DATE: 20030814

DOCKET: C37623

COURT OF APPEAL FOR ONTARIO

WEILER, CHARRON and ROSENBERG JJ.A.

B E T W E E N:

BANK LEU AG

Edward J. Babin and Crawford Smith, for the respondent Bank Leu AG

Lyndon A. J. Barnes and Donald D. Hanna, for the respondent North Shore Credit Union

Plaintiff (Respondent)

• and -

GAMING LOTTTERY CORPORATION, HELIX CAPITAL CORP. LTD. And GUIDO FRANZ-JOSEF BENSBERG

Benjamin Zarnett and Messod Boussidan, for the appellant Gaming Lottery Corporation

Defendants (Appellants)

• and -

GARY L. MOORE, SANDY ANDERSON, NORTH SHORE CREDIT UNION, JAMES ERICKSTEEN, CHARLES ANTHONY FERRACONE, JAMES FARRELL, JILL HALL, MAX JOSEF STRAUSS, KHADJAVI STRAUSS, CLAUS KOERNER and RED OAK LTD.

Third Parties (Respondents)

Heard: March 3, 2003

On appeal from the order of Justice Sidney N. Lederman of the Superior Court of Justice dated November 29, 2001.

WEILER J.A.:

[1] Gaming Lottery Corporation (“GLC”), appeals from the judgment of Lederman J. in favour of Bank Leu (the “Bank”) in the amount of 4.5 million dollars U.S. plus prejudgment interest. The appeal raises issues in company law, and concerns more specifically 1) whether the trial judge erred in finding that Bank Leu was a good faith purchaser of the shares represented by Share Certificate 12093 and in his appreciation of the restriction on their transferability noted on the share certificate 2) whether Bank Leu acquired beneficial title to the shares by common law estoppel 3) whether Share Certificate 12093 was a negotiable instrument and 4) whether the oppression remedy under the Ontario Business Corporations Act, R.S.O. 1990 c. B.16, (“OBCA”) was available to Bank Leu. In the event the appeal by GLC from the decision of Lederman J. in favour of Bank Leu is unsuccessful, GLC seeks contribution and indemnity from North Shore Credit Union. The detailed reasons of the trial judge are reported at (2001), B.L.R. (3d) 68 (Sup. Ct.).

[2] For the reasons that follow, I would dismiss the appeal substantially for the reasons given by the trial judge, namely that Bank Leu was a good faith purchaser of the shares represented by Share Certificate 12093 and that GLC was estopped from denying the validity of the share certificate. I would further hold that the restriction on transfer noted on the share certificate in question did not prevent the shares represented by the certificate from being transferred to Bank Leu. With respect to the oppression remedy, I would hold that the trial judge did not err in granting this relief. I would also dismiss the appeal respecting the third party, North Shore Credit Union.

I. Facts

[3] Bank Leu is a Swiss private bank, based in Zurich, and a member of the Credit Suisse group. It is the oldest bank in Switzerland. It has been conducting business in Switzerland and internationally for over 250 years. Bank Leu loaned $5 million to one Guido Bensberg who transferred Share Certificate No.12093 (“Share Certificate 12093”), issued by Laser Friendly Inc., to the Bank as security for the loans. Laser Friendly Inc. later changed its name to GLC and for ease of reference will be referred to throughout as GLC. When the loans were not repaid, Bank Leu sought to realize on the shares. GLC refused to acknowledge Bank Leu as the valid owner of the shares because the shares were not fully paid for or validly issued. GLC stated that the certificate was part of a “stock roll program” (described below) and should not have been released from safekeeping. The Bank sued GLC on the basis this was oppressive conduct. There is money in court with respect to part of the amount in issue.

A. The Stock Roll Program

[4] Jack Banks (“Banks”) was the President, Chief Executive Officer and Chairman of the Board of Directors of GLC. Larry Weltman, a chartered accountant, was Executive Vice-President and a Director of the company. Weltman’s primary responsibility at GLC was to develop and implement corporate strategy and oversee and manage the financial affairs of the company.

[5] In or about October 1994, GLC became interested in implementing a “stock roll program”. GLC had heard that such programs allowed major foreign banks to subscribe for blocks of shares at a discount to the market price and to pay for such shares by way of a debenture to enhance their balance sheets with the company holding the debenture earning interest on it. GLC was told that if it chose to participate in the program no shares needed to be issued by it until fully paid for and that if it wished to do so it could refuse to issue the shares. In addition, GLC would have the right to reject payment for the shares preventing any dilution of GLC’s existing shares.

[6] With this background information, GLC entered into a stock roll program with Helix Capital Corporation (“Helix”). Weltman discussed the stock roll program with Banks who gave him the authority to proceed with the transaction.

[7] As described by the trial judge, the stock roll program between GLC and Helix had the following characteristics:

• Helix entered into a Subscription Agreement for 15 million common shares of GLC at U.S. $4.00 per share;

• the Subscription Agreement provided for a closing in one-year’s time;

• pending the closing, as of the execution of the Subscription Agreement, share certificates were issued by GLC under the Subscription Agreement;

• pending the closing, the share certificates were to be delivered to Helix or its agent;

• Helix, under the Subscription Agreement, was required to pay GLC interest on the purchase price, based upon a percentage of the market value of the shares subscribed for. In this case $1.8 million USD;

• the purchase price and interest payable under the Subscription Agreement were secured by a debenture;

• at the end of one year, the subscriber under the Subscription Agreement was entitled to tender for the shares at the base value of the subscription price;

• GLC was not required under the Subscription Agreement or Debenture to accept the tender of the subscriber; and

• GLC could, in effect, cancel the transaction, never accept the full payment for the shares, and retain the $1.8 million paid under the Subscription Agreement and Debenture.

[8] The share certificates for the stock roll program with Helix were prepared by Equity Transfer Services Inc., (Equity Transfer”) on instructions from GLC. In total, eight GLC certificates (three certificates of 2.5 million shares each and five certificates of 1.5 million shares each) were created. Share Certificate 12093 came into existence as part of the Subscription Agreement between Helix and GLC. The share certificates, including Share Certificate 12093, show the registered holder as Helix and state very clearly on their face that they are:

FULLY PAID AND NON-ASSESSABLE COMMON SHARES WITHOUT PAR VALUE IN THE CAPITAL OF LASER FRIENDLY INC.

They also state that the shares represented by the certificates are transferable at Equity Transfer in Toronto. Despite this statement and despite the fact that GLC executed a form of stock proxy for voting the shares represented by, inter alia, Share Certificate 12093, it provided instructions to Equity Transfer to confiscate any certificates, including Share Certificate 12093, if submitted for transfer.

[9] Paul Stein, a lawyer acting for GLC, recommended against the representation on the face of the certificates that they were “fully paid”. He suggested a legend indicating that they were not paid for and were subject to another agreement or otherwise not be freely traded. This advice was rejected by Weltman.

[10] Laser Friendly’s (GLC’s) shares were publicly traded on the Toronto Stock Exchange (“TSE”) as well as on NASDAQ, a stock exchange in the United States. Printed on the back of the share certificates was a so-called “Regulation S” legend. Regulation S under the United States Securities Act of 1933 was an exemption, which allowed a company to issues shares without registration in the United States with respect to transactions outside of the United States that did not involve “United States persons”. The legend provided for a time limit before the shares could be transferred (in the case of Share Certificate 12093, that time limit was November 15, 1995). Weltman testified that he was aware that the purpose of such a legend under Regulation s (and Rule 144) was to restrict transfers involving “United States persons” or within the United States.

[11] GLC understood at all times that the shares would be provided by Helix to a third party to be placed in a “program” that would generate the income to pay the “interest”.

B. The Securities Lease Agreement

[12] The GLC share certificates issued in connection with the stock roll program were utilized by Helix in connection with a “securities lease” arrangement with Red Oak Ltd. (“Red Oak”), the principal of which was Bensberg.

[13] Under the securities lease, the shares of several public companies, including shares of GLC were “leased” to Red Oak. Among other things, Helix represented in the agreement that it was the owner of the leased shares. The agreement also indicated that Red Oak wished to lease the shares for the purposes of enabling it to enhance its bank credit lines for its business needs.

[14] By virtue of the securities lease, Bensberg was able to gain control over the share certificates. The securities lease called for the delivery of the share certificates representing the leased assets, including Share Certificate 12093, to an escrow agent, in this case, Sandy Anderson (“Anderson”), manager of the North Shore Credit Union, Bensberg’s Bank in Vancouver.

C. The Loan by Bank Leu to Bensberg

[15] In early November 1994, Bensberg was introduced to Claus Koerner (“Koerner”), an employee in the private banking department of Bank Leu. He was introduced by Max Josef Strauss, a lawyer and the son of a well-known former foreign minister of West Germany, Franz Joseph Strauss. Bensberg was introduced as a substantial businessman looking for a bank to do business with and to manage his portfolio. Bensberg indicated that he required a line of credit and that he would be able to provide stock certificates as collateral.

[16] At a meeting on November 11, 1994, Bensberg physically delivered to Koerner share certificates for five over the counter (OTC) issuers. Koerner had the certificates delivered to his office in Zurich by mail, after which he had them delivered within Bank Leu to the securities administration Department to be deposited into Bensberg’s account. At the same time, Koerner was advised by Bensberg that he would be delivering a number of additional shares through his bank in Vancouver (“North Shore”) to Bank Leu in care of its depository, the Bank of Montreal (“BMO”). Included in the shares, which Bensberg promised to deliver were shares of GLC, evidenced by Share Certificate 12093.

[17] Anderson wrote to Bank Leu by letter dated November 17, 1994 and confirmed that the GLC shares had been forwarded to BMO.

[18] On November 23, 1994, the share certificates for the outstanding securities, including Share Certificate 12093, were received by BMO. At the request of Anderson, a copy of his covering letter to BMO, dated November 17, enclosed with the share certificates, was forwarded to Bank Leu. There is no mention of any loan transaction with Bensberg in the covering letter. Nor is there any mention of any restriction on the shares.

[19] Enclosed with Share Certificate 12093 was an executed irrevocable stock power, endorsed in blank for a transfer. The stock power was properly executed on behalf of Helix by James Ericksteen, its principal, and his signature was guaranteed by the Royal Bank of Canada.

D. Execution of the Pledge and Other Documents - November 15, 1994

[20] On November 15, 1994, Bensberg executed a pledge agreement with Bank Leu in which he pledged all of the assets at any time deposited at Bank Leu as security for any indebtedness to the bank. He also signed a signature card, incorporating Bank Leu’s general conditions, and a declaration in which he declared that he was the beneficial owner of the shares he was depositing. He also signed a more comprehensive credit agreement on December 7, 1994.

[21] After North Shore indicated that it was forwarding to Bank Leu (through BMO) certain shares, including the GLC shares, and after Bensberg signed the pledge, signature card and declaration that he was the beneficial owner of the shares, he was approved for a limited overdraft and funds were initially released to him on November 15, 1994. The amount released as of November 23,1994 was $860,000 USD.

E. Calling the Loan

[22] When the BMO accepted the securities on behalf of Bank Leu on November 23, 1994 the Legend S restriction on transfer was noticed and duly noted by BMO’s employees. On November 30, 1994, Bank Leu advanced Bensberg a further $1.8 million USD by way of overdraft which Keller, a senior credit officer with Bank Leu, approved.

[23] By memo dated December 1, 1994 Keller recommended that Bensberg’s application for credit in the amount of $5 million US be approved by way of a loan against “Marketable Cover”. Keller testified that he felt the risk was acceptable, so long as the Bank closely monitored the loan and kept the amount loaned at 10% of the value of the portfolio. He relied primarily on the value of the GLC shares represented by Share Certificate 12093. The trial judge found at paragraph 31 of his reasons that, “[w]hen the certificates were received, Bank Leu satisfied itself that all the share certificates were genuine (not forged) and none was on a list of stolen or lost securities. The total market value of securities held by Bank Leu was thought to be in excess of U.S. $45 million”. Subsequently the Bank concluded that the only shares that had any value were the Laser Friendly shares. That being so, the trial judge concluded at paragraph 84 of his reasons that Keller did not adhere to his 10% rule.

[24] The loan application for 5 million U.S. was approved sometime between December 1 and December 7, 1994. The Legend S restriction was mentioned in a report on December 7, 1994 by BMO to Bank Leu. In about mid-December, 1994, after substantial funds had been loaned to Bensberg, Keller learned of the restriction on the shares that were being held as collateral and took steps to inquire as to their nature. Bank Leu also sought further information about Bensberg and his businesses. Nevertheless, Bank Leu advanced Bensberg a further $495,000 US after December 15, 1994. Bank Leu advanced approximately U.S. 4.3 million to Bensberg from the beginning of November 1994 to early January 1995.

[25] In or about January 20, 1995, because no concrete positive information on Bensberg was forthcoming, and because of increasing concern that there was a significant problem with the collateral, Bank Leu decided to call the loan. This caused Bensberg’s solicitor, Mr. Hladun Q.C., to write a letter dated January 20, 1995, in which he expressed serious concern and threatened Bank Leu with legal action. On January 23, 1995, Bank Leu sent Bensberg a letter calling the loan and requiring repayment by February 6, 1995. The letter was signed by both Koerner and Keller.

[26] When satisfactory arrangements for repayment had not been made by Bensberg, Bank Leu contacted GLC with respect to Share Certificate 12093 that it held as collateral. Bank Leu was told at that time that the shares had not been paid for and GLC asked Bank Leu to acknowledge that it held the shares only as a depository. Until being so notified by GLC on March 27, 1995, Bank Leu was not aware that the shares had not been paid for. Indeed, Bank Leu was always under the impression that the shares had been validly issued and had been paid for, as appeared on the face of Share Certificate 12093.

[27] Bank Leu obtained default judgment against Bensberg in Switzerland on January 31, 1996 for the full amount of the loan. That judgment remains outstanding.

[28] In the result, the trial judge granted judgment in favour of Bank Leu. His Honour concluded, at para. 114, that:

GLC is estopped by its conduct from asserting a defence against Bank Leu as a good faith purchaser. The risk that the share certificates could be misused should be borne entirely by GLC and not by the good faith holder of the share certificate. The risk should not be with the unsuspecting holder of the certificates, but on those who entered into the transaction for the issuance of the certificates in the first place. GLC was motivated to create the certificates in order to make millions of dollars for which it thought there would be no consequences, and had little or no regard that the certificates could be used as instruments of fraud.

[29] In reaching his decision, the trial judge carefully reviewed the evidence at trial, including the evidence surrounding the circumstances of the loan to Bensberg and receipt of Share Certificate 12093. He also specifically found the following:

• GLC was aware of the relevant risks and concerns arising out of the Stock Roll Transactions and knew of the potential for the certificates to be misused and indeed knew that they could be used in some fashion as “collateral”;

• Weltman knew that there was no legitimate use for the share certificates;

• Stein expressed to GLC a concern that the shares could be used for an improper purpose and attempted to maintain control over the GLC Shares. His advice was ignored;

• GLC was aware almost immediately that the sole practitioners it had sent millions of shares to were not complying with their obligations regarding holding the shares;

• GLC was aware as early as November 18, 1994 that shares from the Helix transaction were to be sent to the BMO. GLC took no steps whatsoever, at anytime, to contact the BMO;

• In early December 1994, the stock roll programs that GLC was involved in came to the attention of the United States Securities and Exchange Commission (SEC). An SEC enforcement inquiry was instituted and came to the attention of GLC early in December 1994;[^1]

• In connection with the SEC inquiry, GLC retained the firm of Jones & Day in Cleveland. That firm advised GLC to withdraw from the programs and to get its certificates. Jones & Day specifically alluded to “badges of fraud” in its communications. Within approximately two weeks of its retainer, the firm resigned because GLC refused to follow its advice;

• Stein then arranged for the Washington and New York-based law firm of White & Case to assist GLC. White & Case repeated the advice that Stein and Jones & Day had given, and told GLC that they were aiding and abetting in the perpetration of a fraud.

• On December 14, 1994, GLC learned that certificates in a second stock roll program with Delta West had been endorsed and someone had attempted to use them as collateral with Merrill Lynch;

• Notwithstanding this knowledge, GLC continued to participate in the stock roll programs. It took no steps to alert Merrill Lynch or to prevent the misuse of its other certificates, including Share Certificate 12093. It also continued to receive payments from Helix in respect of that certificate;

• By letter dated February 1, 1995, White & Case outlined in the most explicit terms many of the concerns that had been repeatedly expressed since early November to GLC in connection with the stock roll programs. White & Case advised GLC that as a matter of urgency it should terminate the agreements with Helix and Delta West and seek the return of its share certificates. White & Case wrote:

Given the foregoing, we believe that there is a substantial risk that if Helix’s customer were to be unable to repay the loan from its lending bank, the bank could assert a claim against Laser Friendly for any resulting loss, and probably would be able to raise serious questions as to whether it was aware of the fact that the Laser Friendly certificates did not represent fully paid and issued shares, and whether Laser Friendly was not knowingly participating in fraudulent misrepresentations by the borrower as to the value of the security the borrower had provided.

On the basis of the foregoing, we believe that you should, as a matter of urgency, (a) terminate the agreements with Helix (and Delta West if the two certificates issued it have not been returned to you) on the ground that they did not fully disclose to you to the uses to which the certificates would be put and inducing you to enter into those agreements, and (b) take all available actions to recover the certificates you have delivered.

• As before, GLC did not follow the advice. In fact, it not only continued, but expanded, its participation in the Helix Stock Roll Program by trying to place through the use of another certificate, No. 12095, in a “program”.

With respect to GLC, the trial judge then concluded at paras. 111-112, as follows:

Given his [Weltman’s] education and experience, he must have known that the use of the certificates to enhance balance sheets made no commercial sense and could only be used in some improper nefarious scheme. By allowing GLC certificates into the stream of international commerce he must have known that they were likely to be misused, including being used as collateral, as in this case. Even in the face of warnings throughout the relevant period that there was a substantial risk of liability if the shares were so misused, Weltman persisted in the program.

Weltman and Banks were the decision makers in respect of the stock roll program on behalf of GLC. Banks attended the trial from time to time, but was not called as a witness. In the circumstances it is appropriate to infer that both he and Weltman knew full well of the possibility of GLC stock certificates being used in the perpetration of a fraud or at the least, they did not care what use was made of them so long as GLC received its “interest payments” and there was no possibility of the transfer of shares being registered.

[30] Conversely, in relation to Bank Leu’s knowledge, the trial judge concluded at para. 86:

“[T]here is no evidence that there was any obvious indication or suspicion that the shares were invalid or that Bensberg was a dishonest man. The evidence demonstrates that Fischer [Keller’s subordinate] was concerned, but his concerns did not relate to the validity of the shares. Even Fischer’s comment about Bensberg’s motives being unclear is more consistent with his concern that Bensberg was a credit risk rather than any concern about possible fraud...

It makes no sense whatsoever that Keller ... deliberately shut his eyes to a fact that was obvious to him but he was afraid to inquire into, namely, that Bensberg was perpetrating fraud on Bank Leu by using share certificates of no value that he had obtained in various stock programs.

[31] GLC brought a third party claim against Koerner alleging that he conspired with Bensberg to defraud Bank Leu. Koerner did not defend this claim and by virtue of rule 19.02(1)(a) he was deemed to admit the allegations against him. Counsel for GLC argued that Keller’s deemed admission of his guilt on the third party claim by virtue of a legal fiction was a legal fact in Bank Leu’s action against GLC with the result that Bank Leu could not be considered a good faith purchaser. The trial judge held at paras. 89-90:

Koerner was noted in default approximately 6 years after he ceased to be employed at Bank Leu. At the time he was noted in default, he had no authority to bind the bank with either express admissions or deemed admissions. Apart from the “deemed admissions” argument, there is no evidence on which to found any of GLC’s allegations that Koerner had any knowledge that the shares had not been paid for or was otherwise engaged in any conspiracy to defraud.

Even if it had been established that Koerner was engaged in perpetrating a fraud on Bank Leu, that knowledge cannot be imputed to the bank. As stated in Crawford & Falconbridge, Banking and Bills of Exchange (8th Edition 1986) at page 1465, “There is no reason to suppose that an agent acting in excess of his authority would inform his principal of the details of his activities” so as to affect its status as a good faith purchaser. (Also see Richards v. Bank of Nova Scotia (1896), 26 SCR 381 at 387; The Commercial Bank of Windsor v. Morrison (1902), 32 SCR 98 at 105.)

In ignoring the warnings from Fischer and Jhaveri, in particular, Keller may have been negligent or, indeed, foolish. These individuals, if they were called as witnesses might have provided further evidence of this, but I am not satisfied that their testimony would have added anything to GLC’s position that Bank Leu knew or was wilfully blind to the fact that Bensberg was a fraudster and that the share certificates were invalid. Therefore, I am unable to draw any adverse inference from the failure of Bank Leu to call these individuals as witnesses.

[32] The trial judge’s findings were based not only on the documentary record but on his assessment of the credibility of the various witnesses. He did not find Weltman to be credible. He noted that Weltman had plead guilty to securities fraud in the United States, had lied on his discovery (at a time when he thought the documents necessary to impeach him would not be produced) and had actively deceived GLC’s auditors. (Banks, although present at the trial, did not testify.)

[33] The thrust of the trial judge’s findings in relation to GLC’s participation in the stock roll program was that GLC was a willing participant in what it knew was a fraudulent scheme by which share certificates, including Share Certificate 12093, were physically pledged as collateral for loans.

II. Issues and Analysis

A. The Main Action

1. Whether the trial judge erred in finding that Bank Leu was a good faith purchaser of the shares represented by Share Certificate 12093 and in his appreciation of the restriction on their transferability noted on the share certificate?

[34] The appellant submits that the trial judge erred in finding that Bank Leu was a good faith purchaser and further erred in his appreciation of the evidence relating to the restriction on the transferability of the share certificate. The trial judge’s finding that Bank Leu was a good faith purchaser is central to his analysis that GLC is estopped from asserting the defence that its shares have not been paid for. The trial judge’s finding that Bank Leu was a good faith purchaser is also important when considering the issue of whether Share Certificate 12093 was a negotiable instrument. Provided that the security is a negotiable instrument, a good faith purchaser can acquire higher rights than the transferor.

[35] Section 53(1) of the OBCA defines a good faith purchaser as follows:

“good faith” means honesty in fact in the conduct of the transaction concerned.

“good faith purchaser” means a purchaser for value, in good faith and without notice of any adverse claim,

(a) who takes delivery of a security certificate in bearer form or order form or of a security certificate in registered form issued to the purchaser or endorsed to the purchaser or endorsed in blank,

(b) in whose name an uncertificated security is registered or recorded in records maintained by or on behalf of the issuer as a result of the issue or transfer of the security to the purchaser, or

(c) who is a transferee or pledgee as provided in section 85; (“acheteur de bonne foi”)

[36] Section 63(2) reads as follows:

A security is valid in the hands of a purchaser for value without notice of any defect going to its validity.

[37] There is no issue that Bank Leu was a purchaser for value. It was a pledgee of a security for value. The issues are whether Bank Leu acted in good faith and whether the Regulation S restriction on the share certificate was notice of an “adverse claim” to Bank Leu. An adverse claim is defined in s. 53(1) as including, “… a claim that a transfer is or would be unauthorized or wrongful or that a particular adverse person is the owner of or has an interest in the security.” GLC submits that Bank Leu was wilfully blind to the fact that Bensberg was not the authorized owner of the shares represented by Share Certificate 12093 because of the circumstances surrounding his application for the loan. The trial judge rejected this submission.

[38] The test to determine whether a holder of a share certificate is a good faith purchaser as expressed by the trial judge and approved by this court in Assad v. The Economical Mutual Insurance Group et al. (2002), 59 O.R. (3d) 641 (C.A.) at para. 19 is as follows:

[19] Suspicions combined with blindness adds up to an absence of good faith. In Bank Leu Ag v. Gaming Lottery Corp., [2001] O.J. No. 4715 (S.C.J.), Lederman J. relied on the House of Lords in arriving at this conclusion. At para. 75 et seq. he states:

The term “good faith purchaser” has been recognized in the common law for centuries. While mere negligence, commercial stupidity or unreasonableness will not be sufficient to negative good faith on the part of a plaintiff, wilful blindness amounting to dishonesty and refusal to ask obvious questions will suffice. In Jones v. Gordon (1877), 2 App. Cas. 616 (H.L.), Lord Blackburn stated at pages 628-9:

But then I think that such evidence of carelessness or blindness as I have referred to may with other evidence be good evidence upon the question which, I take it, is the real one, whether he did know that there was something wrong in it. If he was (if I may use the phrase) honestly blundering and careless, and so took a bill of exchange or a bank‑note when he ought not have taken it, still he would be entitled to recover. But if the facts and circumstances are such that the jury, or whoever has to try the question, came to the conclusion that he was not honestly blundering and careless, but that he must have had a suspicion that there was something wrong and that he refrained from asking questions, not because he was an honest blunderer or a stupid man, but because he thought in his own secret mind – I suspect there is something wrong, and if I ask questions and make further inquiry, it will no longer be my suspecting it, but my knowing it, and then I shall not be able to recover – I think that is dishonesty. I think, my Lords, that that is established, not only by good sense and reason, but by the authority of the cases themselves.

In London Joint Stock Bank v. Simmons, [1892] AC 201 (H.L.) at page 221, Lord Herschell stated:

One word I would say upon the question of notice, and being put upon inquiry. I should be very sorry to see the doctrine of constructive notice introduced into the law of negotiable instruments. But regard to the facts of which the taker of such instruments had notice is most material in considering whether he took in good faith. If there be anything which, excites the suspicion that there is something wrong in the transaction, the taker of the instrument is not acting in good faith if he shuts his eyes to the facts presented to him and puts the suspicions aside without further inquiry [emphasis added].

GLC acknowledges that mere negligence in the conduct of the transaction concerned on the part of the purchaser of the instrument will not deprive such purchaser of good faith status. But if there is anything which excites the suspicion that there is something wrong (and it is not necessary to have notice of what the particular wrong may be) in the transaction, the taker of the instrument is not acting in good faith if the taker shuts his or her eyes to the facts presented and puts the suspicions aside without further enquiry.

[39] GLC acknowledges that the trial judge stated the test for a good faith purchaser correctly but submits that he applied it incorrectly. GLC submits that the trial judge made findings of fact that are consistent only with a conclusion that Bank Leu was wilfully blind to suspicions it had about the loan to Bensberg and that Bank Leu was not a good faith purchaser of Share Certificate 12093. In particular, GLC relies on the findings of the trial judge in relation to Peter Keller. Keller was responsible for the department dealing with loans made by Bank Leu’s domestic branch network, secured and unsecured lending to private individuals as well as the real estate lending activities of the Bank. At the time of trial, Keller had over 22 years of banking experience, almost all of which was in credit. Keller supported the loan to Bensberg. The specific “findings” on which GLC relies in paragraph 85 of its factum are as follows:

(1) Notwithstanding clear warning signals and expressions of concern by people within Bank Leu itself, Keller rejected Fischer’s opinion that the motives of the Bensberg transaction were unclear and that the information on Bensberg was inadequate, and advanced a further $1.8 million USD by way of overdraft on the same day that he received Fischer’s memo to that effect.

(2) Keller ignored inconsistencies and contradictory information about Bensberg that had been received by Bank Leu.

(3) Keller “pushed” for the $5 million credit to Bensberg against the concerns of other Bank Leu representatives, in contravention of Swiss banking law, in contravention of internal Bank guidelines and in contravention of his own “10% rule”. In so doing, Keller was, as the learned trial judge found, blinded by the fact that Bensberg offered the possibility of being a very large customer for Bank Leu.

(4) Fischer posed the correct questions, but Keller did not wait for answers before granting loan advances.

(5) Keller closed his eyes, as the learned trial judge found, to many warning signals about the credit worthiness of Bensberg, and the value and liquidity of the stock portfolio.

(6) Keller caused a further advance of $515, 000.00 USD after he actually knew of the restrictions on transferability of all the share certificates pledged by Bensberg, including 12093.

[40] Contrary to GLC’s assertion, the first three items on this list are found in paragraph 80 of the trial judge’s reasons as some of the indicia on which GLC relied in support of its submission that the evidence established Bank Leu had ample bases for suspicion about Bensberg and the transaction but made no further inquiry. In a similar vein, the trial judge stated at paragraph 81 of his reasons that, “Fischer was posing the correct questions but Keller did not wait for the answers before granting the loan advances. In these circumstances, counsel for GLC argues that Keller suspected something was wrong and yet actively refrained from inquiry, although he had the means of knowledge.” Again, at paragraph 85 of his reasons the trial judge stated, “There were many warning signs about the creditworthiness of Bensberg, the value and liquidity of the stock portfolio. The closing of one’s eyes to these signs and the failure to adhere to the bank’s own internal guidelines might amount to negligence or even gross negligence or recklessness or perhaps even a breach of Swiss banking laws in not seeing that Bensberg was a significant credit risk.” After carefully considering GLC’s submission that Bank Leu had reason to suspect that the share certificate was invalid or that Bensberg was a dishonest person, the trial judge ultimately rejected that submission. He concluded at paras. 86 and 87:

[86][T]here is no evidence that there was any obvious indication or suspicion that the shares were invalid or that Bensberg was a dishonest man. The evidence demonstrates that Fischer [Keller’s subordinate] was concerned, but his concerns did not relate to the validity of the shares. Even Fischer’s comment about Bensberg’s motives being unclear is more consistent with his concern that Bensberg was a credit risk rather than any concern about possible fraud... It makes no sense whatsoever that Keller ... deliberately shut his eyes to a fact that was obvious to him but he was afraid to inquire into, namely, that Bensberg was perpetrating fraud on Bank Leu by using share certificates of no value that he had obtained in various stock programs.

[87]…The fact that Keller or others in the bank may have had a broad suspicion that Bensberg was a credit risk, cannot be interpreted so widely as to constitute suspicion about the validity of the share certificates. In these circumstances, Bank Leu was a good faith purchaser in taking the pledge of certificate 12093.

[41] In addition, as I have mentioned, the trial judge found that Bank Leu was not bound by the deemed admissions of Koerner in GLC’s third party action against him and he refused to draw an adverse inference against Bank Leu because Koerner was not called.

[42] In considering the appellant’s submissions, I bear in mind that, as recently reiterated in Housen v. Nikolaisen (2002), 2002 SCC 33, 211 D.L.R. (4th) 577 (S.C.C.), appellate courts should not reverse findings of fact unless the trial judge has made a “palpable and overriding error” and that the same degree of deference should be paid to a trial judge’s inferences of fact. Questions of law are subject to a standard of correctness. Questions of mixed law and fact involve the application of a legal standard to a set of facts. When the question of mixed fact and law at issue involves a finding of negligence, the standard of “palpable and overriding error” still applies unless the finding of negligence rests on an incorrect statement of the legal standard. The latter can amount to an error of law. The majority summarized the deference required when questions of mixed fact and law are involved at para. 36 as follows:

To summarize, a finding of negligence by a trial judge involves applying a legal standard to a set of facts, and thus is a question of mixed fact and law. Matters of mixed fact and law lie along a spectrum. Where, for instance, an error with respect to a finding of negligence can be attributed to the application of an incorrect standard, a failure to consider a required element of a legal test, or a similar error in principle, such an error can be characterized as an error of law, subject to a standard of correctness… where the issue on appeal involves the trial judge’s interpretation of the evidence as a whole, it should not be overturned absent palpable and overriding error.

[43] GLC submits that the trial judge applied the test for a good faith purchaser too narrowly. He erred in focussing on whether Bank Leu suspected a particular wrong, namely, that Share Certificate 12093 represented shares that had not been fully paid for and were invalid. GLC submits that as a result of narrowing the test, the trial judge in effect required that Bank Leu have actual knowledge of a particular wrong.

[44] I disagree that in applying the test for a good faith purchaser the trial judge narrowed it so as to require actual knowledge of a particular wrong. Although the representation on the share certificate that the shares were fully paid for, was rightly an important factor in the trial judge’s analysis, the trial judge did not just consider the share certificate. He considered the unusual nature of the loan. He also considered whether there was any basis for suspecting that Bensberg was dishonest and found there was not. The trial judge’s “findings” on which GLC relies are indicative that Bank Leu had concerns over the volatility of the security package and Bensberg’s creditworthiness. The trial judge found that when Keller ignored these concerns, Keller may have been negligent. Negligence is, however, not sufficient. The trial judge specifically rejected the submission that the Bank was suspicious that a fraud was being committed. In relation to its submission that the Bank was wilfully blind, GLC has not met the onus as articulated in Housen, supra, with respect to the trial judge’s characterization of the facts. I would also reject GLC’s submission that the trial judge misapplied the test for a good faith purchaser.

[45] GLC’s second major submission also cuts across both the issue of whether the Bank is a good faith purchaser and the issue of whether Share Certificate 12093 is a negotiable instrument. GLC’s submission is that the effect of the restriction on the certificate was that Bank Leu knew the shares could not serve as security for the loan transaction to Bensberg because the certificate was in Helix’s name and any transfer to Bensberg or by him to Bank Leu was prohibited by the restriction noted on the share certificate until November 15, 1995. In order for this submission to succeed GLC must establish: 1) BMO’s knowledge of the restriction on the share certificate as of November 23rd should be imputed to Bank Leu; and 2) the effect of the restriction is that the shares are incapable of being transferred at all until November 15, 1995 and are worthless as collateral. The trial judge found, at para. 87 of his reasons, that Bank Leu did not appreciate that the shares pledged to it by Bensberg had on them the Regulation S restriction “until most of the loan was advanced.” While the trial judge did not expressly deal with the two components of GLC’s submission he implicitly rejected the submission. In effect GLC submits that the trial judge did not properly appreciate the evidence relating to Share Certificate 12093 concerning Regulation S.

[46] As I have indicated, BMO received Share Certificate 12093 on November 23, 1994 on behalf of Bank Leu. No issue of imputed knowledge arises in relation to the $860,000 USD Bank Leu advanced prior to November 23, 1994, because this money was advanced on the basis that the share certificates for the securities being pledged were being delivered to BMO. BMO had not yet received them and so had no knowledge of the restrictions. Thus it had no knowledge to impute to Bank Leu until after November 23, 1994.

[47] Bank Leu submits that the knowledge of an agent, in this case BMO, should only be imputed to the principle, Bank Leu, where the circumstances warrant and the agent is involved in the transaction. BMO was acting as the custodian of the share certificates for safe keeping and was not involved in Bank Leu’s decision to lend to Bensberg so Bank Leu argues that it should not have knowledge of the Regulation S restriction imputed to it.

[48] Bank Leu relies on the decision in Rocco v. Northwestern National Insurance Co., [1929] 64 O.L.R. 559 (C.A.) at 562-63 in support of its submission. In that case Middleton J.A. first emphasized at para. 12 that the knowledge of an agent is not knowledge by the principal unless “the circumstances are such as to justify the opinion that the agent would be likely to communicate the information to those in charge of the affairs of the company” [emphasis added]. Here, BMO was not only likely to communicate the information to Bank Leu, it did communicate the information both in a report dated December 7, 1994, which was received about mid-December and in the earlier custody account statement of November 30, 1994. It would appear that BMO’s knowledge should be imputed to Bank Leu because BMO was expected to communicate (and did communicate the information) respecting the restriction on Share Certificate 12093 to Bank Leu.

[49] The custody account statement was typically received a week after it was sent or around December 7, 1994, which would have been about the time Bank Leu approved the loan to Bensberg. Because the custody account statement is not considered important for credit purposes, Bank Leu submits it should not have BMO’s knowledge of the Regulation S restriction imputed to it. Bank Leu relies on that portion of Middleton J.A.’s decision in Rocco, supra, in which he quotes with approval the decision of Viscount Sumner in the case of J.C. Houghton & Co. v. Northard Lowe and Wells Ltd., [1928] A.C. 1 at 18-19 to the effect that a company is not deemed to know all the information possessed by its clerks or that is on the books of the company. It is the knowledge of the directors or those who lead the actions of the company that results in knowledge being imputed to the company because it is on the strength of their knowledge that a company would proceed. The company is not affected by what it could not have been expected to know under the system of domestic management established by the company. Bank Leu’s submission, however, ignores an exception to this principle that is mentioned in Houghton, supra. It appears that when a company finally does learn the information those directing the company must have taken “prompt and proper action” in order to avoid having the earlier knowledge of the agent imputed to the corporate principal. In this case, once Bank Leu became aware of the Regulation S restriction on the share certificate it did not take “prompt and proper action”. Instead, it lent more money to Bensberg. Thus, the decision in Rocco, supra, does not assist Bank Leu.

[50] To deal with GLC’s argument it is therefore necessary to squarely address the effect of the Regulation S restriction on Bank Leu. For ease of reference I reproduce the wording of the restriction:

The shares represented by this certificate have not been registered under the United States Securities Act of 1933 (The “Act”), have no voting rights and are being transferred pursuant to an exemption under regulation S. Until November 15, 1995 no shares of the stock may be offered, sold or transferred. Offers, sales or transfers in the United States or to a United States person (as defined in regulation S promulgated under the Act) or for the account and benefit of a United States person are not permitted, except as provided in said regulation S unless the shares are registered under the Act or with the prior consent of Laser Friendly Inc. pursuant to an application exemption from such registration under the Act.

[51] The legend begins by stating that the shares represented by the certificate have not been registered under the United States Securities Act. The legend then goes on to say that they are being transferred pursuant to an exemption to the Act, Regulation S. The next sentence states that, “Until November 15,1995, no shares of the stock may be offered sold or transferred.” If this sentence is interpreted as meaning that the shares cannot be transferred at all, the sentence directly contradicts the preceding one, which states that the shares have been transferred under Regulation S. The sentence that follows makes it clear that Regulation S only applies to offers, sales or transfers in the United States or to a “United States person”. Transfers to such persons or within the United States are only permitted pursuant to a regulation S exemption or with the prior consent of Laser Friendly Inc.

[52] Imputing BMO’s knowledge of the Regulation S restriction to Bank Leu is of no import since, as I read the restriction, it did not affect the right to transfer the shares outside the United States to persons who were not “United States persons”. None of the transactions involving Share Certificate 12093 took place in the United States or involved “United States persons”. Helix, a Canadian company, was identified as the registered owner of the shares on the face of the share certificate. Helix transferred the shares to Bensberg and there was no evidence that he was a “United States person”. He in turn transferred them to Bank Leu, a Swiss bank. The Regulation S restriction did not govern the transfer of GLC’s shares in this situation.

[53] I must also consider s. 56(3) of the OBCA, the relevant the relevant portions of which are:

(3) Where a share certificate issued by a corporation ….is, or becomes, subject to,

(a) a restriction on transfer…

the restriction…is ineffective against a transferee of the share who has no actual knowledge of it, unless it or a reference to it is noted conspicuously on the share certificate.

Because the Regulation S restriction is noted conspicuously on the back of the certificate and Bank Leu had actual knowledge of it through BMO, its agent, GLC submits that the restriction is effective. This submission takes the words of the subsection out of context. Sections 56 (1) and (2) must also be considered. They state:

56 (1) A corporation shall state upon the face of each share certificate issued by it,

(a) the name of the corporation and the words “Incorporated under the law of the Province of Ontario” or words of like effect:

(b) the name of the person to whom it was issued; and

(c) the number and class of shares and the designation of any series that the certificate represents

(2) Where a corporation is authorized to issue shares of more than one class or series, the corporation shall legibly state on each share certificate issued by it,

(b) the rights, privileges, restrictions and conditions attached to the shares of each class and series that exists when the share certificate is issued; or

(c) that the class or series of shares that it represents has rights, privileges or restrictions or conditions attached thereto, and that the corporation will furnish to a shareholder, on demand and without charge, a full copy of the text of,

(ii) the rights, privileges, restrictions and condition attached to that share and to each class authorized to be issued and to each series in so far as the same have been fixed by the directors; and

(iii) the authority of the directors to fix the rights, privileges, restrictions and conditions of subsequent series, if applicable.

[54] The effect of sections 56 (1) and (2) is that a corporation authorized to issue more than one class or series of shares must indicate the class or series of shares on the front of the certificate and state the restrictions attaching to that class or series on the certificate or state that a copy of the restrictions on the class or series is available upon request. Considered in the context of the previous subsections, the restrictions referred to in s. 56(3) are the restrictions referred to in s. 56(1) and (2), namely restrictions arising because a corporation is authorized to issue shares of more than one class or series, not a restriction arising by operation of U.S. law.

[55] This interpretation of s. 56(3) is reinforced by s. 63 of the OBCA, the relevant portion of which provides that, “a security is valid in the hands of a purchaser for value (including by way of pledge) without notice of any defect going to its validity.” The defect going to the validity of the shares represented by Share Certificate 12093 was the fact they had not been paid for, a defect of which Bank Leu had no notice. The Regulation S restriction did not purport to affect the validity of the shares.

[56] Even where there is a restriction on the transfer of shares of a company and the shares are transferred without complying with that restriction, the transfer can be effective as between the transferor and the transferee. See Re M.C. United Masonry Ltd. (1983), 40 O.R. (2d) 330 (C.A.) citing Harrold v. Plenty, [1901] 2 Ch.D. 314; Hawks v. McArthur et al., [1951] 1 All E.R. 22. The principle in Hawks, supra, was recently endorsed by the English Court of Appeal in Pennington v. Waine, [2002] E.W.J. No. 892 at para. 51 (C.A.). In that case, the court held that a transfer of the beneficial or equitable interest in shares in breach of company articles was nonetheless effective. The fact that the transferee had to do a further act in the form of applying for and obtaining registration in order to perfect legal title did not prevent the transfer from operating. In Pennington, supra, nothing in the articles stated that a transfer in violation of the restrictions made the transfer void. Here, nothing in the Legend S restriction on the back of the share certificate states that a transfer in violation of the restriction makes the transfer void as between the transferor and transferee.

[57] I would reject GLC’s submission that the effect of the restriction on the certificate was that the shares could not serve as security for the loan transaction to Bensberg because the certificate was in Helix’s name and any transfer to Bensberg or by him to Bank Leu was prohibited by the restriction noted on the share certificate until November 15, 1995.

[58] GLC further submits that BMO placed a value on the shares of zero in its end of November custody account statement to Bank Leu because of the Regulation S restriction and, imputing that knowledge to Bank Leu, this is evidence Bank Leu knew the shares were worthless as collateral with the result it was not a good faith purchaser. On the custody account statement there is provision for the share price, the exchange rate as at the end of the month if the price is shown in USD and a valuation in Canadian dollars. Both the share price and value for the 2.2 million shares of Laser Friendly (GLC) represented by Share Certificate 12093 are shown as zero. The uncontradicted evidence of Mr. Barnes, on behalf of BMO, was that the share price number and the valuation number had nothing to do with the market price of the shares. It had to do with the fact that he could not pull up the price feed due to the fact “an in-house CUSIP number” had been assigned to the shares. Thus, the appellant’s submission that Bank Leu knew the shares were worthless because BMO affixed a zero value to the shares on account of the Regulation S restriction must fail. I would also reject GLC’s submission that the shares were worth nothing as collateral.

[59] There is no basis for interfering with the trial judge’s conclusion that Bank Leu was a good faith purchaser by way of pledge of certificate 12093. I turn now to the issue of whether the trial judge correctly held that GLC was estopped from asserting a defence against Bank Leu by common law estoppel.

2. Did Bank Leu acquire beneficial title to the shares by common law estoppel?

[60] There is no issue that a good faith purchaser for value of a share certificate may acquire good title to it even from someone with no title if the issuer has acted in such a way so as to have made a representation which gives rise to an estoppel. The essential elements of such an estoppel are: a) a representation by one party to be acted upon by another party; b) action by the other party on the faith of the representation; and c) resulting detriment to the other party. See Colonial Bank v. Cay and Williams, (1890), 15 A.C. 267 (H.L.) at 286; Bloomenthal v. Ford (1897), A.C. 156 at 166-167 (H.L.); Burkinshaw v. Nicholls (1978), 3 A.C. 1004 at 1026-1027 (H.L.).

[61] The share certificate represented that the shares were fully-paid. GLC submits that the only representation GLC could be said to have made to Bank Leu was Share Certificate 12093 taken as a whole. GLC submits that the share certificate represented Helix as the registered owner of the shares and it was clear that Helix did not have the right to dispose of the shares because of the Regulation S restriction noted on Share Certificate 12093. For the reasons given above, I have already rejected the submission that the Regulation S restriction prevented the shares from being transferred at all. I would reject GLC’s argument that it made no misrepresentation or that any representation was immaterial because it was clear the shares could not be transferred on account of the Regulation S restriction.

[62] GLC also submits that the second element of estoppel, reliance by Bank Leu on Certificate 12093 in advancing the funds to Bensberg, is not present. In support of its position GLC makes the following points: 1) BMO did not receive Share Certificate 12093 until November 23,1994, by which time it had already advanced $620,000 USD to Bensberg. 2) When BMO received the certificate it noted the restrictions on it and ascribed a zero valuation to the shares. 3) By the time Bank Leu had Certificate 12093 in its physical possession it did not review the contents of the certificate until December 15, 1994, by which time it had advanced $3.3 million US to Bensberg. Bank Leu advanced further funds with notice of the restriction. 4) The trial judge was not entitled to consider the conduct of GLC in his analysis of the estoppel issue and could only look to the wording of the Certificate itself because Bank Leu was not aware of any of GLC’s acts when it advanced funds to Bensberg.

[63] I will deal with GLC’s submissions in order as follows: 1) In considering whether estoppel should apply, the trial judge was entitled to go beyond the share certificate and to consider that but for GLC’s conduct Bensberg could not have made the representation he did: see Colonial Bank v. Cady and William, supra, at 285 and McLeod v. Brazilian Traction and Light and Power Co., [1927] 60 O.L.R. 253 at 261-263 (Ont. S.C.) See also Sylvan Lake Golf and Tennis Club v. Performance Industries (2001), 2002 SCC 19, 209 D.L.R. (4th) 318 at 340 (S.C.C.). This applies to the first advance of $860,000, US as well as the other advances. 2) As I have held, the evidence indicates that the zero valuation ascribed to the certificate by BMO has nothing to do with its value as a security; 3) Although Bank Leu had advanced 3.3 million US by the time it had certificate 12093 in its physical custody BMO’s possession of the certificate and knowledge of its contents as agent can be imputed to Bank Leu. Thus, Bank Leu relied on the certificate from and after November 23, 1994; 4) GLC created and delivered the share certificates and deliberately placed them in the international stream of commerce knowing, or not caring, that they were likely to be used in a fraud. The Regulation S restriction does not assist GLC in this regard.

[64] The trial judge did not err in holding that Bank Leu acquired beneficial title to the shares by common law estoppel.

3. Was Share Certificate 12093 a Negotiable Instrument?

[65] Certificate 12093 was in “street form”, that is the share certificate in the name of Helix had attached to it an irrevocable signed stock power so that it could be freely transferred. GLC submits, however, that the Regulation S restriction noted on the shares means that it is not a negotiable instrument.

[66] The trial judge did not definitively decide whether the shares were a negotiable instrument or not because he found in favour of Bank Leu on the basis of common law estoppel. The trial judge did, however, say in his reasons at paragraph 65:

Drawing on the close analogy to the negotiability of bills of exchange, there may be support for the proposition that any restriction on transfer noted conspicuously on the certificate will render it non-negotiable. Professor Benjamin Geva, in Negotiable Instruments and Banking, Vol II. (Toronto, Edmond Montgomery, 1995) at p. 38 states that a bill, cheque or note must be unconditional at its inception and subsequent fulfilment of the condition does not make it unconditional. That being so, it could be said that because of the restrictions, certificate 12093 was not a negotiable instrument and even after November 15, 1995 certificate 12093 did not become a negotiable instrument.

[67] I would disagree with the trial judge’s interpretation that the time restriction on transferring the shares was a condition. A negotiable instrument is an unconditional promise to pay on demand or at a particular time: see B.A. Garner, ed., Black’s Law Dictionary, 7th ed. (St. Paul, Minn.: West Group, 1999). In the worse case scenario, that particular time was after November 15, 1995.

[68] More importantly, subsection 53(3) of the OBCA states:

Except where its transfer is restricted and noted on a security in accordance with subsection 56(3), a security is a negotiable instrument.

[69] I have already held that the regulation S restriction was not a restriction “in accordance with subsection 56(3)” in paragraphs 50 –55 of these reasons.

4. Did the trial judge err in holding that the oppression remedy was available to Bank Leu?

[70] The oppression remedy is contained in s. 248 of the OBCA. It states:

248. (1) A complainant and, in the case of an offering corporation, the Commission may apply to the court for an order under this section.

(2) Where, upon an application under subsection (1), the court is satisfied that in respect of a corporation or any of its affiliates,

(a) any act or omission of the corporation or any of its affiliates effects or threatens to effect a result;

(b) the business or affairs of the corporation or any of its affiliates are, have been or are threatened to be carried on or conducted in a manner; or

(c) the powers of the directors of the corporation or any of its affiliates are, have been or are threatened to be exercised in a manner,

that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer of the corporation, the court may make an order to rectify the matters complained of.

(3) In connection with an application under this section, the court may make any interim of final order it thinks fit including, without limiting the generality of the foregoing,

(a) an order restraining the conduct complained of;

(b) an order appointing a receiver or receiver‑manager;

(c) an order to regulate a corporation’s affairs by amending the articles or by-laws or creating or amending a unanimous shareholder agreement;

(d) an order directing an issue or exchange of securities;

(e) an order appointing directors in place of or in addition to all or any of the directors then in office;

(f) an order directing a corporation, subject to subsection (6), or any other person, to purchase securities of a security holder;

(g) an order directing a corporation, subject to subsection (6), or any other person, to pay to a security holder any part of the money paid by the security holder for securities;

(h) an order varying or setting aside a transaction or contract to which a corporation is a party and compensating the corporation or any other party to the transaction or contract;

(i) an order requiring a corporation, within a time specified by the court, to produce to the court or an interested person financial statements in the form required by section 154 or an accounting in such other form as the court may determine;

(j) an order compensating an aggrieved person;

(k) an order directing rectification of the registers or other records of a corporation under section 250;

(l) an order winding up the corporation under section 207;

(m) an order directing an investigation under Part XIII be made; and

(n) an order requiring the trial of any issue.

(4) Where an order made under this section directs amendment of the articles or by-laws of a corporation,

(a) the directors shall forthwith comply with subsection 186 (4); and

(b) no other amendment to the articles or by‑laws shall be made without the consent of the court, until the court otherwise orders.

(5) A shareholder is not entitled to dissent under section 185 if an amendment to the articles is effected under this section.

(6) A corporation shall not make a payment to a shareholder under clause (3) (f) or (g) if there are reasonable grounds for believing that,

(a) the corporation is or, after the payment, would be unable to pay its liabilities as they become due; or

(b) the realizable value of the corporation’s assets would thereby be less than the aggregate of its liabilities.

[71] The oppression remedy is designed to afford a remedy when a corporation acts in an oppressive, unfair or prejudicial manner towards a minority shareholder or creditor or in a manner that unfairly disregards their interests. Important underpinnings of the oppression remedy are the expectations, intentions and understandings of the minority shareholder and creditor. Against these are to be balanced the extent to which the acts complained of were unforeseeable or the extent to which the creditor and minority shareholder could reasonably have protected itself from the acts about which complaint is now made: Sidaplex-Plastic Supplier Inc., v. Elta Group Inc. (1995), 131 D.L.R. (4th) 399 (Ont. Gen. Div.) aff’d (1998), 162 D.L.R. (4th) 367 (Ont. C.A.).

[72] The expectations of the creditor or minority shareholder are determined on an objective basis. At a minimum the expectations of Bank Leu would include the expectation that a corporation would comply with the fundamental principles of corporate law in issuing shares and share certificates.

[73] GLC submits that in granting Bank Leu’s request for relief, the trial judge failed to take into consideration Bank Leu’s flawed behaviour in the transaction, which he characterized as “approaching recklessness” and in violation of Swiss Banking Law. GLC submits that the direct cause of Bank Leu’s situation was its own conduct and that the trial judge granted Bank Leu an inappropriate remedy.

[74] Section 248(3) empowers a court upon a finding of oppression to make “any order it thinks fit.” As held by this court in Naneff v. Con-Crete Holdings Ltd. (1995), 23 O.R. (3d) 481 at 486-487 (C.A.), and as stated in Sidaplex-Plastic Suppliers, supra, at para. 4: “This gives the court at first instance a broad discretion and the appellate court a limited power of review. The appellate court is entitled to interfere only where it is established that the court at first instance has erred in principle or its decision is otherwise unjust.”

[75] The trial judge found that GLC prevented Bank Leu from exercising its rights as a shareholder on the grounds that the shares had not been paid for. GLC created this situation by issuing Share Certificate 12093 which stated that the shares were fully paid for without requiring payment and allowing the certificate into the stream of international commerce. If the shares had been paid for it would not have mattered that the shares were restricted because at the very latest the Bank could have sold them as of November 15, 1995. Moreover, as I have held, the restriction did not prevent the shares from being transferred in these circumstances.

[76] GLC has not demonstrated any error in principle on the part of the trial judge. He considered all the relevant circumstances. His decision was not unjust.

B. The Third Party Claim

1. Was North Shore Vicariously liable for the fraudulent acts of its employee Anderson?

[77] In determining whether an employer is vicariously liable for an employee’s intentional tort, the analysis proceeds in two steps. The first step is to determine if existing authorities are decisive. If so, the analysis stops there. If not, the Court then proceeds to determine whether vicarious liability should be imposed in light of a broader based policy analysis based on whether the employer’s enterprise created or significantly enhanced the risk of the harm that occurred: see Bazley v. Curry (1999), 174 D.L.R. (4th) 45 at paras. 22, 41(S.C.C.); Jacobi v. Griffiths (1999), 174 D.L.R. (4th) 71 (S.C.C.) at paras. 67, 79. There must be a strong connection between the employer’s enterprise and the risk of the harm that occurred, sufficient to justify imposing employer liability (Bazley, supra, at para. 42; Jacobi, supra, at para. 29).

[78] GLC submits that North Shore is vicariously liable for Anderson’s alleged dishonest conversion of Laser Friendly (GLC’s) Share Certificate 12093, in breach of an escrow agreement, in furtherance of a fraudulent conspiracy. The trial judge found that any misconduct on the part of Anderson arose in the course of his private dealings in his personal capacity for which North Shore cannot be vicariously liable. GLC submits that that distinction was not properly determinative of the issue of vicarious liability.

[79] Traditionally, an employer is liable for employees’ unauthorized acts only if they are so connected with authorized acts that they might be regarded as modes, although improper modes, of doing them. The employer is not responsible if the wrongful act of an employee is not so connected with that authorized by or within the scope of employment as to be a mode of carrying out the employment. If the act can be viewed as an independent act of the employee, the employer will not be responsible: C.P.R. v. Lockhart, [1942] 3 W.W.R. 149 (P.C.) at 157.

[80] Where the plaintiff deals with the employee in a personal capacity or enters into contracts with the employee in a personal capacity the employer is not vicariously liable: Bagoo v. Tasker, [1993] O.J. No. 1734 (Gen. Div.) at paras. 41-43; Cambell v. Sherman, [1993] O.J. No. 2815 (Gen.Div.) at paras. 168, 170; Bourgeault v. McDermid (1982), 140 D.L.R. (3d) 174 (B.C.S.C.) at 176, 177; Rowe v. Investors Syndicate Ltd., [1984] O.J. No. 346 (H.C.J.) at paras. 150-162.

[81] I am not persuaded that the trial judge erred in holding that any misconduct of Anderson in wrongfully releasing the shares from escrow was carried out in his personal capacity and that North Shore was therefore not liable for his acts. The trial judge’s findings of fact, which are not attacked and which are amply supported by the evidence are as follows:

[121] It is plain from the very face of the escrow agreement that the contracting parties were Helix, Red Oak and Anderson, in his personal capacity. No one reading the escrow agreement would know that North Shore is involved in any way.

[122] The business decision to select Anderson and use him as escrow agent was Ericksteen’s and Ericksteen dealt with Anderson solely in his personal capacity. Moore, the lawyer for Helix and Ericksteen, confirmed in his evidence that North Shore was not a party to the escrow agreement and that at all times the intention was to deal with Anderson solely in his personal capacity. Moore was responsible to draft legal documentation for Ericksteen and his companies and in that regard he was familiar with the basic legal concepts of separate legal identity of corporations. He was likewise familiar with the need for companies to act through authorized signing officers. Moore was himself an authorized signatory for Helix and signed as such when intending to bind the company. It was Moore who drafted the escrow agreement and was fully aware that the agreement was to be with Anderson in his personal capacity. Moore’s communications with Anderson were to him directly without any mention of North Shore, he made demand under the escrow agreement directly on Anderson for the return of certificate 12093. Moore never put anyone at North Shore on notice of this demand.

[123] In these circumstances, where a party deals with an employee in a personal capacity or enters into contracts with the employee in a personal capacity, the employer cannot be vicariously liable: (see Bagoo v. Tasker, [1993]).J. No. 1734 (Gen. Div.); Campbell v. Sherman, [1993] O.J. No. 2815 at paras. 168, 170 (Gen. Div.)). Any misconduct by Anderson arose in the course of his private dealings and not as the authorized representative of North Shore.

[82] In addition, I note that the evidence indicates that North Shore never acted as an escrow agent for shares or securities. This was not a service that North Shore offered its members and Anderson was not authorized to act as an escrow agent on behalf of North Shore. North Shore never held out that he was so authorized.

[83] In the event this analysis is not determinative, however, I would hold that there should be no vicarious liability under the second stage of the analysis set out in Bazley, supra, and Jacobi, supra.

[84] The questions a court must ask itself in assessing the evidence at this stage and North Shore’s position, which I would adopt, are ably set out in its factum at para. 38 as follows:

• What opportunity did North Shore’s enterprise offer the employee to abuse his power or position? None. Helix and Red Oak were obviously prepared to deal with Anderson in a personal capacity.

• To what extent did Anderson’s alleged wrongful act further North Shore’s aims? Not at all. This is in contrast to the dreams of financial gain that motivated all other parties involved in the Gaming/Helix/Red Oak/Bank Leu transactions.

• To what extent was Anderson’s alleged wrongful act related to friction, confrontation or intimacy inherent in the employer’s enterprise? Not at all.

• What extent of power did North Shore confer on Anderson in relation to the victim? None. Unlike, for example, a credit union member whose assets the credit union entrusts to its employees, North Shore conferred no power on Anderson in relation to Gaming (or Helix or Bank Leu, or any other person involved for that matter).

• How vulnerable are potential victims? Not at all. Gaming was a public company, for which one should expect ready access to expert advisors, and high standards of management skill and integrity. Gaming in fact consulted skilled legal advisers, whose advice it consistently ignored. It is hard to imagine a less vulnerable class of “victim”.

[85] I would hold that the trial judge did not err in holding that North Shore is not liable for the conduct of Anderson.

III. Disposition and Costs

[86] For the reasons given, I would dismiss the appeal in the main action and in the third party action.

[87] At the conclusion of the hearing this Court reserved its decision and asked that the parties file submissions with respect to costs. Those submissions have now been received and, while submissions were made that costs of the appeal on a substantial indemnity basis were appropriate, I would award costs on a partial indemnity basis. On a partial indemnity basis Bank Leu seeks $38,945.86 and North Shore seeks $29,003.69 inclusive of disbursements and G.S.T. GLC does not challenge the quantum of costs sought by Bank Leu and North Shore on a partial indemnity basis. Accordingly, I would order that GLC pay the costs of this appeal and fix costs in favour of Bank Leu at $38,945.86 all inclusive and those of North Shore at $29,003.69 all inclusive.

Released: August 14, 2003

“KMW”

Signed: “Karen M. Weiler J.A.”

“I agree Louise Charron J.A.”

“I agree M. Rosenberg J.A.”

[^1]: During this period, GLC was also involved in two further Stock Roll transactions with the Third Party Defendants Farrell and Ferracone. The parties to the subscription arrangements in those transactions was an entity called “Delta West”. It was the use of share certificates issued in the first Delta West transaction that led to the SEC investigations.