obtained a de facto injunction without a court order by freezing the accounts. To that point, it found: “[s]urely RBC would not argue that it was entitled to go into the [defendant’s] garage and unilaterally seize his vehicles and hold them until trial if it had an arguable case that the vehicles were purchased with the proceeds of the currency trading.
The Court of Appeal held that there were no issues requiring a trial in respect of Mr. Rastogi’s entitlement to the funds in the RBC Direct Investing and Toronto-Dominion Bank accounts and affirmed the summary judgment directing the return to him of those funds.