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1937 Supreme(SC) 70
Privy Council At Canada
Maugham, Wright , Macmillan, Justice Lords Atkin, JJ.
Isaac W.C. Solloway and another -Appellant
Versus
J.P. McLaughlin -Resopndent
Appeal No. 69 of 1936
Decided On : 29-10-1937
Lawrence Jones and Co., Gard Lyell and Co., F.A. Brewin, J.C. McRuer , R.I. Ferguson , Wilfrid Barton , Cyril Radcliffe
Fraudulent agents forfeit their right to indemnity. Damages for conversion are measured by the value of the goods at the date of conversion, reduced by the value of the goods at the time they are returned to the owner.
Headnote:(A) Agency and Conversion - Fraudulent agents forfeit right to indemnity - Unauthorized sale of margin shares constitutes conversion - Measure of damages for conversion is the value of goods at the date of conversion, reduced by the value of goods returned at the time of return.
(B) Conversion - Where goods are converted and subsequently returned, the plaintiff is entitled to damages based on the value at the time of conversion, minus the value at the time of return. The fact that the plaintiff might be in a better position than if no fraud occurred does not preclude recovery, as the law provides relief against dishonest agents.
Facts of the case:
A client engaged a brokerage firm to purchase shares on margin and deposited shares as security. The firm operated a fraudulent scheme, selling the deposited shares without authorization and failing to honestly execute the purchase transactions, instead profiting from the decline in market value. The client eventually paid the balance of the account and received the shares.
Findings of Court:
The directors were privy to the fraud. The firm, acting as fraudulent agents, forfeited the right to indemnity for the transactions. The unauthorized disposal of the deposited shares amounted to conversion.
Issues: Whether a principal can recover payments made under a fraudulent agency transaction and claim damages for conversion of security shares when the shares were eventually returned.
Ratio Decidendi: Agents who engage in a fraudulent scheme to defraud their principal forfeit their right to an indemnity in respect of transactions forming part of the fraud. The unauthorized sale of shares held as security is conversion, and damages are measured by the value of the shares at the date of conversion. If the converted goods are later returned, the damages are reduced by the value of the goods at the time of return. The principal is entitled to this recovery even if they benefit from the agent's superior market timing during the fraud.
Result: Appeal dismissed. Cross appeal allowed.
Legal Category Hierarchy
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tort
- conversion
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agency
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fraudulent agents
- right to indemnity
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fraudulent agents
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commercial law
- stock-broking
Lord Atkin:-
These are an appeal and a cross appeal from decisions of the Supreme Court of Canada in an action brought in the High Court of Ontario by the present respondent against two companies named Solloway Mills and Co. Ltd., one registered in Ontario and the other in the Dominion and against the present appellants Mr. Isaac Solloway and Mr. Harvey Mills, two of the directors of the companies. The action was tried before an Assistant Master, Mr. Lennox, who reported that there was due to the plaintiff from the Ontario Company and the appellants the sum of $65,129.92. The Dominion Company had dropped out of the proceedings. On appeal by the present appellants from the Master's report, Kerwin J. confirmed the report with an arithmetical correction of the amount found to be due to $55,922.98. On appeal the Court of Appeal dismissed the action as against the present appellants, Macdonnell J. A. dissenting. On appeal by the plaintiff, the Supreme Court allowed the appeal but reduced the amount of the judgment to $28,281.40 and interest. The two director-defendants appeal and the plaintiff cross appeals.
The claim of the plaintiff arose out of transactions which he had with the Ontario Company in 1929 and 1930. The Company purported to carry on business as stock-brokers having acquired in 1928 the business of that nature which had been started by the two appellants in 1927. The Company were members of the Standard Stock and Mining Exchange in Toronto. On 16th October 1929 the plaintiff instructed the Company to buy for him 7,000 shares of Sudbury Basin Mines Ltd. on margin at market price, then $7 a share. He at the same time deposited 3,500 shares of Sudbury Basin Mines, Ltd. as margin. He duly received a contract note purporting to show that the transaction had been carried out in accordance with the rules of the appropriate Stock Exchange which in the present case was the Standard Stock and Mining Exchange in Toronto. The shares steadily declined in value : requests were made from time to time by the Company for further margin or cash: the plaintiff duly complied with these requests bo that in the course of the transactions between October and December inclusive he deposited with the Company a further 10,500 shares of the Sudbury Company and paid $8,000 cash. He received monthly statements showing the shares as being carried for him. On 13th January 1930 the plaintiff decided to close the account. The balance against him on that date appeared to be $42,334.92. He paid that sum and was given delivery of 21,000 shares, i. e. 7,000 originally bought, 3,500 originally deposited and 10,500 subsequently deposited. It now appears that the transactions as far as the Company were concerned were part of a fraudulent system of business and were themselves fraudulent in their inception, continuance and completion. The Company purporting to buy and in fact making valid contracts of purchase for their clients contemporaneously sold shares of the same Company, and used their client's shares to complete these sales. The shares are in the form familiar in American companies and with a blank transfer endorsed pass in a similar manner to bearer shares. A broker is not considered to be under an obligation to retain for his client the specific shares which may be delivered to him under the contract made for his client. But he has, of course, to get into his possession and retain an equivalent number of shares. Under the fraudulent system of the Company, they were throughout the course of this transaction 'short' of these Sudbury Basin shares by about 100,000 shares, involving no doubt similar frauds on other clients. In other words they were bears when their clients were bulls: they correctly anticipated the fall of the market: and when their clients demanded the shares they went into the market and bought them at the fallen price to their own substantial profit. The same course was adopted with the shares deposited as margin. The Company sold the
