Hendrickson v. Reserverlogix Corp., 2012 ABQB 766

Court of Queen ’ s Bench of Alberta Citation: Hendrickson v. Reserverlogix Corp., 2012 ABQB 766 Date: 20121217 Docket: 1001 05066 Registry: Calgary Between: Cliff Hendrickson and Valari Hendrickson Plaintiffs - and - Reserverlogix Corp., Donald Mccaffrey, Gary Maekelburger and Werner Gerl Defendants _______________________________________________________ Reasons for Judgment of J.B.

Hanebury, Master in Chambers _______________________________________________________ [ 1 ] The plaintiffs, a husband and wife (the Hendricksons), have sued three individuals and a company, Reserverlogix Corporation (the Company), for their losses on the shares of the Company and their loss of opportunity. An application has been brought by the Company for

summary judgment dismissing the claim against it. [ 2 ] Reserverlogix Corporation is a pharmaceutical development company, publicly traded on the Toronto Stock Exchange. The defendant, Donald McCaffrey, was a director of the company and employed as the chief executive officer. He had two friends, his co- defendants, Gary Maekelburger and Werner Gerl, who were also friends of the Hendricksons.

[ 3 ] Over a period of time information was provided to the Hendricksons to the effect that certain drug trials were going well and the Company would be taken over at the end of 2007 which would significantly increase the share price. Based on this information the Hendrickson’s bought shares. Despite the failure of the sale to materialize by the end of 2007, the Hendricksons purchased more shares in 2008. The sale still did not occur and their shares fell in value. Some of their shares they bought by way of a margin account which was eventually called.

The Hendricksons claim damages of $263,000 for a loss on their share purchases and they also claim for a loss of opportunity in the amount of $2.5 million. FACTS AND ALLEGATIONS [ 4 ] The pleadings set out the claim against the Company. [ 5 ] The Henricksons allege that the individual defendants, including Mr. McCaffrey as the authorized representative of the Company, “fraudulently, or in the alternative grossly negligently, or in the alternative negligently, misrepresented” certain matters in relation to the underlying value of the shares of the Company.

Those misrepresentations include alleging that: the underlying drug over which the company had patent rights would be “the greatest drug in the history of the world”; the company had entered into a final and binding agreement which would be announced on December 31, 2007, for a takeover at a value of between $60.00 and $100.00 per share; and, there would be a substantial royalty of between 3 and 12% payable to the holders of the company’s shares on the revenue from the sale of the drug for the remainder of the life of the patent.

The Hendricksons allege that the Company is vicariously liable for the conduct and statements of Mr. McCaffrey, as they were made in his capacity as a director and senior officer of the Company. [ 6 ] Particulars were sought in relation to these allegations. [ 7 ] In relation to Mr. McCaffrey it is alleged that he or one of the other two co-defendants told Mr. Hendrickson “how great Reserverlogix Corporation was doing”. It is alleged that one evening Mr. McCaffrey stated that he anticipated making $400 million from the share proceeds after the sale. The particulars allege that Mr. McCaffrey told Ms.

Hendrickson that he had the sale deal for Reserverlogix Corporation “under his arm” and that the results of their drug, which was being tested in United States, were extremely positive. It is alleged that Mr. McCaffrey also told Ms. Hendrickson that he had given a personal guarantee on their margin account at Blackmont and he provided her with some details of the sale. It is alleged that he told the couple that the deal would be “soon” and the share price would be about $100.00 a share. They allege that they heard him complain that the stock was being manipulated and shorted.

They allege that when they ran into financial difficulties he helped them arrange a mortgage and said “we will cover your margin”. [ 8 ] It is also alleged that overall the attitude and comments of Mr. McCaffrey led the Hendricksons to invest in the Company. As a result of these alleged statements, the Hendricksons say that they encouraged their family and friends to invest in the company and $10,000,000.00 of shares were purchased on the stock exchange. [ 9 ] The Hendricksons admit in their Reply to the Demand for Particulars that they do not believe Mr.

McCaffrey sold any of his shares during the period in issue. [ 10 ] In response to this Reply to Demand for Particulars the Company brought this application for

summary dismissal to strike the claim against it for vicarious liability. An affidavit in support was sworn by Brad Cann, Chief Financial Officer. He was not cross- examined on his affidavit. [ 11 ] He states that on January 25, 2007, the company publicly announced that it had retained a financial advisor to assist with strategic alternatives. The announcement stated that this was a “pre-planning stage” and that “our goal is to enter into a strategic agreement with a pharmaceutical company”. A subsequent filing by the Company notes that a potential sale was still being pursued in December, 2007. [ 12 ] Mr.

McCann states that if Mr. McCaffrey made any actionable comments to the Hendricksons, the Company did not condone, permit or allow him to do so, nor could it have benefitted from such statements. He states that there was no pending takeover, and whether there was or not, any discussions or comments would have been prohibited by the Company as set out in their policies, and such statements formed no part of Mr. McCaffrey’s duties. Furthermore, such comments, if there was in fact a takeover contemplated, were illegal as constituting insider trading.

Finally, he states, the shares of the company were traded to such a degree that the transactions of

the Hendricksons would not have affected either the price or the appearance of the volume of trading. [ 13 ] No affidavit evidence was filed by the Hendricksons. ARGUMENT [ 14 ] The Company points out that the disclosure of insider information, such as that alleged to have been disclosed by Mr. McCaffrey, is contrary to the Criminal Code ,

section 382.1 (2) and the Securities Act , section 147 (3). At the same time, by attempting to profit from insider information, the plaintiffs themselves would have been in breach of section 147 (2) of the Securities Act and

section 382.1 (

e) of the Criminal Code . [ 15 ] It notes that the Company’s internal policies and procedures, including its Insider Trading Policy and Disclosure and Media Policy, prohibit the behaviour alleged to have been carried out by Mr. McCaffrey. [ 16 ] The Company argues that Mr. McCaffrey is the only individual defendant who has any relationship with the Company. As the other two defendants have no relationship with it there are no circumstances under which the Company could be responsible for anything said by them to the plaintiffs. The only issue therefore is whether the Company, as Mr.

McCaffrey’s employer, is vicariously liable for the statements made by Mr. McCaffrey. [ 17 ] The Company notes that it is alleged in paragraph 8 of the Statement of Claim that the Company “authorized” Mr. McCaffrey to make the above statements. It argues that it has provided evidence that this is not correct and there is no evidence from the Hendricksons to support that allegation. [ 18 ] The primary claim therefore, is for vicarious liability of the Company for the alleged authorized or unauthorized statements of Mr. McCaffrey, its employee and director.

Accepting for the purposes of this application that those statements were made, the Company argues that this situation does not meet the test for vicarious liability and the Court should determine that issue summarily. The statements were unauthorized and were made in a social setting, not a business setting.

The Company acknowledges that employers can sometimes be vicariously liable for the unauthorized acts of their employees, but argues that this principle has never been extended to a situation where the plaintiff and the employee were in league together or where the plaintiff could not reasonably have believed that the employee was carrying out his employment duties in doing the things complained of. [ 19 ] The Hendricksons respond that in light of Mr.

McCaffrey’s position in the Company, whenever and wherever he talked about the Company’s business, including in a social setting, he was doing so in his capacity as an authorized officer of the Company. [ 20 ] The plaintiffs also argue that the application is premature as: there are no affidavits of records; they do not have any affidavit evidence of Mr. McCaffrey, nor has he been questioned; and, there is no evidence from him under oath as to the capacity in which he was making the alleged representations.

By this I take it that they are of the view that with his evidence they may be able to argue that he was authorized by the Company to make the statements he did. ISSUE [ 21 ] Is there a genuine issue for trial as to the vicarious liability of the Company for the acts of Mr. McCaffrey? If there is no genuine issue for trial, should the Court dismiss the claim at this time or adjourn it for consideration at a future date? ANALYSIS [ 22 ] The test for the

summary dismissal of a claim is well known. The Court must be satisfied that there is no genuine issue of

material fact requiring a trial: Canada (A.G.) v. Lameman, 2008 SCC 14 , [2008] 1 S.C.R. 372. The burden is on the defendantand it cannot rely on mere allegations in the pleadings. Each side must put its best foot forward: para. 11, citing Goudie v. Ottawa (City),2003 SCC 14, para 32. At para. 19 of Lameman the Court noted that “[a]

summary judgment motion cannot be defeated by vaguereferences to what may be adduced in the future, if the matter is allowed to proceed [as] to accept that proposition would undermine therationale of the rule.” See as well: Murphy Oil Co. et al. v. Predator Corp. et al., 2004 ABQB 688 , [2005] 365 A.R. 326(Q.B.), aff’d 2006 ABCA 69, at para. 89, citing Suncor Inc. v. Canada Wire & Cable Ltd. (1993) (AB KB), 7 Alta.L.R. (3d) 182 (Q.B.). [23] Where the issue is one of law, the Court may decide the issue summarily if it can fairly be decided on the record before it:Tottrup v.

Clearwater (Municipal District) No. 99, 2006 ABCA 380 , 2006 Carswell Alta. 1627; Dow Chemical Canada Inc.v. Shell Chemicals Canada Ltd., 2010 ABCA 126. Is there a genuine issue for trial as to the vicarious liability of the Company for the acts of Mr. McCaffrey? [24] The concept of vicarious liability of an employer for the authorized and unauthorized acts of its employees is not new. In Lloyd (Pauper) v. Grace, Smith & Co., [1912] A.C. 716 a firm of solicitors was held liable for the fraud perpetuated by their articlingclerk who improperly obtained property from a client.

However, the concept has expanded from this original narrow realm to includeother more diverse factual situations. [25] In this case the Hendricksons first argue that there is a genuine issue for trial on the basis that the misrepresentations made byMr. McCaffrey were authorized by the Company. They point to his status in the company as support for that statement. [26] There is no case that holds that a company is deemed to have authorized the illegal acts of its director or CEO.

It wassuggested by counsel for the Company that such a finding would mean that a rogue officer who schemed with an outside party to defraudhis employer would be acting with the employer’s deemed authorization. As noted in 671122 Ontario Ltd. v. Sagaz Industries CanadaInc., 2001 SCC 59, at para. 58, there is no presumption that the scope of an employee’s authority includes the commission of unlawfulacts. [27] In this case, the provision of insider information was an unlawful act. Therefore, for this argument to constitute a triable issue,there must be some evidence other than the position of Mr.

McCaffrey to support the claim that the Company authorized Mr. McCaffreyto commit this unlawful act. [28] The only evidence on the issue is under oath from the Company’s representative who swears that it did not authorize Mr.McCaffrey’s actions. That evidence was not challenged by way of cross-examination nor was any evidence filed by the Hendricksons.As a result, there is no evidence on the record to support a claim that the Company is vicariously liable for the acts of Mr. McCaffrey onthe basis that those acts were authorized. [29] The Hendricksons next argue that the Company is liable for Mr.

McCaffrey’s actions, even in unauthorized. [30] The leading case on vicarious liability in Canada for unauthorized tortious acts by an employee is Bazley v. Curry (SCC), [1999] 2 S.C.R. 534. In that case the employee was a pedophile who abused children while employed by theChildren’s Foundation.

The Court was required to determine if the employer, in the absence of negligence, was vicariously liable for itsemployee’s tortious conduct. [31] The Court found that, just as an employer is liable for the authorized tortious acts of an employee, it is also liable for hisunauthorized tortious acts when they are so connected with authorized acts that they may be regarded as modes (although impropermodes) of doing an authorized act. [32] The Court established a two-step test for determining when the unauthorized tortious acts would result in employer liability.

First, the Court is to look to prior judicial precedents to see if the case before it comes within them. [ 33 ] If no answer comes from that source, the Court should consider whether the imposition of liability would serve certain policy purposes. To ascertain those policy purposes the Court considered the three types of cases where liability has been imposed. [ 34 ] The first is where the employee was acting in furtherance of the employer’s aims and therefore had ostensible or implied authority.

The second is where the nature of the business and the employee’s position can put him or her in a situation of friction where a tort may be committed, such as a bartender who must deal with obnoxious clientele. In such a situation the resultant liability is essentially a cost of doing business.

The third is where an employee is dishonest or fraudulent, such as a bank employee who steals from a customer of the bank. [ 35 ] The common theme behind these cases, said the Court, is that “where the employee’s conduct is closely tied to a risk that the employer’s enterprise has placed in the community, the employer may justly be held vicariously liable for the employee’s wrong”: Bazley para. 22 . [ 36 ] The first policy consideration found behind a determination of liability is the provision of a “just and practical remedy” for the harm.

The Court noted that it must seem “just” to “place liability for the wrong on the employer”: Bazley para. 31 . The second policy consideration is the deterrence of future harm. As employers are usually the ones most able to reduce accidents and the chance of intentional wrongs by better supervision and organization, holding them liable is important as it will encourage the behaviour to avoid such liability. [ 37 ] The Court noted at para. 36: A wrong that is only coincidentally linked to the activity of the employer and duties of the employee cannot justify the imposition of vicarious liability on the employer.

To impose vicarious liability on the employer for such a wrong does not respond to common sense notions of fairness. Nor does it serve to deter future harms. Because the wrong is essentially independent of the employment situation, there is little the employer could have done to prevent it.

Where vicarious liability is not closely and materially related to a risk introduced or enhanced by the employer, it serves no deterrent purpose, and relegates the employer to the status of an involuntary insurer. [ 38 ] The fundamental question, said the Court, is: whether there is a connection or nexus between the employment enterprise and the wrong that justifies the imposition of vicarious liability on the employer in terms of a fair allocation of the consequences of the risk and/or deterrence [1] : Bazley para. 37 .

In other words, “[o]nce engaged in a particular business it is fair that an employer be made to pay the generally foreseeable costs of that business”: Bazley para. 41 . [ 39 ] To determine the sufficiency of the connection between the employer’s creation or enhancement of the risk and the wrong complained of, subsidiary factors can be examined. The Court found that for intentional torts those factors include: (

a) the opportunity that the enterprise afforded the employee to abuse his or her power; (

b) the extent to which the wrongful act may have furthered the employer’s aims (and hence be more likely to have been committed by the employee); (

c) the extent to which the wrongful act was related to friction, confrontation or intimacy inherent in the employer’s enterprise; (

d) the extent of power conferred on the employee in relation to the victim; and (

e) the vulnerability of potential victims to wrongful exercise of the employee’s power. [ 40 ] The Court noted that the assessment of a material increase in risk is not determined by whether the wrong occurred on the employer’s premises during working hours. However, the fact that it occurred outside that time and place could work to negate the suggestion of a materially enhanced risk of harm, as it could suggest that the conduct was essentially unrelated to the employment and any enhanced risk it may have created: Bazley , para. 45 .

In short, the tests should not be employed “mechanically, but with a sensitive view to the policy considerations that justify the imposition of vicarious liability”: Bazley , para. 46 .

[ 41 ] Subsequent case law has reiterated this approach. [ 42 ] Vicarious liability was considered in John Doe v. Bennett , 2004 SCC 17 , another case involving sexual abuse. In that case the Court noted that to meet the policy rationale for the imposition of vicarious liability the complainant must show that the “relationship between the tortfeasor and the person against whom liability is sought [is]... sufficiently close [and that]...the wrongful act [is]... sufficiently connected to the conduct authorized by the employer”: John Doe , para. 20 .

Both are required to ensure that the goals of fair and effective compensation and the deterrence of future harm are met. [ 43 ] As the same Court noted in 671122 Ontario Ltd. v. Sagaz Industries Canada Inc. , 2001 SCC 59 , deep pockets alone are not a justification for vicarious liability.

It must seem just to place liability for the wrong on the employer on the grounds that the person who puts an enterprise into the community that has certain risks, is the person who should bear the loss: para. 31. [ 44 ] With that overview of the case law I turn a consideration of whether there is a triable issue as to where the loss should fall in this case, or if the claim can be dismissed summarily. [ 45 ] There is no case law on point that can be utilized as a precedent to determine this case.

Therefore, the aforementioned criteria must be examined to determine if there is the connection necessary between the employment enterprise and the wrong to justify the imposition of vicarious liability. This examination must take into consideration the twin policy objectives of deterrence and whether it is just to place the liability on the employer. [ 46 ] The first criteria is the opportunity that the enterprise afforded the employee to abuse his or her power. In this case, the employee was both the president and a director of the Company and as such would have access to insider information.

Therefore he had an opportunity to abuse his power. [ 47 ] The second criteria is the extent to which the wrongful act may have furthered the employer’s aims (and hence be more likely to have been committed by the employee). There is no evidence before this Court that the alleged misrepresentations furthered the employer’s aims. [ 48 ] The third criteria is the extent to which the wrongful act was related to friction, confrontation or intimacy inherent in the employer’s enterprise.

This criteria has no apparent relationship to the conduct in issue in this case. [ 49 ] The fourth criteria is the extent of the power conferred on the employee in relation to the victim. The Hendricksons and Mr. McCaffrey were social acquaintances. He had no obvious power over them as would, for example, a service provider. Their dealings with him were purely on a social basis. His only power was in his position which gave him access to insider information.

At best the Hendricksons can argue that he had stature in the community and therefore had some power over them. [ 50 ] The final criteria is the vulnerability of the potential victims to the wrongful exercise of the employee’s power. The Hendricksons were investors who ran a margin account. They saw an opportunity to make money and, unfortunately, they took it. If the facts alleged in their pleadings are correct, their vulnerability was directly related to their eagerness to make money, legally or otherwise, and not to Mr.

McCaffrey’s position or conduct. [ 51 ] In my view these criteria do not establish a sufficient connection between the wrong and the conduct authorized by the Company to demonstrate that there is a genuine issue for trial as to whether the loss resulting from these unauthorized acts should be placed on the Company. [ 52 ] Furthermore, even if it did, the Courts have made it clear that these criteria are to be applied in light of the overall policy objectives of deterrence and the justness of making the employer bear the loss. In the facts of this case I cannot see how it is just to have

an employer bear the loss occasioned by a rogue employee who gives information to third parties who improperly use it for their own gain and then seek reimbursement when their illegal scheme does not bear fruit. This situation raises no triable issue as to the Company’s vicarious liability. [ 53 ] On the material before this Court there is no genuine issue for trial on the vicarious liability of the Company for the conduct of Mr. McCaffrey which led to the misguided and illegal attempts by the Hendricksons to profit from insider information.

If there is no genuine issue for trial, should the Court dismiss the claim at this time or adjourn it for consideration at a future date? [ 54 ] That leaves for consideration the question of whether the application to dismiss the claim for vicarious liability on the basis of the authorization by the Company of Mr. McCaffrey’s release of insider information should be adjourned. Counsel for the Hendricksons argues that there have been no affidavits of records and no questioning of Mr. McCaffrey and therefore evidence substantiating the allegation that Mr.

McCaffrey’s conduct was authorized by the Company is unobtainable at this time. [ 55 ] An adjournment of a

summary judgment application is an infrequently-used discretionary alternative for, as earlier noted, generally the hope of future supporting evidence should not stop a

summary judgment application. The adjournment of the application is used by the Courts when there is a concern that otherwise there will be a failure of justice: Wenzel Downhole Tools Ltd. v. National Oilwell Varco, Inc. , 2010 ABCA 381 , para. 8 [ 56 ] In this case the application was heard prior to the filing of an affidavit of records. However, the time for that filing has passed and I was not advised of any pending application before the Court to compel production. Furthermore, while it is quite correct that the Hendricksons have not had an opportunity to question Mr.

McCaffrey, they did have an opportunity to question the Company’s representative who swore that Mr. McCaffrey’s conduct was unauthorized, and they did not do so. In addition, the Hendricksons did not put any evidence themselves before this Court. As a result, Mr. McCann’s affidavit evidence remains unclouded. [ 57 ] I see no reason to exercise my discretion to adjourn the issue to a later date. CONCLUSION [ 58 ] The application is granted. The claim against the Company is dismissed. [ 59 ] The Company is entitled to its costs. Heard on the 26 th day of September, 2012.

Dated at the City of Calgary, Alberta this 17 th day of December, 2012.

J.B. Hanebury M.C.C.Q.B.A. Appearances: John D. Blair, Q.C. Borden Ladner Gervais LLP for the Applicant/Defendant Reserverlogix Corp. Teddy E. Nobles Butlin Oke Roberts Nobles Braun for the Respondents / Plaintiffs Cliff Hendrickson and Valari Hendrickson [1]Deterrence as a consideration was considered more extensively by the Court in K.L.B. v. British Columbia, 2003 SCC 51 ,[2003] 2 S.C.R. 403 at 421.