DATE: 20021211

DOCKET: C36121

C35627

COURT OF APPEAL FOR ONTARIO

CATZMAN, GOUDGE AND FELDMAN JJ.A.

B E T W E E N:

RESEARCH CAPITAL CORPORATION

Jessica Kimmel for the appellant Vartevar E. Brounsuzian

(Plaintiff) Respondent

Christopher Wirth

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for the appellant Steven Nowack

STEVEN NOWACK and VARTEVAR E. BROUNSUZIAN

John R. Sproat

Defendant (Appellant)

and Michelle Wong

for the respondent

A N D B E T W E E N:

VARTEVAR E. BROUNSUZIAN

Plaintiff by Counterclaim

• and -

RESEARCH CAPITAL CORPORATION and CAROL SANDS

Defendants by Counterclaim

Heard: November 25, 2002

On appeal from the judgment of Justice Keith Hoilett from the Superior Court of Justice dated October 13, 2000.

BY THE COURT:

[1] On August 24, 1996, Steven Nowack opened an account at Research Capital Corporation, an investment dealer in Toronto. Through that account Mr. Nowack placed orders in late August for the short sale of 3,000 shares of Dell Computer Corporation.

[2] On September 13, 1996 Ed Brounsuzian agreed to provide a guarantee of this account to secure any ultimate balance due to Research Capital.

[3] Unfortunately, the price of Dell shares rose steadily and by May 1997 when sufficient shares were finally purchased to cover the short position and the account was closed out, the loss position in the account was in excess of $350,000 U.S.

[4] At trial, Hoilett J. granted judgment to Research Capital for the full amount of the loss against Mr. Nowack as primary debtor and against Mr. Brounsuzian as guarantor, and he gave Research Capital its party and party costs of the action. He also allowed Mr. Brounsuzian’s claim over against Mr. Nowack for indemnity.

[5] Both defendants have appealed. In argument Ms. Kimmel, counsel for Mr. Brounsuzian, took the lead. Counsel for Mr. Nowack supported her position but beyond that offered no viable argument to suggest either that as primary debtor Mr. Nowack could escape all liability, or that the indemnity finding against him should be reversed.

[6] The appellants argue first that the trial judge erred in finding that Research Capital did not owe Mr. Brounsuzian a fiduciary duty in obtaining his guarantee.

[7] Secondly, they argue that, in any event, Research Capital breached the duty of full disclosure imposed on it by the law of guarantee.

[8] Mr. Nowack then argues that as a consequence, his damages should be capped as of September 13, 1996. He says that if full disclosure had been made, the guarantee would not have been forthcoming and his account would have been closed out at that date. Further losses due to the continuing rise of the Dell share price would therefore not have been incurred.

[9] We can deal shortly with the appellants’ argument that the trial judge erred in finding that the circumstances of the making of the guarantee did not create a fiduciary relationship between Research Capital and Mr. Brounsuzian. Absent a manifest error, such a finding is for the trial judge. See Hodgkinson v. Simms, 1994 70 (SCC), [1994] 3 S.C.R. 377 at 420. Here the trial judge carefully reviewed those circumstances and found none of the indicia of vulnerability that characterized a fiduciary relationship. In our view, he made no error in doing so and we would not interfere with his conclusion.

[10] We can address the appellants’ second argument by assuming without deciding that in the circumstances of this case, the law of guarantee imposes a duty of disclosure on the respondent. The appellants concede that any such duty has a threshold of materiality so that only a nondisclosure which is material would constitute a breach. The appellants also acknowledge that it is up to them to demonstrate materiality.

[11] The primary instance of nondisclosure put forward by the appellants is the failure of the respondent to tell Mr. Brounsuzian at the time the guarantee was obtained that, contrary to the requirements of the brokerage industry, Mr. Nowack had not put up the “required to margin” security. The value of this security was 30% of the sale price of the Dell shares and it was to be deposited in Mr. Nowack’s account in addition to that sale price. However, the respondent did make clear to Mr. Brounsuzian at the time he gave the guarantee that Mr. Nowack’s account was in a loss position so that if 3,000 Dell shares were purchased to complete the short sale, the loss would be some $36,457.00 U.S. Mr. Brounsuzian also knew that his guarantee obligated him to secure this loss position and all increases in it.

[12] The trial judge was not satisfied that the nondisclosure of Mr. Nowack’s failure to put up the “required to margin” security was a material omission. This finding must be accorded some deference in this court and we cannot say that the trial judge erred in making it.

[13] Indeed, viewed from one perspective, there was no effective misrepresentation at all. Mr. Brounsuzian knew of the loss position in the account and his responsibility for it when he gave the guarantee. Since the loss position for which he was responsible was the difference between the cost of buying 3,000 Dell shares and the proceeds already received on the prior short sale of 3,000 Dell shares, the guarantor must be taken to have known that he was responsible for everything beyond the sale proceeds of the Dell shares and that Mr. Nowack had therefore provided no “required to margin” security.

[14] More importantly, however, Mr. Brounsuzian was well aware that ultimately he was securing the loss position in Mr. Nowack’s account. He knew the amount of that loss position when he gave the guarantee and he also knew that he would be held responsible for any increase in it. This risk and its magnitude were not reasonably affected by Mr. Nowack’s failure to post the “required to margin” security.

[15] Nor can it be said that nondisclosure of this failure would reasonably have altered Mr. Brounsuzian’s assessment of Mr. Nowack’s credit worthiness. He met with Mr. Nowack before giving the guarantee and there was much to indicate that Mr. Nowack was a man of substance and experienced in stock trading, even though the respondent was seeking a guarantee for his account.

[16] We therefore decline to interfere with the conclusion of the trial judge that this nondisclosure was not material.

[17] The appellants also argue that there was a second material nondisclosure: the respondent’s failure to tell Mr. Brounsuzian that his guarantee, limited as it was to the 3,000 share account, did not satisfy the requirements placed on the respondent by the industry regulator that such guarantees be unlimited.

[18] While this was not dealt with by the trial judge, the short answer is that the guarantee probably did meet the regulator’s requirement since the respondent froze Mr. Nowack’s account and since the guarantee therefore secured all losses that might arise in that account. Thus, for the purposes of that account, it was an unlimited guarantee. Moreover, there was no evidence that had Mr. Brounsuzian known that the regulator required guarantees to be unlimited he would not have given this particular guarantee.

[19] In summary, the trial judge did not err in declining to find that there was material nondisclosure by the respondent in the obtaining of this guarantee. As a result, the respondent’s second argument must also fail.

[20] Thus, despite the able argument of Ms. Kimmel, we would dismiss the appeal with costs fixed on a partial indemnity basis at $10,000 to be paid jointly and severally by the two appellants.

Released: December 11, 2002 “MAC” “M.A. Catzman J.A.”

“S.T. Goudge J.A.”

“K. Feldman J.A.”