Hampton Securities Limited v. Tassone, 2016 ONSC 1743

CITATION: Hampton Securities Limited v. Tassone, 2016 ONSC 1743

COURT FILE NO.: CV-11-436896

DATE: 20160310

SUPERIOR COURT OF JUSTICE – ONTARIO

RE: HAMPTON SECURITIES LIMITED ON ITS OWN BEHALF and ON BEHALF OF ALL CREDITORS OF JOSEPH TASSONE, Plaintiff/responding party

AND:

JOSEPH TASSONE and ANNE TASSONE, Defendants/moving parties

BEFORE: Stinson J.

COUNSEL: Colby Linthwaite, for Plaintiff /responding party

Jordan Kirkness, for Defendants/moving parties

HEARD: December 11 and 22, 2015

ENDORSEMENT

Introduction

1This is an employment case, involving the relationship between an investment firm, Hampton Securities Limited and one of its former employees, Joseph Tassone. Tassone was employed as a “trader" by Hampton for approximately 14 years, until his resignation/constructive dismissal in September 2011.

2Tassone 's job was to buy and sell publicly traded securities in the name of Hampton, using capital supplied by Hampton, with a view to making profits arising from those trades. At the time Tassone left, he had accumulated over $500,000 in trading losses, largely due to one specific investment in a company that became insolvent. Hampton is suing Tassone for those losses.

3This decision concerns a motion for partial summary judgment brought by Tassone and his wife. The issue at this stage of the case is whether, as a former employee, Tassone must reimburse Hampton for his accumulated losses. By agreement of counsel, this motion will finally decide (in favour of one side or the other) the issue of liability for the main claim advanced by Hampton. Depending on the outcome of that issue, it may also dispose of the remainder of Hampton’s claim, leaving only Tassone’s counterclaim for wrongful dismissal unresolved.

Facts

4Tassone began working for Hampton as a trader in 1997. The parties have been unable to locate an employment agreement signed by him. The record contains copies of a form of agreement signed by other traders in November 1997, at the time the business was started and they and Tassone began working for Hampton. It is likely and I find as a fact that Tassone either signed an identical document, or was aware of its terms and assented to them by virtue of his ongoing employment.

5Many of the terms of Tassone’s employment (such as the ones contained in the November 1997 document) are undisputed, while others are hotly contested. The contested terms include the status of a so-called “personal reserve account” (discussed below) and the more fundamental question of whether Tassone had any liability to cover losses arising from trades carried out by him, following the termination of his employment.

6The funds used by Tassone to carry out the transactions were Hampton’s funds and the trades were carried out on its account. As a result, any profits or losses were also for the account of Hampton. In relation to remuneration, the parties agreed that up to a certain threshold, the profits would be split on the basis that each would receive 50%. Above a certain threshold, the division would be 60% to Tassone and 40% to Hampton.

7The foregoing arrangement, however, was subject to an important qualification: in months in which the trades made by Tassone achieved no profits, he would earn no remuneration. If the trades he made resulted in a loss, that loss would notionally be carried forward to the next month. Thereafter, Tassone would earn remuneration and be paid only if he were able to generate profits sufficient to offset the accumulated loss; in that event, he would be paid by applying the appropriate percentage split to the profit remaining after the accumulated loss was eliminated. If losses were incurred for a series of months, the losses would accumulate, and Tassone would earn nothing during that time. Only once Tassone again generated profits that were sufficient to overcome his accumulated losses, would he earn anything.

8In addition to the foregoing terms of remuneration, the arrangements between Hampton and Tassone included a so-called “personal reserve account.” There is no documentation prescribing all of the terms of the personal reserve and thus, not surprisingly, there is some dispute as to those terms.

9Summarized simply, the personal reserve was a notional capital account maintained by Hampton in its records. It was comprised of income earned by and allocated to Tassone, but not yet paid over to him and/or funds actually contributed by Tassone to his personal reserve account. Generally speaking, it was maintained at the level of $100,000. It sometimes fluctuated depending on draws made by Tassone, contributions made by him, remuneration earned by him and notional offsets imposed by Hampton in months where Tassone had trading losses.

10Relations between Hampton and Tassone began to unwind in the late spring of 2011 when, as a result of one particular investment that went sour, Tassone’s accumulated trading losses exceeded $500,000. As a result, Hampton decided to place a limit on the amount of capital that it made available to Tassone to make further investments. For his part, and in light of that restriction, Tassone considered that his prospects of ever generating enough profits to overcome his accumulated losses were dim and thus his chances of earning further income from Hampton were similarly poor. Following discussions with Hampton, Tassone resigned his employment. At the time of his resignation, the aggregate of trading losses incurred by Tassone was in the order of $700,000, while the amount in his personal reserve was approximately $100,000.

11When Tassone left, Hampton took the position that: (1) Tassone was liable to indemnify it for the full amount of the accumulated losses in his trading account; and (2) Hampton was entitled to apply against those losses the remaining balance in Tassone’s personal reserve. Accordingly, following Tassone’s departure, Hampton applied the remaining balance of Tassone’s personal reserve to reduce the accumulated trading losses. It also liquidated Tassone’s shares in Hampton and used the proceeds to pay down the losses. After these steps, the remaining net loss was in excess of $600,000.

12Hampton subsequently commenced this action against Tassone to collect the remainder of the accumulated loss. Hampton also claims relief against Tassone’s spouse under Fraudulent Conveyances Act, R.S.O. 1990, c. F.29. It says that a transfer by Tassone to his wife of his interest in the matrimonial home should be set aside because it was carried out in order to defeat creditors’ claims.

13Tassone denies liability for the sum claimed and takes the position that he was constructively dismissed by reason of the strictures placed upon him concerning further trading. The Tassones deny the conveyance offended the statute. In his counterclaim in the current action, he seeks damages for constructive dismissal.

Issues and Analysis

14The fundamental question on this motion for partial summary judgment is largely a question of fact: did the parties agree that Tassone would indemnify Hampton for all outstanding trading losses in the event of the termination of the employment relationship? A secondary question is: were the terms of Tassone’s employment contrary to the provisions of the Employment Standards Act, R.S.O. 1990 c. E. 14 (“ESA”), as amended, with the result that Hampton is prohibited from enforcing the terms that it says entitle it to the relief it seeks?

Issue 1 - Did the parties agree that Tassone would indemnify Hampton for all outstanding trading losses in the event of the termination of the employment relationship?

15I have previously described the undisputed terms of Tassone’s employment.

16Hampton’s argument that Tassone is liable for all accumulated losses, whether or not they are covered by the personal reserve, is based primarily on the history of dealings between the parties. Hampton asserts that no single “canonical" document exists that contains all terms of employment. It points to the (unsigned) original employment offer in November 1997, a memorandum to Tassone dated December 13, 2002, the monthly payout statements showing the calculation of Tassone’s remuneration and accumulated trading losses, the audit confirmations signed by Tassone regarding the status of his reserve account, and the oral evidence of the principal witnesses.

17Hampton submits that Tassone is bound by a memorandum dated December 13, 2002 from its president, Peter Deeb, which reads as follows:

This note will confirm that you and all traders are subject to our standard policy with respect to any trader reserve balance that is or may be held on our books.

Hampton reserves the right to increase reserve requirements at its sole discretion and retains the right to offset reserves and any trading revenue against the trading losses incurred by the applicable trader.

18Hampton’s records confirm that the reserve account was shown as a liability owed by the employer to the employee; from time to time Tassone’s accumulated losses were netted out to arrive at a calculation of the net reserve owing to Tassone. Subject to one possible exception, there are no other documents or evidence in the record to explain the terms or the operation of the personal reserve.

19The possible exception concerns an earlier occasion during which, during a period when Tassone’s accumulated losses were several hundred thousand dollars, he voluntarily offered to top up his personal reserve by contributing $200,000. No express terms were discussed at the time. Tassone proffered a cheque for $200,000, but it was never cashed. I interpret that incident as reflecting an offer by Tassone to assist Hampton in meeting its capital reserves as required by the applicable regulatory regime. In any event, this incident did not address post-employment obligations.

20In relation to the issue of the liability of departing employees for accumulated trading losses, no writing reflects such an obligation. Deeb suggested there is an established practice in the industry. I am not prepared to rely on his evidence on this point, given his concession that the practice in relation to reserve accounts varies from firm to firm. More importantly, there was no independent evidence with respect to such a practice; if such a practice does indeed exist, it should have been very straightforward for Hampton to adduce evidence to support the proposition. In the absence of such evidence, I am not prepared to make such a finding.

21Tassone disputes Hampton’s assertion regarding his obligations on termination. Indeed, Tassone disputes the enforceability of Hampton’s policy and practice relating to his personal reserve. He argues, among other grounds, that he was never shown a copy of the memorandum dated December 13, 2002 and that, in any event, there is no consideration for such an amendment to the terms of his employment relationship.

22More significantly, Tassone argues, the parties had no agreement with respect to the employee’s responsibility to cover accumulated trading losses upon termination of the employment relationship, and certainly no agreement that would expose the employee to liability in excess of the amount of his personal reserve. Tassone also disputes the suggestion that there is an established industry practice. I do not need to deal with this last point, since I do not accept that Hampton has established the existence of such a practice.

Express Term?

23Before reviewing the other evidence that bears on the fundamental question, it is useful first to recap what the known terms of employment were. Although there is no signed copy of it, the document dated November 13, 1997 contains an offer of employment from Hampton to its prospective employees, containing specific terms with respect to compensation. Over the subsequent years, Tassone was compensated in accordance with the terms set forth in this document. This document is silent in relation to the employee's potential liability for trading losses, either during the currency or at the end of the employment relationship. There is no mention of a personal reserve.

24The evidence of both parties confirms that, soon after the employment relationship commenced, Tassone began to accumulate a personal reserve; over time he contributed additional funds to increase the reserve from $25,000 to $100,000. Little turns on the source of the funds in the reserve. The reality is best reflected in the audit confirmation documents signed by the parties. In one of these, Hampton confirmed its liability to Tassone for the full $100,000, an amount that was confirmed by Tassone. In another audit confirmation, Hampton recited its liability to Tassone for $100,000 net of accumulated losses of $26,000, for a net liability of $74,000. This, too, was confirmed by Tassone. These documents reflect an understanding between the parties that the personal reserve was considered to be available to offset accumulated trading losses.

25The audit confirmation forms signed by Tassone are also consistent with the contents of the memorandum dated December 13, 2002. It recites that the employer “retains the right to offset reserves and any trading revenue against the trading losses incurred by the applicable trader.” While I am aware that Tassone disputes having received a copy of the memorandum, given the length of time that has lapsed (more than a decade) and also the contents of the audit confirmation documents, I do not accept Tassone's evidence on this point.

26The personal reserve is also referenced in the monthly payout sheets that were prepared to calculate Tassone’s income. The established practice of the parties was that Tassone was not entitled to be paid compensation at any time when he had accumulated trading losses, taking into account his prior performance and his performance during the month in question. He was paid only when his current month’s trading profits eliminated any accumulated loss from prior months; in that event, the net profits would be split according to the established formula. Month by month trading losses were aggregated until they were extinguished by trading profits. The payout sheets referenced the payout to the employee before deduction for reserves.

27The parties carried on in this fashion for many years. Tassone earned and was paid remuneration on the basis described above; the reserve account was established, maintained and accounted for on an ongoing basis. Tassone nevertheless argues that the reserve account and the entitlement of Hampton to deduct accumulated losses against it were modifications or amendments to the employment agreement that were not supported by consideration.

28Hampton responds that no consideration was necessary because the reserve and its purpose and application were part of the employment relationship throughout. In support of this proposition, Hampton points to the situation (described previously) in which when Tassone voluntarily proffered a cheque for $200,000 to increase the size of his reserve fund, at a time when the accumulated trading losses were in the vicinity of $300,000. As noted, the cheque was never cashed and ultimately the losses were extinguished by other profits, and compensation continued as before.

29That incident illustrates one of the underlying purposes of the reserve fund, namely, to preserve the liquidity of Hampton’s financial reserves so that it could continue in business. In situations where losses accumulate to a certain point, the capital reserves of Hampton would be depleted such that its ability to trade freely might be restricted due to regulatory requirements. Accordingly, the personal reserves of the traders provide an additional cushion for Hampton’s own capital reserves. That purpose and the existence of the reserves would be consistent from the commencement of employment.

30The foregoing fact, coupled with the original capitalization of the reserve at $25,000 and its subsequent increase to $100,000, and the audit confirmations signed by Tassone, all lead me to conclude that the personal reserve concept and the entitlement of the employer to offset accumulated losses against the reserve, were part of the employment relationship from the beginning. It follows that no additional consideration was necessary because, save in relation to the amount of the reserve, the terms of the reserve were part of the employment contract throughout.

31I therefore find as a fact that it was a term of the employment contract between the parties that a personal reserve would be maintained by Tassone with Hampton. Those funds were the property of Tassone, but were available to be applied to reduce or extinguish any accumulated trading losses. The personal reserve would thus also be available to be applied against any losses that may have existed when employment ceased.

32The foregoing analysis establishes what the terms of the parties’ contract were. Still unanswered, however, is the fundamental question, namely: did the parties agree that Tassone would indemnify Hampton for all outstanding losses in the event of the termination of the employment relationship?

33As mentioned, no document provides for Tassone to be liable to indemnify Hampton for all accumulated losses in the event he ceases to be an employee. Indeed, Tassone’s situation is to be contrasted to that of another former employee of Hampton whose employment contract (which was signed many years after Tassone joined Hampton) included the following express terms:

You acknowledge responsibility for any and all losses incurred by you, including but not limited to trading losses, execution costs, clearing costs and system commitments, as well as Hampton’s right to offset these losses and/or costs against reserves held on your behalf. In the event that said reserves are insufficient to cover off your obligations to Hampton, you acknowledge Hampton’s right to full recourse from you. [emphasis added]

34The foregoing language may be also contrasted to the contents of another trader’s employment contract signed in November 2001 (also after Tassone joined Hampton) which said nothing about the trader’s liability for accumulated losses at the date of termination of employment. In relation to reserves, that agreement provided as follows:

A reserve will be accumulated up to a minimum of $50,000 at the rate of 5% of net revenue generated per month. Interest will be paid annually at the sub debt rate of 6%. Hampton reserves the right to increase reserve requirements at its sole discretion, and retains the right to offset reserves and any trading revenue against the trading losses incurred by the applicable trader

The contract in which the above passage appears also contained the following language:

This agreement contains the entire contract of employment between you and Hampton and supersedes all previous negotiations, understandings and agreements whether verbal or written with respect to any matters referred to herein.

35While I recognize that the two employment contracts from which I have just quoted were with other traders, they are notable for several reasons. First, at a stage after Tassone was hired, Hampton made it a practice to insert an express clause in its employment contracts addressing the liability of a trader in respect of accumulated losses where the reserves were insufficient to cover the obligations. The trader was required to acknowledge Hampton’s right to full recourse, a right that would survive termination of the employment relationship. This is plainly not something that was included in any document relating Tassone's employment.

36The other notable point is that in the November 2001 contract nothing is said about liability where reserves are insufficient to cover off obligations and there is no acknowledgement of Hampton’s rights to recourse. Additionally, that contract expressly provides that it is the entire agreement between the parties. Although this is not Tassone’s contract, such a provision – coupled with the lack of any language dealing with liability for losses in excess of the reserve – contradicts Deeb's assertion that it is Hampton’s as well as the standard practice for traders on Bay Street to be liable for their losses, as he now claims.

37Based on the foregoing, I am not prepared to find as a fact that it was an express term of the employment contract between Hampton and Tassone that, in the event Tassone’s accumulated losses exceeded his personal reserve at the time the employment relationship ended, Tassone would be liable to make good 100% of the remaining losses. Based on the evidence I accept, the parties' agreement did not include such a term.

38Hampton nevertheless asserts that such a term should be implied into Tassone’s employment agreement.

Implied Term?

39The concept of the implication of a contractual term was discussed by Lambert J.A. in London Drugs Ltd. v. Kuehne & Nagel International Ltd. (1990), 1990 CanLII 3811 (BC CA), 70 D.L.R. (4th) 51 (BCCA) as follows:

A contract establishes certain rights and obligations which the parties to the contract have agreed to undertake, as between themselves. The courts will not impose obligations between the contracting parties as a result of the contract that the parties did not themselves agree to. But, on the other hand, the courts will not let a contract lapse or fail if it is clear enough what the parties intended, and what they thought they had agreed to, but they have failed to provide expressly for some necessary aspect of their agreement.

There is a useful restatement of the relevant principles in the reasons of Lord Simon of Glaisdale, for the Privy Council, in BP Refinery Western Port Pty Ltd. v. Shire of Hastings (1977), 16 A.L.R. 363 (P.C.) at page 376:

Their lordships do not think it is necessary to review exhaustively the authorities on the implication of the term in a contract which the parties have not thought fit to express. In their view, for a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to get business efficacy to the contract so that no term will be implied if the contract is effective without it; (3) it must be so obvious that “it goes without saying”; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract."

40Applying the foregoing analysis to the present case, I make the following observations in relation to the question whether a term should be implied in Tassone’s contract of employment requiring him to cover all remaining trading losses (following the application of his personal reserve) in the event of the termination of his employment:

(1) In relation to the condition that the implied term be reasonable and equitable, I note that the express terms of Tassone’s employment contract provide that he was to receive only a portion of the profits generated by his trading: they were to be divided 50/50 or 60/40 depending on the level of profit attained. Although Hampton was expressly entitled to retain a share of the profits, the implied term it requests would result in Tassone being responsible for all of the losses. I cannot say this is reasonable or equitable. Thus, this condition is not satisfied.

(2) In relation to the key condition that the agreement between the parties lacks business efficacy and requires additional terms to make it effective, in this case the employment contract was fully effective without any need for an implied term. This condition is not satisfied.

(3) In relation to the condition that the implied term would “go without saying”, I cannot agree that it would. In other cases, such as the trader’s contract quoted above, express language was used. Given the absence of any language addressing the issue, I am not prepared to say that it is obvious that Tassone would be responsible for all his losses. This condition is not satisfied.

(4) I agree that such a term would be capable of clear expression.

(5) In relation to the condition that the implied term not contradict any express term of the contract, it is arguable that such a term might be viewed as contradicting the division of profits expressed in the contract, since it requires the employee to absorb all the losses. This condition is not satisfied.

41Having considered the relevant factors, I find that four out of five are not satisfied. I therefore do not accept that a term requiring Tassone to compensate Hampton for all accumulated losses upon the termination of the employment relationship is a necessary and obvious term that should be implied.

42I therefore conclude that it was neither an express or implied term of the parties’ agreement that, on termination, Tassone was liable for all accumulated losses in excess of his personal reserve.

Summary re Issue 1

43The evidence satisfies me that it was a term of Tassone’s employment that he was required to maintain a personal reserve. Hampton was entitled to set off against the personal reserve, the aggregate of Tassone’s trading losses. This is clearly reflected in the audit confirmation letter signed by Tassone. This means that when Tassone departed, Hampton was entitled to apply the balance of his personal reserve to reduce his accumulated losses.

44The evidence fails to persuade me that the parties agreed that, in the event of the termination of his employment, Tassone had a contractual obligation to indemnify Hampton for accumulated losses in excess of his reserve. Such a term was neither expressed in the employment contract nor can it properly be implied.

45In view of the factual findings I have made and the conclusions I have reached, Hampton’s claim for payment of the alleged indebtedness must fail, because it is founded upon a premise I do not accept. It is therefore unnecessary for me to address the submissions of the parties regarding whether the contract alleged by Hampton was unenforceable by reason of violations of the Employment Standards Act.

Conclusion and Disposition

46For these reasons, Hampton's claim for payment of accumulated losses in excess of Tassone’s retained personal reserve is dismissed. The Tassones’ motion for partial summary judgment is granted. Should Hampton (or the Tassones) be seeking further relief in relation to the claim of Hampton, counsel should arrange a telephone case conference with me at which that topic may be addressed.

47Unresolved (and not expressly addressed in the parties’ oral submissions before me) is the propriety of Hampton’s unilateral liquidation of Tassone’s shares, and the application of the proceeds of that process to reduce his accumulated losses. In the event that issue is contentious and the matter proceeds further in relation to Hampton’s claim or Tassone’s counterclaim, that subject can be addressed then, or as the parties may decide.

48In relation to the counterclaim (which was not addressed during the motion for partial summary judgment) consistent with the directives of the Supreme Court of Canada in Hryniak v. Mauldin, 2014 SCC, I will remain seized of this proceeding. Once the parties determine how (or if) they wish to proceed, a telephone case conference should be convened so that an appropriate procedure can be discussed and the necessary directions given.

49Finally, in relation to costs, I invite the parties to reach agreement. Should they be unable to do so within 15 days, they may make brief written submissions, as follows:

(a) The defendants shall serve their costs outline on the plaintiff, accompanied by written submissions, within 20 days of the release of these reasons.

(b) The plaintiff shall serve its response on the defendants within 15 days thereafter. I invite the plaintiff to submit the costs outline it would have presented had it been successful on the motion.

(c) The defendants shall serve their reply, if any, within 10 days thereafter.

(d) In all cases, the written submissions shall be limited to three double-spaced pages, plus costs outlines.

(e) I direct that counsel for the defendants shall collect copies of all parties' submissions and arrange to have that package delivered to me in care of Judges' Administration, Room 170 at 361 University as soon as the final exchange of materials has been completed. To be clear, no materials should be filed individually: rather, counsel for the defendants will assemble a single package for delivery as described above.

___________________________ Stinson J.