This post aims to summarize part of the analysis of the Québec Court of Appeal’s recent decision on KPH 11 v. Richardson Wealth Limited (Richardson GMP Limited) 2022 QCCA 148.
The appellants are sophisticated investors. The Respondent is a securities firm. The individual appellants had different relationships with the Respondent.
Robert Hirsch was a client of the Respondent, having opened a margin account to trade options in November 2011.
Robert Hirsch is the father of the other individual appellants, Derek, Kenneth and Andrew Hirsch.
KPH 11 L.P. is a limited partnership set up by the Hirsches family in July 2013. KPH 11 L.P. became a client of the Respondent in or around July 2013.
9155-8742 Québec inc. (“9155”) is a general partner of KPH 11 L.P. Andrew Hirsch signed his name on the New Client Application Form on behalf of 9155. The Respondent believed that Andrew was a personal guarantor, and that 9155 was also a guarantor. Otherwise, he would not have accepted the Application. However, Appellants alleged that Andrew did not sign the New Client Application in his personal capacity and that 9155 was the only guarantor.
Beginning in June 2013, the price of holdings valued at over $1,000 was not properly reflected in the monthly statements. Rather, a value of $999.99 was indicated due to a bug in the Respondent’s system. It is worth to note that the trader in the Respondent has no access to the monthly statements. And thus, the trader of the Respondent was not aware of the pricing error at that time. The Appellants did not notify the trader of any pricing error neither. The Appellants claimed that they did not know that this issue would affect the valuation of the accounts or the margin calculation.
In February 2014, the Respondent realized that the bug in its brokerage platform would have significant impact on the calculation of available margins. The Respondent found that a proper valuation of the accounts showed equity deficiencies of $7.7 million.
In October 2015, the Respondent made the margin calls. However, the margin calls remained unanswered by the Appellants. As a consequence, the Respondent liquidated the accounts, which resulted in the overdrafts in dispute.
Procedural History (Brief)
In January 2020, after a 11 days trial, the trial judge dismissed the Appellants’ argument and found that the Respondent had not committed any fault. The individual Appellant Robert Hirsch was held liable for the final debit balance of some 1.7 million in his account. The trial judge also found that KPH 11 LLP was not a validly constituted limited partnership and that Robert, Derek and Kenneth, along with 9155, which acted as a surety in relation to the second account are solidarily liable for the final debit balance of approximately $3.2 million (Richardson GMP Limited c. KPH 11 LP, 2020 QCCS 239).
The judgment is appealed. Firstly, the Appellants argued that the trial judge failed to give proper consideration to the context in which the margin calls were made and that the trial judge erred in finding that the Respondent did not act abusively in October 2015. The Appellants’ arguments were relied on the notion of a distorting lens, which the Supreme Court addressed in Salomon v. Matte‑Thompson, 2019 SCC 14. Secondly, the Appellants argued that the trial judge should not have entertained the Respondent’s late-raised legal argument to the effect that KPH 11 L.P. was not a validly constituted limited partnership and that Robert, Derek and Kenneth Hirsch are solidarily liable as they carried on investment activities as an undeclared partnership. This argument was based on the guiding principles of procedure regarding the importance of cooperation and transparency, nor with the related requirement stipulated in Article 99 C.C.P.
In February 2022, the Québec Court of Appeal rendered its decision. The Québec Court of Appeal found that the Appellants’ first ground of appeal failed. However, the Québec Court of Appeal concluded that the Appellants succeeded in the second ground of appeal and that the 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 (Art. 2246 C.C.Q.).
Main Issue to Analyse
- Did the trial judge make palpable and overriding error by holding that the Respondent did not act abusively to make margin calls in October 2015?
- Did the trial judge make palpable and overriding error by holding that KPH 11 L.P. was not validly constituted limited partnership and that the individual appellants are solidarily liable?
- The trial judge was correct to conclude 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.
- ) In the analysis, the Court of Appeal reminds us of the Supreme Court of Canada’s decision on Benhaim v. St‑Germain, 2016 SCC 48, which emphasizes that appellate deference is all the more warranted in cases which involve extensive and complex evidence. It is worth to reproduce paragraph 37 of this decision:
“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 paragraphs 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.”
2) The Court of Appeal finds that the trial judge’s conclusions on Respondent’s margin calls were supported by solid evidence in the present case. The Appellants have not identified obvious errors with a determinative impact on that aspect of the impugned judgment. The Appellants should not expect the Court of Appeal to retry the case and reassess the evidence that was adduced at trial (Labrie c. B.L., 2021 QCCA 1651 paras. 8-9; Droit de la famille – 21677, 2021 QCCA 650).
3) The Court of Appeal finds that the trial judge was correct to conclude 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 (Sévigny c. Richardson Greenshields Canada ltée, 1988 CanLII 915). While the Court of Appeal acknowledges that Sévigny was decided two years prior to the Supreme Court’s seminal judgement in Houle c. Banque Canadienne Nationale, 1990 CanLII 58 (CSC), 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.” (Para. 12 of KPH 11 v. Richardson Wealth Limited (Richardson GMP Limited) 2022 QCCA 148);
4) The Court of Appeal also finds that it is clear from the record that the individual appellants are investors with solid and extensive experience and that they seldom relied on the Respondent’s valuation of their accounts to understand where their positions stood at any given point in time. “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.” Further, the Court of Appeal also finds that the evidence amply supports the trial judge’s conclusion that the Respondent committed no fault after the margin calls were made.
2. The trial judge should not have entertained the Respondent’s late-raised legal argument during the trial in order to conclude that the individual appellants are solidarily liable for the final debit balance.
1) The Respondent raised his legal argument regarding the validity of the constitution of KPH 11 L.P. for the first time during oral argument. It was considered to be a surprise for the Appellants as the Respondent had accepted – including pursuant to explicit allegations in its pleadings – that its contracting party was a properly-constituted limited partnership. The Court of Appeal finds that adopting such a position for the first time during oral argument had the effect of significantly changing the parameters of the dispute at the very last stage of the proceeding. Art. 99 C.C.P. requires the attorneys to avoid taking another party by surprise or raising an unexpected debate.
2) The Respondent argues that the Appellants never asked the trial judge to reopen the trial in order to have an opportunity to adduce further evidence regarding their potential liability as partners. The Court of Appeal finds that “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.” (para. 21 of KPH 11 v. Richardson Wealth Limited (Richardson GMP Limited) 2022 QCCA 148).
- Art. 99 C.p.c. prévoit que l’acte de procédure doit indiquer tout ce qui, s’il n’était pas énoncé, pourrait surprendre une autre partie ou soulever un débat imprévu et que ses énoncés doivent être présentés avec clarté, précision et concision, dans un ordre logique et être numérotés consécutivement.
- Art. 17 C.p.c. prévoit que le tribunal ne peut fonder sa décision sur des moyens que les parties n’ont pas été à même de débattre.
- Art. 20 C.p.c. prévoit que les parties se doivent de coopérer notamment en s’informant mutuellement, en tout temps, des faits et des éléments susceptibles de favoriser un débat loyal et en s’assurant de préserver les éléments de preuve pertinents.
(Reminder: The purpose of this article is to provide general legal information. It does not contain a full analysis of the law nor does it constitute a legal advice on the points of law discussed. To minimize the legal risk for your business, you must take specific legal advice from a lawyer on any particular matter which concerns you. Thanks for your attention.)