DATE: 20050225

DOCKETS: C39556, C39557 and C41925

COURT OF APPEAL FOR ONTARIO

LABROSSE, WEILER and BLAIR JJ.A.

B E T W E E N :

GALE BLACKBURN and ROBERT H. BLACKBURN

Plaintiffs (Respondents, Appellants by way of cross-appeal)

• and -

MIDLAND WALWYN CAPITAL INC., LEVESQUE SECURITIES INC. and GEORGE GEORGIOU

Defendants (Appellants, Respondents by way of cross-appeal)

Counsel:

Gary L. Petker for the respondents, appellants by way of cross-appeal

James D.G. Douglas, David Di Paolo and Hugh G. Lissaman for the appellant, respondent by way of cross-appeal Midland Walwyn Capital Inc.

Joel Wiesenfeld and Linda M. Plumpton for the appellant, respondent by way of cross-appeal Levesque Securities Inc.

John Kingman Phillips and Laura C. Young for the appellant, respondent by way of cross-appeal George Georgiou

Heard: February 21, 2005

On appeal from the judgment of Justice Donald J. Gordon of the Superior Court of Justice dated January 22, 2003 and from the costs award of Justice Gordon dated September 2, 2003.

BY THE COURT:

Overview

[1] Following a 31-day trial, the respondents, Gale and Robert Blackburn (the "Blackburns") were awarded judgment for negligence and breach of contract in respect of losses in their brokerage accounts against the appellants, Midland Walwyn Capital Inc. ("Midland") and George Georgiou ("Georgiou"), jointly and severally, in the sum of $22,500, and against the appellants, Georgiou, Midland, and Levesque Securities Inc. ("Levesque"), jointly and severally, for a further sum of $120,000, plus interest and costs. Midland and Levesque were awarded judgment against Georgiou for contribution and indemnity in the amount of $41,250 and $30,000, respectively.

[2] The appellants appeal and the respondents cross-appeal the judgment. For the reasons that follow, we would dismiss both the appeal and cross-appeal.

The Issues

[3] The appellants appeal the following issues.

(1) Liability

[4] Georgiou acted as the Blackburns' stockbroker while he was employed by the brokerage firms Midland, from 1989 to November 19, 1993, and thereafter Levesque, from November 22, 1993 until January 27, 1995. He provided investment advice to the Blackburns, including recommendations as to purchases and sales of stocks. The Blackburns relied on Georgiou's knowledge and expertise and only purchased stocks on Georgiou's advice. As a result of following Georgiou's advice, the Blackburns suffered a financial loss on their investment accounts of approximately $190,000 from 1993 to 1995.

[5] In detailed reasons, the trial judge found that the requisite degree of vulnerability did not exist to establish a fiduciary relationship between Georgiou and the Blackburns. However, he found that all the appellants had a duty of care to the Blackburns and that the appellants had not discharged that duty.

[6] In particular, the trial judge found that Georgiou was negligent in his dealings with the Blackburns. It is not necessary to review the obvious negligence of Georgiou, which included a history of discretionary trading, disregarding client instructions, churning and unauthorized transactions. The trial judge's findings of negligence and breach of duty by Georgiou are not attacked on this appeal.

[7] The trial judge also found Midland and Levesque negligent in failing in their duty to supervise properly and control Georgiou in his dealings with the Blackburns and in failing to warn the Blackburns of the danger of dealing with Georgiou.

[8] Midland made Georgiou its youngest vice-president in the history of the firm – a special status symbol – knowing that he was breaking industry and internal rules, and was a risk to clients. Thereafter, all supervision by Midland ended. Georgiou was a rogue broker, but he was a big producer. No one warned the Blackburns that he was a risk to them and no one told them in November 1993 that he had been terminated for cause and why. On the contrary, the Blackburns were led to believe that Georgiou had resigned because of an innocent disagreement with Midland.

[9] Three days after Georgiou was fired by Midland for questionable trading practices and breach of regulations, he was hired by Levesque. Once again, no one at Levesque told the Blackburns he had been fired for cause by Midland. Levesque was well aware of the risk that Georgiou posed as a broker and it chose not to warn the Blackburns of the obvious risk of dealing with him. As stated, Georgiou was a big producer. Levesque accepted the risk "with full knowledge of the facts" and thereafter failed to investigate or monitor the accounts. Georgiou lost more of the Blackburns' money until he was also fired by Levesque.

[10] The trial judge found that liability resulted from negligence and also breach of contract. These findings are well supported by the evidence. It was reasonably foreseeable that if the brokerage firms did not supervise Georgiou, did not properly monitor the accounts, and did not warn clients, some would sustain losses at the hands of Georgiou. They totally ignored their duty to protect their client.

[11] On November 22, 1993, Mr. Blackburn entered into an agreement with Georgiou to cover the loss from an inappropriate and unauthorized transaction (the "impugned transaction"). We do not accept the submission of the appellants that this agreement was the cause of the loss to the Blackburns and that, in effect, it absolved Midland and Levesque of any liability. Although Georgiou had been terminated, the Blackburns' account was still at Midland and, until it was transferred to Levesque, Midland owed a duty to the Blackburns to supervise their account. Thus, before, at the time of, and after the agreement, the brokerage firms did not comply with the regulatory requirements to supervise the accounts of their client. Had they complied with the regulations, it would have been clear to both Midland and Levesque that there was an inappropriate concentration of one stock in the account from the impugned transaction. This would inevitably have led to an investigation and to contacting the Blackburns to inform them of the existing facts. Instead, they turned a blind eye to an improper state of affairs.

[12] We agree with the trial judge that the loss was caused because Midland and Levesque did not discharge their duty of care to the Blackburns properly.

[13] The trial judge also found that the Blackburns had contributed to their loss on the basis of their own investment knowledge and failure to approach management. He found that their negligence was considerably less than that of the appellants and assessed the degree of liability at 25% to the Blackburns and 75% to the appellants.

[14] It is important to note, on the issue of liability, that the trial judge drew an adverse inference from the failure of Georgiou and employees of Midland and Levesque who had involvement with Georgiou to testify. It was open to him to conclude, as he did, that their evidence would have been damaging to the appellants.

[15] We see no basis to interfere with the trial judge's finding and apportionment of liability.

(2) Ratification/Estoppel

[16] The appellants submit that the Blackburns ratified the actions of Georgiou in respect of the manner stocks were traded.

[17] The trial judge noted that the Blackburns had some trading experience but were not sophisticated or knowledgeable investors and that there was no evidence that they were aware that certain transactions were contrary to regulations. He concluded that, due to the failure of Midland and Levesque to warn the Blackburns of Georgiou's trading problems, they could not rely on ratification or estoppel. The brokerage firms chose not to contact the clients and report the danger; instead, they stood by silently. Further, the trial judge also found that ratification could not excuse negligence when the conduct of Georgiou "was, perhaps, a civil fraud and Midland and Levesque were well aware of his improper trading practices."

[18] In order for ratification to occur, the client must know all the circumstances. While the appellants submit that the Blackburns had sufficient knowledge of the transaction and that was all Mr. Blackburn needed, we disagree. Mr. Blackburn did not know that Georgiou was not entitled to trade his accounts on a discretionary basis, did not know that Georgiou had engaged in unauthorized trading on a regular basis with other clients and breached securities regulations, and did not know that Midland and Levesque knew that. Nor did he know that Midland had already had to pay out substantial sums as a result of Georgiou's misdealing.

[19] There was clear evidence that, had the Blackburns known the full extent of Georgiou's misconduct, the relationship with Georgiou would have ended.

[20] This issue was essentially a question of fact and we would not accede to this ground of appeal.

(3) Mitigation

[21] In terms of mitigation or delay, the trial judge, relying on Laflamme v. Prudential-Bache Commodities Canada Ltd., 2000 SCC 26, [2000] 1 S.C.R. 638, at paras. 53-56, concluded that the Blackburns could not have been expected to take action until they determined the acts of Georgiou and the brokerage firms were wrongful, which did not occur until they were informed of the conduct of Georgiou. It was this wrongful conduct which had led to his being fired by Levesque and the existence of a serious problem in their accounts. This finding is supported on the evidence.

[22] The losses occasioned here were caused by negligent management and cannot be shifted onto the victims. Moreover, the Blackburns took the very advice that Georgiou, an extremely convincing talker, convinced them to take as to how to mitigate their damages. This advice was followed to the knowledge of the brokerage firms. By taking his advice, the clients cannot be faulted.

[23] There was no failure on the part of the Blackburns to mitigate.

(4) Costs

[24] In fixing the costs of the trial, the trial judge took the following factors into consideration:

• little attempt was made to settle this action, contrary to evidence given at trial;
• the corporate defendants were determined to fight each issue to the very end;
• Georgiou was a dishonest stockbroker who ignored the regulations and ethical standards of the industry;
• the corporate defendants had actual knowledge of Georgiou's actions but chose to remain silent and made no attempt to protect their clients;
• Georgiou refused to cooperate;
• Levesque was responsible for delaying the trial and increasing expenses;
• Levesque opposed documents that should have been admitted for the truth of their contents;
• the brokerage firms' strategy included a personal attack on the honesty and integrity of Mr. Blackburn, for which there was no basis;
• certain strategies undertaken by the parties which were found to have no merit; and
• the trial took much longer than estimated because of the conduct of the appellants.

[25] In light of these factors, the trial judge concluded that the cost award should be based on the substantial indemnity scale as, in his view, to do otherwise would reward the appellants.

[26] Costs are in the discretion of the trial judge. In our view, there is a proper basis to justify the trial judge's decision based on the considerations outlined above. In addition, although not mentioned in his reasons regarding costs, the trial judge had found the conduct of Georgiou, for which the brokerage firms were in law responsible, "was perhaps a civil fraud". He fixed the costs of the action at $342,611.22 against Midland, Levesque and Georgiou, and a further amount of $40,000 against Levesque and Georgiou, plus G.S.T., based on 75% of the substantial indemnity scale (consistent with the apportionment of negligence), plus a premium of some $27,000.

[27] In allowing the premium, the trial judge took the relevant factors into consideration: the risk to the law firm, the responsibility assumed by the lawyer, the complexity of the case, the amount in issue, the importance of the case to the client, the skill shown by the lawyer, the result achieved, and the clients' ability to pay. He awarded a modest premium.

[28] We see no error that would justify this court to interfere.

(5) Levesque's claim for full indemnity from Georgiou

[29] The trial judge awarded Levesque contribution and indemnity against Georgiou for one-half of the judgment awarded against Levesque. Levesque claims that it should be fully indemnified by Georgiou.

[30] Recovery for the full claim against Georgiou was denied by the trial judge who found Levesque to have its own share of responsibility for the Blackburns' loss. The trial judge apportioned liability accordingly and we see no basis to interfere with this part of the decision.

The Cross-Appeal

[31] The Blackburns have cross-appealed on the following issues.

(1) Loss of Opportunity

[32] The claim for loss of opportunity brought by the Blackburns was based on a model that was said to represent the dealings of a conservative investor.

[33] The trial judge rejected this part of the claim because the evidence presented did not support the use of the model. The Blackburns had never invested conservatively, as they traded often and aggressively, purchasing and selling stocks, which are considered speculative in nature. The Blackburns' loss of profits based on the proposed model was highly speculative and not appropriate in the circumstances.

[34] The judgment also awarded prejudgment interest on the damages, which were argued to be substantially higher than prevailing rates during the period in question. In our view, in all the circumstances, the Blackburns were adequately compensated.

(2) Similar Fact Evidence

[35] The Blackburns submit that the trial judge erred in failing to admit similar fact evidence.

[36] A voir dire was held with respect to other account holders of Georgiou who had been supervised by the same management at the respective brokerage firms.

[37] The proposed evidence was not relevant to the issue of whether Midland was negligent in its supervision of the Blackburns' accounts. Arguably, the evidence was tendered to show a general disposition and to colour the trial judge's view of the brokerage firm. The trial judge concluded that the essential items such evidence would address had already been tendered and would have no probative value.

[38] This type of evidence was properly ruled inadmissible similar fact evidence.

(3) Punitive and Aggravated Damages

[39] The Blackburns argue that the trial judge erred in refusing to award punitive and aggravated damages based on the conduct of the appellants.

[40] It is only in exceptional circumstances that mere negligence or breach of contract will warrant an award of punitive damages. The conduct of Midland and Levesque, although negligent, was found not to be sufficiently reprehensible, vindictive, harsh or malicious to warrant an award of punitive damages. The trial judge's decision not to award such damages was reasonable on the facts of this case and there is no basis to disturb his decision in this regard.

Disposition

[41] In the result, we would dismiss both the appeal and the cross-appeal. The Blackburns are entitled to their costs of the appeal. On the other hand, the Blackburns cross-appealed, pursued the cross-appeal at the hearing, and lost. Success has been divided and, in the circumstances, we would fix the costs of the appeal to the Blackburns at $35,000 plus disbursements and G.S.T. and dismiss the cross-appeal without costs.

Released: FEB 25 2005 Signed: "J.-M. Labrosse J.A." JML "K.M. Weiler J.A." "R.A. Blair J.A."