Bank Liability For A Customer’s Fraud: Ontario Court Orders TD To Repay $16.3 Million 

When a fraudster uses your money to pay down his own overdraft, can you recover from the bank that took the money? In 1442422 Ontario Limited and Jokada Inc. v. The Toronto-Dominion Bank, 2026 ONSC 3856, Justice Dietrich of the Commercial List said yes — and in doing so delivered one of the most interesting Ontario decisions in years on bank liability for customer fraud.

The plaintiffs lost their negligence claim outright. They nonetheless won through knowing receipt, conversion, and unjust enrichment, with no reduction for their own admitted failure to conduct basic due diligence.

Two personal investment companies — 1442422 Ontario Limited (“144”) and Jokada Inc. — invested $17.8 million with Nestig Inc. on the strength of representations by its principal, Stephen Heimbecker, that the money would fund private mortgages. 

The principals behind 144 and Jokada knew Mr. Heimbecker socially through the horse racing industry, where he had a strong reputation and a history of paying his share.

What the investors did not know was that TD Bank had already discovered a $21.6 million unauthorized overdraft across Mr. Heimbecker’s accounts caused by a cheque kiting scheme, had restrained his accounts, had sued him and Nestig, and had obtained a Mareva injunction freezing his assets. TD had also learned that Nestig’s mortgage broker licence had been suspended by the Financial Services Regulatory Authority of Ontario.

On October 14, 2022, 144 wired $16.8 million into Nestig’s TD account, described on its face as a bridge loan under a participation agreement. Jokada had wired $1 million into a lawyer’s trust account the day before. Under the participation agreement, the funds were to be held by Nestig, and released to borrowers only with 144’s consent (or returned if not advanced).

They were never advanced. Rather, TD applied them to eliminate Mr. Heimbecker’s overdraft, obtained consent orders permitting the repayment notwithstanding the Mareva injunction and terminating its own action as moot.

The parties agreed on the governing framework. In a claim against a bank for harm caused to a third party by the bank’s own customer, a duty of care arises only where the bank had actual knowledge of the fraud. Constructive knowledge does not create a duty.

No one alleged TD subjectively knew Mr. Heimbecker was defrauding the plaintiffs. Instead, 144 and Jokada argued TD was wilfully blind or reckless, each of which is treated as morally equivalent to actual knowledge. 

The evidence of red flags was formidable. TD had sworn an affidavit alleging a complex cheque kiting fraud. It knew Mr. Heimbecker had made repeated untrue statements about the source and timing of repayment. It knew Nestig’s licence was suspended. It knew its own 2022 anti-money laundering policy required enhanced due diligence; understood that enhanced diligence meant demanding documents and verifying information; asked for that information repeatedly; and never received it. It had already decided to close the accounts because of these issues.

Even so, the Court was not persuaded the culpability element was made out. The decisive fact was that Mr. Heimbecker had already repaid roughly $3 million of the overdraft through legitimate means — refinancing a farm property and selling mortgages. That prior legitimate repayment, in the Court’s view, undercut any finding of a clear probability of fraud in the repayment that followed. The negligence claim was dismissed.

A claim in knowing receipt requires that the defendant received trust property, and that it had the requisite knowledge. The test for kowledge is constructive, meaning knowledge of facts sufficient to put a reasonable person on inquiry. TD conceded the funds were trust property,  and there was no dispute the funds were applied for TD’s own benefit.

The Court reasoned that where a bank is under a duty to inquire, it will be fixed with constructive knowledge if it fails to make appropriate inquiries. The bank need not conduct an impractically extensive investigation or meet a standard of perfection — it must act reasonably. Critically, reasonableness is measured against the bank’s own account agreements and its own policies. If the steps taken do not accord with those, absent a valid explanation, the inquiries likely will not pass the reasonableness test.

TD’s 2022 AML policy required enhanced due diligence for higher-risk customers, including risk-based enquiries, information gathering, analysis, and enhanced ongoing monitoring. TD’s own witnesses accepted that the red flags triggered it. TD and its counsel asked the right questions and then applied the funds without ever getting answers.

The Court also rejected TD’s attempt to characterize the repayment as a discrete transaction. Once enhanced diligence was triggered by the customer’s conduct, it applied to the customer, not merely to a single transaction. TD had constructive knowledge of the breach of trust, and was liable in knowing receipt.

The tort of conversion involves a wrongful interference with the goods of another, such as taking, using or destroying these goods in a manner inconsistent with the owner’s right of possession. The tort is one of strict liability, and accordingly, it is no defence that the wrongful act was committed in all innocence. TD did not dispute the elements of the tort. It argued only that conversion is confined to tangible property (such as a physical cheque), and cannot apply to an intangible bank deposit.

The Court held that it would be unreasonable to treat a cheque as a chattel capable of being converted, but to hold that once the cheque is cashed, it falls outside the tort entirely. The Court agreed that extending conversion to funds on deposit is appropriate, and TD was liable.

The elements of the principled approach to unjust enrichment are well-established: (i) an enrichment by the defendant, (ii) a corresponding deprivation of the plaintiffs and (iii) an absence of juristic reason for the enrichment.

TD’s answer was that it did not become richer. Before the payment it held an asset — a debt owed by Mr. Heimbecker. After the payment that asset was replaced by another asset of identical amount: cash. One asset out, one asset in, no enrichment.

The Court rejected the equivalence, and did so on TD’s own conduct.  Equal amount is not equal value. 

As the Court put it, if TD had truly believed the two assets had the same value, it would not have been pursuing repayment at all. Something of value — a tangible benefit — passed from the plaintiffs to TD. The funds were held in trust for 144 and Jokada, they were deprived of them, and TD was correspondingly enriched.

Pinto Shekib LLP is a Toronto litigation boutique acting for and against banks, corporations, and individuals in high-value commercial litigation and fraud recovery disputes. Contact us at info@pintoshekib.ca or 416-901-9984 to schedule a consultation.