2022 QCCA 148, 2022 QCCA 148

KPH 11 c. Richardson Wealth Limited (Richardson GMP Limited) 2022 QCCA 148 COURT OF APPEAL CANADA PROVINCE OF QUEBEC REGISTRY OF MONTREAL No.: 500-09-028856-201 , 500-09-028857-209 (500-17-091884-158) (500-17-091883-150) DATE: February 2, 2022 CORAM: THE HONOURABLE FRANÇOIS DOYON, J.A. MARK SCHRAGER, J.A. FRÉDÉRIC BACHAND, J.A. No.: 500-09-028856-201 (500-17-091884-158) KPH 11 L.P. 9155-8742 QUEBEC INC. DEREK HIRSCH ROBERT HIRSCH KENNETH HIRSCH APPELLANTS – Defendants/Cross-plaintiffs v.

RICHARDSON WEALTH LIMITED, formerly known as RICHARDSON GMP LIMITED RESPONDENT – Plaintiff/Cross-defendant and ANDREW HIRSCH IMPLEADED PARTY – Defendant/Cross-plaintiff No.: 500-09-028857-209 (500-17-091883-150) ROBERT HIRSCH APPELLANT – Defendant v. RICHARDSON WEALTH LIMITED, formerly known as RICHARDSON GMP LIMITED RESPONDENT – Plaintiff JUDGMENT [ 1 ] This is an appeal from a judgment of the Superior Court, District of Montreal (the Honourable Mr. Justice Thomas M. Davis), [1] condemning the appellants to pay to the respondent nearly $5,000,000.

This sum represents the combined final debit balance of two accounts that the appellants had opened with the respondent stock broker and which they used to trade options on margin. One account, in the name of appellant Robert Hirsch, had a final debit balance of some $1.7 million. The other account, in the name of appellant KPH 11 L.P., had a final debit balance of approximately $3.2 million. [ 2 ] The gist of the case relates to the appellants’ contention that the respondent exercised its contractual rights abusively when it liquidated securities from the accounts further to margin calls made in October 2015.

Those margin calls came days after the respondent claimed that it had just realized that a bug in its brokerage platform, of which the parties were aware since February 2014, had a significant — yet hitherto unknown — impact on the calculation of available margins. The respondent’s position then was that a proper valuation of the accounts showed equity deficiencies of $7.7 million.

After the margin calls went unanswered by the appellants, the respondent liquidated the accounts, which resulted in the overdrafts in dispute. [ 3 ] After setting out the background to the case and analyzing the extensive evidence adduced over the course of 11 days, the judge dismissed the appellants’ argument and found that the respondent had not committed any fault. In file No. 500-09-028857-209, Robert Hirsch was held liable for the final debit balance in his account.

In file No. 500-09-028856-201, the judge further found that KPH 11 L.P. was not a validly constituted limited partnership and that Robert, Derek and Kenneth Hirsch had carried on investment activities as an undeclared partnership. He thus found them — along with appellant 9155-8742 Québec Inc., which acted as a surety in relation to the second account — solidarily liable for the final debit balance of approximately $3.2 million. The judge also dismissed cross-applications brought by the appellants, in which they claimed damages totalling nearly $10,000,000. * * *

[ 4 ] The appellants begin by challenging the judge’s holding that the respondent did not act abusively in October 2015. They do so by relying on the notion of a distorting lens, which the Supreme Court addressed in Salomon v. Matte - Thompson . [2] Specifically, they claim that the judge failed to give proper consideration to the context in which the margin calls were made.

Had he done so, they further contend, the judge would have found that the respondent’s actions resulted not from market movements — as is usually the case when margin calls are made —, but rather from its sudden, unilateral and unreasonable decision to change, without sufficient notice, the extent of the risk it was willing to accept while supporting the appellants’ trading operations. [ 5 ] The appellants’ claim regarding the true cause of the respondent’s actions in October 2015 was specifically considered and dismissed by the judge.

He found that the margin calls had not resulted from a change in the manner in which margins were calculated, but rather from the fact — unknown to the respondent until October 2015, because of a mistake it made in good faith — that the accounts showed equity deficiencies that not only exposed it to an intolerable financial risk, but also amounted to a breach of the written agreement with the appellants as well as the relevant regulatory requirements.

This means, among other things, that the respondent could not be said to have acquiesced to, tolerated or approved the degree of risk to which it had been exposed during the preceding year and a half. [ 6 ] To succeed on their main ground of appeal, the appellants must demonstrate that those key findings are tainted by one or more palpable and overriding errors.

Indeed, the Supreme Court made clear in Salomon that the standards of appellate review remain applicable even where it is claimed that the trial judge erred by analyzing the evidence through a distorting lens: [A] distorting lens cannot be invoked as a substitute for identifying a reviewable error “or to mask the fact that an ‘error’ identified by an appellate court does not meet the high standard imposed by Housen ” (A.F., at para. 81). Although appellate courts may find this notion helpful in explaining the basis for their interventions, it in no way changes the standards articulated in Housen .

An appellate court must identify a crucial flaw in the lower court’s decision, be it — depending on which Housen standard applies — an error of law or a palpable and overriding error.

More particularly, the notion of a distorting lens does not warrant an appellate court’s reweighing the evidence or merely substituting its own factual findings for those of the trial judge. [3] [ 7 ] It is also worth recalling the Supreme Court’s recent pronouncement on the nature of palpable and overriding errors: Absent a palpable and overriding error, an appellate court must refrain from interfering with findings of fact and findings of mixed fact and law made by the trial judge […].

An error is palpable if it is plainly seen and if all the evidence need not be reconsidered in order to identify it , and is overriding if it has affected the result: […]. As Morissette J.A. so eloquently put it in J.G. v. Nadeau , 2016 QCCA 167 , at para. 77 , [ translation] “ a palpable and overriding error is in the nature not of a needle in a haystack, but of a beam in the eye. And it is impossible to confuse these last two notions”: quoted in [ Benhaim v. St - Germain , 2016 SCC 48 ,] , at para. 39 .

The beam in the eye metaphor not only illustrates the obviousness of a reviewable error, but also connotes a misreading of the case whose impact on the decision is plain to see . [4] [Italics in the original; underlining added] [ 8 ] Moreover, the respondent correctly notes that appellate deference is all the more warranted in cases, such as the present one, which involve extensive and complex evidence.

The Supreme Court emphasized this point in Benhaim , after discussing the justifications underlying the deferential stance of appellate courts on questions of fact: It may be useful to recall the many reasons why appellate courts defer to trial courts’ findings of fact, which were described at length in Housen , at paras. 15-18 . Deference to factual findings limits the number, length and cost of appeals, which in turn promotes the autonomy and integrity of trial proceedings. Moreover, the law presumes that trial judges and appellate judges are equally capable of justly resolving disputes.

Allowing appellate courts free rein to overturn trial courts’ factual findings would duplicate judicial proceedings at great expense, without any concomitant guarantee of more just results. Finally, according deference to a trial judge’s findings of fact reinforces the notion that they are in the best position to make those findings. Trial judges are immersed in the evidence, they hear viva voce testimony, and they are familiar with the case as a whole. Their expertise in weighing large quantities of evidence and making factual findings ought to be respected.

These considerations are particularly important in the present case because it involves a large quantity of complex evidence. [5] [ 9 ] The appellants have failed to demonstrate that the trial judge’s conclusions on the justification for the respondent’s actions in October 2015 was tainted by palpable and overriding errors. Those conclusions find ample support in the evidence, and the appellants have not identified obvious errors with a determinative impact on that aspect of the impugned judgment.

Their arguments essentially amount to an invitation to retry the case and reassess the evidence that was adduced at trial.

As the Court has noted on numerous occasions, such arguments are generally bound to fail given the applicable standards of appellate review. [6] [ 10 ] Furthermore, the Court sees no reason to intervene in relation to the other key findings made by the trial judge in relation to the respondent’s actions in October 2015. [ 11 ] With respect to the margin calls themselves, the judge rightly found that the relevant contractual provisions afforded the respondent extensive discretion regarding the margins made available to the appellants, while also requiring that any margin call be promptly met.

The provisions are also clear with respect to the respondent’s right to liquidate securities from the accounts if a margin deficit is not rectified when called, and the record shows that the discretion afforded in the documents reflects industry standards and practices. [ 12 ] Moreover, the judge was correct to conclude, on the basis of the Court’s judgment in Sévigny , [7] that the respondent’s right to make margin calls was unaffected by its good-faith failure to promptly understand the extensive impact of the bug in its brokerage platform.

While the appellants are correct in pointing out that Sévigny was decided two years prior to the Supreme Court’s seminal judgment in Houle , [8] it does not ensue that it is no longer good law. Sévigny does not contradict — and the respondent does not dispute — the proposition that a broker’s right to make a margin call must be exercised in good faith. [9] [ 13 ] The Court also finds no reviewable error in the judge’s conclusion that the respondent did not act abusively while carrying out

the margin calls. It is clear from the evidence that Robert and Derek Hirsch — who, for most of the relevant period, were portfolio managers registered with the Autorité des marchés financiers — had extensive experience and expertise in options trading. They knew or should have known that the respondent enjoyed extensive discretion in relation to the margins and that any margin call would have to be promptly met.

They were or ought to have been aware of relevant usages as well as applicable regulatory requirements, including that, as emphasized by the respondent’s expert, “it was crucial that [the appellants] have substantial financial means to support the trading, to satisfy a margin call […]”, because “[t]hese funds [had to] be immediately available, as margin calls need to be met within 24 hours in most circumstances”. [10] None of this is surprising given that equity values can change rapidly. [ 14 ] Also, and crucially, it is clear from the record that Robert and Derek Hirsch’s experience and expertise was such that they never relied on the respondent’s valuation of their accounts to understand where their positions stood at any given point in time.

Tellingly, their own expert acknowledged that they should have ceased trading in February 2014, when the bug in the respondent’s brokerage system was first discovered. As for the respondent’s expert — whose opinion the judge found to be compelling —, he had this to say about what Robert Hirsch should have done from that point on: [11] Mr. Hirsch continued trading and put on a very large number of additional positions, on margin, notwithstanding the fact that the margin requirements were not properly calculated and charged.

Any sophisticated investor would have known that putting on so many additional positions without margin was against rules and regulations and could jeopardize the broker’s capital requirements. [ 15 ] Moreover, Robert and Derek Hirsch’s experience and expertise explained why, throughout the parties’ relationship, the respondent’s role was limited to carrying out trades as instructed by either one of them. This entailed that the respondent had no significant obligation to provide advice to the appellants.

Indeed, as authors Baudouin, Deslauriers and Moore explain: La détermination de l’intensité de l’obligation de conseil se fait à partir du mandat confié au courtier. En effet, il peut s’avérer qu’aux termes mêmes de celui-ci, le courtier ne soit qu’un simple exécutant des ordres transmis par ses clients.

Dans un tel cas, le devoir de conseil s’estompe. [12] [References omitted] [ 16 ] The Court is also of the view that the judge was correct to point to the strong public policy reasons in upholding the contractual rights of brokers to make margin calls and to insist that they be promptly met. [13] Those considerations explain why clients’ claims asserting that their brokers acted abusively while making margin calls are rarely successful: De nature courante sur le marché boursier, les transactions sur marge sont à la base de nombreux litiges.

La convention de marge permet au client de se procurer et de conserver un portefeuille de valeurs mobilières en ne déboursant qu’une fraction du cours de la valeur, le solde du prix de souscription engageant le crédit du courtier. Fortement contrôlé en raison de certaines crises historiques, ce système entraîne l’endettement du client et peut forcer le courtier à liquider son portefeuille d’actions, de même que les garanties, afin de se faire rembourser .

En raison des clauses qui prévoient systématiquement cette situation, rares sont les cas où le client obtient gain de cause en cas de liquidation de son portefeuille de valeurs mobilières , à moins que le courtier n’ait pas respecté les termes de l’entente ou les délais subséquemment accordés. [14] [References omitted; underlining added] [ 17 ] Lastly, the evidence amply supports the trial judge’s conclusion that the respondent committed no fault after the margin calls were made.

The record shows that the appellants were afforded several days — which is well above industry practice — before the respondent began the liquidation process, and that the process was completed after approximately 30 days. Moreover, the appellants have not shown that the judge’s finding that they had made little effort to respond in a satisfactory manner to the margin calls was tainted by a palpable and overriding error.

Nor have they shown that the judge was wrong to find, based on the opinion of the respondent’s expert, that the securities had been liquidated in an appropriate and prudent manner given the circumstances. [ 18 ] The appellants’ main ground of appeal thus fails. * * * [ 19 ] The appellants have a much more compelling case in relation to the second aspect of their appeal, which challenges the judge’s findings to the effect that KPH 11 L.P. was not a validly constituted limited partnership and that Robert, Derek and Kenneth Hirsch carried on investment activities as an undeclared partnership. [ 20 ] A first problem lies in the fact that the judge entertained the respondent’s contention even though it was raised for the first time during oral argument.

Until that point, the respondent had accepted — including pursuant to explicit allegations in its pleadings — that its contracting party (KPH 11 L.P.) was a properly-constituted limited partnership. While the respondent is correct to point out that parties cannot make admissions on points of law, adopting such a position for the first time during oral argument had the effect of significantly changing the parameters of the dispute in file No. 500-09-028856-201 at the very last stage of the proceeding.

That does not sit well with guiding principles of procedure regarding the importance of cooperation and transparency, nor with the related requirement, emphasized in

article 99 C.C.P. , to avoid taking another party by surprise or raising an unexpected debate. [ 21 ] In response, the respondent points to the fact that, during oral argument, the appellants never asked the judge to reopen the trial so as to have an opportunity to adduce further evidence regarding their potential liability as partners in an undeclared partnership. The Court does not find that argument to be particularly compelling.

In a day and age when the proportional and effective use of scarce judicial resources has become a paramount consideration, trials should generally not be reopened further to a party’s attempt to assert, at the very last minute, an argument that could have been raised at the appropriate stage of the pre-trial phase. [ 22 ] What is more, by pointing to the absence of any request seeking a reopening of the trial, the respondent is implicitly conceding that, in all likelihood, the personal appellants would have needed to adduce further evidence in order to adequately address their potential liability as partners in an undeclared partnership.

This suggests that they may not have been given an adequate opportunity to debate —

within the meaning of

article 17 para. 2 C.C.P. — the issue of their personal liability. [ 23 ] It is not necessary to rule conclusively on this issue because, even assuming that there was no breach of

article 17 para. 2 C.C.P. , the Court considers that several errors taint the judge’s conclusion that KPH 11 L.P. was not a validly constituted limited partnership. [ 24 ] To begin, the Court agrees with the appellants that the judge should have allowed the production of a copy of the subscription agreement signed by Kenneth Hirsch, which confirmed his status as KPH 11 L.P.’s sole special partner. While the judge was correct in considering the best evidence rule (article 2860 para. 1 C.C.Q. ), his conclusion regarding the inapplicability of the exception set out in

article 2860 para. 2 C.C.Q. was based on an incomplete assessment of the record. Contrary to what he wrote at paragraph 208 of his judgment, Kenneth Hirsch’s explanation as to why he could not produce the original of the subscription agreement was by no means limited to the September 2019 email exchange with the lawyers who represented the appellants at the relevant period. Mr.

Hirsch testified that much broader enquiries were conducted at an earlier stage of the proceeding, specifically in the context of the examinations on discovery, both at his and at KPH 11 L.P.s’ offices, as well as with the appellants’ former lawyers. He further testified that he did not draft the document and never had it on his computer. [ 25 ] These explanations suffice to conclude that Mr. Hirsch’s copy of the subscription agreement was admissible. The requirement set out at

article 2860 para. 2 C.C.Q. is not a particularly stringent one, and courts rightly tend to be more lenient when the original of the document in dispute was neither created nor kept by the party seeking to rely on secondary evidence. [15] A proper consideration of all the evidence relating to Mr. Hirsch’s efforts should have led the judge to conclude that he had acted in good faith and with diligence within the meaning of

article 2860 para. 2 C.C.Q. [ 26 ] Regarding the inconsistencies in the dates mentioned in the partnership agreement, which most likely merely result from careless drafting and working from previous versions of a template, the Court fails to see how they could have any impact on the existence of KPH 11 L.P. as a limited partnership.

Moreover, while the judge was correct to note that the partnership agreement provides for a termination date set at December 31, 2011, he gave no regard to the fact that the Hirsches’ decision to open an account in the name of KPH 11 L.P., in July 2013, demonstrates that the partnership’s termination date had been modified. Nor did he take into consideration the fact that the respondent, who received a copy of the partnership agreement when the account was opened, had not then raised any issue regarding the termination date indicated therein.

Rather, the respondent explicitly acknowledged at the time that it would be doing business with an existing limited partnership, to which it sent statements and transferred funds — via a bank account in the name of KPH 11 L.P. — throughout the parties’ relationship. [ 27 ] The judge was also wrong to take issue with the fact that 9155-8742 Québec Inc. never administered the partnership despite being identified as the general partner in the partnership agreement. His analysis overlooks the fact that the agreement specifically provides for the delegation of the general partner’s duties to any person.

It also overlooks the extensive evidence tending to demonstrate that those duties had effectively been delegated to and carried out by Robert and Derek Hirsch. [ 28 ] These elements, taken together with the evidence relating to Kenneth Hirsch’s US$228,000 contribution to KPH 11 L.P.’s trading account with the respondent, demonstrated the existence of a limited partnership, and the judge’s conclusion to the contrary constitutes a reviewable error. [16] [ 29 ] The judge also alluded to the fact that KPH 11 L.P. only filed the declaration required by the Act respecting the legal publicity of enterprises [17] in October 2013, which was several months after the opening of its account with the respondent.

However, this filing had no bearing on the existence of KPH 11 L.P., which came into being much earlier, when the underlying partnership contract was concluded (articles 2187 and 2249 C.C.Q. ). The only effect of a failure to file the declaration is to trigger the presumption that the partnership is undeclared (article 2189 C.C.Q. ).

That presumption is of little relevance in this case, as KPH 11 L.P.’s status as a limited partnership was properly declared early in the parties’ relationship. [ 30 ] The Court thus concludes that, in file No. 500-09-028856-201, liability for the final debit balance of approximately $3.2 million should only be imposed on KPH 11 L.P. and its general partner 9155-8742 Québec Inc. (article 2246 C.C.Q. ).

FOR THESE REASONS, THE COURT: In file No. 500-09-028856-201 [ 31 ] ALLOWS the appeal in part, without legal costs given the mitigated outcome, and replaces paragraphs 235 and 236 of the judgment under appeal with the following: [235] GRANTS Plaintiff’s Re-amended Introductory Application in the file No. 500-17-091884-158 against Defendants KPH 11 L.P. and 9155-8742 Québec Inc.; [236] CONDEMNS Defendants KPH 11 L.P. and 9155-8742 Québec Inc. solidarily to pay Plaintiff RGMP Inc. the sum of $3,231,367.91, with interest at the legal rate and the additional indemnity in virtue of

Article 1619 C.C.Q. from December 8, 2015; In file No. 500-09-028857-209 [ 32 ] DISMISSES the appeal with legal costs.

FRANÇOIS DOYON, J.A. MARK SCHRAGER, J.A. FRÉDÉRIC BACHAND, J.A. Mtre Douglas Mitchell Mtre Sophie Perron Mtre Danielle Marcovitz IMK For KPH 11 L.P., 9155-8742 Quebec inc., Derek Hirsch, Robert Hirsch, Kenneth Hirsch, Andrew Hirsch Mtre Yves Robillard Mtre Rosemarie Sarrazin MILLER THOMSON For Richardson Wealth Limited Date of hearing: December 14, 2021