DATE: 20030602

DOCKET: C36895

COURT OF APPEAL FOR ONTARIO

RE: L.L.P. HOLDINGS LIMITED, L.T.J.D. 888 CORPORATION and 644743 ONTARIO LIMITED (plaintiff/respondent) – and – HONGKONG BANK OF CANADA and CENTRAL GUARANTY TRUST COMPANY (defendant/appellant)

BEFORE: MOLDAVER, GOUDGE and CRONK JJ.A.

COUNSEL: J. Brian Casey, for the appellant

Timothy Pinos and David Ward, for the respondent

HEARD: May 23, 2003

On appeal from the judgment of Justice Susan Lang of the Superior Court of Justice, dated July 27, 2001.

E N D O R S E M E N T

[1] The appellant, Hongkong Bank of Canada, raises four grounds of appeal. It submits that the trial judge erred:

(i) by failing to find that the respondent, L.L.P. Holdings Limited (“LLP”), acquiesced in and ratified the transfer of LLP’s funds from the appellant bank to an account at Central Guaranty Trust Company (“Central”);

(ii) by failing to find that LLP was contributorily negligent in relation to the transfer of its funds to Central and the subsequent theft of them;

(iii) by failing to draw an adverse inference against LLP as a result of its failure to call certain witnesses at trial; and

(iv) by failing to reduce the amount of damages awarded to LLP by (a) the sum of approximately $495,000 on account of Mr. Pilzmaker’s alleged share of the transferred funds; and (b) the sum of $5,767.83 paid to LLP’s accountants.

[2] For the reasons that follow, we would not give effect to any of those grounds of appeal.

(1) The Trial Judge’s Rejection of the Defences of Acquiescence,

Ratification and Contributory Negligence

[3] The trial judge rejected the appellant’s submission that LLP, by its conduct, acquiesced in and ratified the transfer of the $4 million in issue from the appellant bank to Central. She also rejected the appellant’s assertion that LLP was negligent in failing to recognize that the funds had been removed from the appellant bank and deposited with Central.

[4] The appellant argues before this court that, in rejecting the defences of acquiescence, ratification, and contributory negligence, the trial judge erred in law by admitting into evidence and relying upon out-of-court statements allegedly made by Mr. Pilzmaker to Mr. La Gamba regarding LLP’s funds. On the basis of those statements, it is argued, the trial judge found that Mr. La Gamba, as the president of LLP, had been lulled into believing until 1990 that LLP’s funds were on deposit with the appellant bank and that Mr. Pilzmaker was engaged in looking for alternative investments for the funds. Those findings, the appellant submits, flow from the improper reliance by the trial judge on the truth of the contents of Mr. Pilzmaker’s statements to Mr. La Gamba.

[5] We do not agree that the evidence concerning Mr. Pilzmaker’s out-of-court statements to Mr. La Gamba was admitted, or relied upon, by the trial judge for impermissible purposes.

[6] Mr. La Gamba’s testimony regarding the statements was not tendered as proof of the truth of the contents of the statements but, rather, as proof of the fact that the statements were made. In those circumstances, the rule against the admission of hearsay evidence is not engaged. As observed by Sopinka J., writing for a majority of the Supreme Court of Canada, in R. v. Evans, [1993] 3 S.C.R. 653 at 661 and 663-64:

An out-of-court statement which is admitted for the truth of its contents is hearsay. An out-of-court statement offered simply as proof that the statement was made is not hearsay, and is admissible as long as it has some probative value. …

The admission of this kind of evidence is not hearsay because the only issue is whether the statement was made, and the veracity, perception and memory of the witness relating the statement can be fully tested by cross-examination. Since the truth of the declarant’s assertion is not in issue, deprivation of the right to cross-examine the declarant, on which rejection of hearsay is premised, is of no consequence [citations omitted].

[7] In this case, Mr. La Gamba’s state of mind and belief concerning the whereabouts of LLP’s funds, and Mr. Pilzmaker’s activities in relation to the funds, were central to the appellant’s defences of acquiescence, ratification and contributory negligence. The out-of-court statements made to Mr. La Gamba by Mr. Pilzmaker influenced the former’s state of mind and belief. Thus, the fact of the statements was directly relevant to the defences raised by the appellant, regardless of the truth or falsity of the statements. The evidence of the statements, in those circumstances, was not hearsay and was properly admitted and relied upon by the trial judge.

[8] In addition, and importantly, the trial judge’s rejection of the defences of acquiescence, ratification, and contributory negligence was not based solely, or even primarily, on the fact of Mr. Pilzmaker’s statements to Mr. La Gamba; nor did the trial judge ignore the evidence relied upon by the appellant to support its claims of LLP’s acquiescence, ratification, and negligence. Rather, the trial judge extensively reviewed the evidence relied upon by the appellant, and considered the cumulative effect of all the circumstances. She based her conclusions on the context of the events as they unfolded over many, many months and the circumstances in which they occurred, including:

(i) her assessment of Mr. La Gamba’s credibility and the reliability of his explanations for the alleged contradictions between his evidence at trial and evidence given by him at earlier stages in the proceeding;

(ii) the fact that Mr. La Gamba did not transfer his own funds to Central, which the trial judge found he would have done if he believed that Mr. Pilzmaker had obtained a better interest rate for LLP’s funds at Central;

(iii) her finding that Mr. La Gamba had no reason to believe that the appellant bank would not honour the requirement for two signatures from LLP representatives as a pre-condition to the removal or transfer of any LLP funds in excess of $1,000;

(iv) the demonstrated fact of Mr. Pilzmaker’s own history of poor documentary practices, even when acting honestly;

(v) the perception of many that Mr. Pilzmaker was a man of immense wealth who would have no cause to steal; and

(vi) Mr. La Gamba’s brief and relatively unsophisticated experience with “high-level” banking.

[9] Against that contextual backdrop, the trial judge concluded that Mr. La Gamba’s failure to ascertain the improper removal of LLP’s funds, and to notify the appellant of same, “cannot be said to amount to acquiescence, constructive knowledge, laches or negligence”. She had earlier concluded in her reasons that Mr. La Gamba did not know about the transfer of LLP’s funds until 1990, and that LLP did not ratify at any time the removal of those funds by Mr. Pilzmaker. We see no error in those conclusions, which were open to the trial judge on the evidence properly admitted before her.

[10] It is appropriate, in our view, to make one further comment regarding the trial judge’s rejection of the appellant’s defence of ratification. In transferring LLP’s funds to Central, Mr. Pilzmaker exercised his authority concerning LLP for his own personal benefit. His improper design in that regard was established by proof of the fact that the Central account required only his signature to authorize withdrawals, which had the effect of removing the transferred funds from LLP’s control. Mr. Pilzmaker’s removal of LLP’s funds from the appellant bank, on the evidence accepted by the trial judge, was carried out without the knowledge of Mr. La Gamba and was not the act of his principal, nor carried out for his principal’s benefit. The defence of ratification is not available in those circumstances: Begley v. Imperial Bank of Canada, [1935] S.C.R. 89 at 105, [1936] 3 D.L.R. 1 at 8 (J.C.P.C.)

(2) The Failure to Draw an Adverse Inference

[11] We are also not persuaded that the trial judge erred in declining to draw an adverse inference against LLP as a result of its failure to call the Lams to testify at trial. As the appellant points out, the evidence of the Lams, who are minority shareholders in LLP and who reside outside of Canada, could have been obtained through commission evidence. It was open to the appellant, as well as the respondent, to proffer their evidence. It failed to do so.

[12] In addition, and significantly, the trial judge’s finding that any evidence from the Lams could not have made a material contribution to the outcome of the case is supported by the evidentiary record at trial: the Lams were not signatories to LLP’s accounts with the appellant; they did not receive banking statements from the appellant concerning LLP’s funds and accounts; they had no authority over LLP’s banking arrangements with the appellant; and they did not participate in any dealings between LLP and the appellant or among LLP, Central and Mr. Pilzmaker. In those circumstances, the trial judge committed no error in declining to draw an adverse inference.

(3) The Claimed Deductions from the Award of Damages

[13] In our view, the two deductions claimed by the appellant from the damages awarded by the trial judge are not supportable. The deduction of $5,767.83 on account of the payment made by Mr. Pilzmaker to LLP’s accountants was not pressed by the appellant on this appeal. The claimed deduction of $494,865.07 is based on the assertion that Mr. Pilzmaker, as a 12.5% equity shareholder in LLP, was entitled to a 12.5% interest in the LLP funds transferred by him to Central and, accordingly, LLP should not receive the benefit of a damages award for funds legitimately received by Mr. Pilzmaker in his capacity as a minority shareholder. Apart from the fact that this issue was not raised at trial, the appellant’s submission ignores the fact that shareholders in LLP were entitled to share in LLP’s funds only upon proper authorization by the company of a dividend. No such dividend was authorized here. Moreover, when confronted with his wrongdoing, Mr. Pilzmaker surrendered his LLP shares to LLP. His rights as a shareholder of LLP ceased upon that surrender.

(4) Disposition

[14] For the reasons given, the appeal is dismissed. The respondent is entitled to its costs of the appeal on a partial indemnity basis, fixed in the amount of $17,500, inclusive of disbursements and Goods and Services Tax.

“M. J. Moldaver J.A.”

“S. T. Goudge J.A.”

“E.A. Cronk J.A.”