In an unreported judgment Pallotta v. Cengarle, Court file CV-16-56337 released on February 27, 2020, Faieta J. found real estate lawyer Licio Cengarle vicariously liable for his clerk’s mortgage fraud scheme as well as for breach of trust. This case is a cautionary tale for professionals and employers about the need for internal controls.

Background

The lawyer, Mr. Cengarle, trusted his long-time real estate clerk, Rose De Filippis. She was given a high degree of autonomy in terms of dealing with the clients, drafting documents, arranging meetings, arranging for clients to sign the required documents and closing real estate transactions. Eventually, Ms. De Filippis violated that trust by committing fraud. This specific case involved $200,000 received from the Plaintiffs based on the false representation from Ms. De Filipis that those funds would be would be lent to a local land developer. Instead, Ms. De Filippis used the $200,000 for her own purposes. She had become involved in a real estate scheme in Panama, which encountered difficulties, and required infusions of cash. Her employer, Mr. Cengarle, testified that he is also a defendant in 15 other actions related to Ms. De Filippis’ frauds but denied responsibility for those frauds.

Vicarious liability in the employer-employee relationship

Employers may be independently liable for the actions of their employees under the doctrine of vicarious liability. Vicarious liability in a fraud context is based on the rationale that the party who puts a risky enterprise into the community may fairly be held responsible when those risks emerge and cause loss or injury to members of the public. There are three types of cases where vicarious liability has been traditionally been imposed: (1) cases based on the furtherance of the employer’s aims; (2) cases based on the employer’s creation of a situation of friction, confrontation or intimacy inherent in the employer’s enterprise; and (3) the dishonest employee case typically involving theft or fraud.

In imposing liability on Mr. Cengarle, the Court took into account several policy considerations set out by the Supreme Court of Canada in Blackwater v. Plint, 2005 SCC 58:

  • Vicarious liability may be imposed where there is a significant connection between the conduct authorized by the employer or controlling agent and the wrong.
  • Having created or enhanced the risk of the wrongful conduct, it is appropriate that the employer or operator of the enterprise be held responsible, even though the wrongful act may be contrary to its desires.
  • The fact that wrongful acts may occur is a cost of doing business.
  • Faced with two faultless parties, a much stronger justification exists for placing the risk of loss on the party who introduced the risk and is better able to control that risk.

The court found Ms. De Filippis to be an employee and emphasized the significant connection between the risk created by Mr. Cengarle having her manage all aspects of his real estate practice, and the fraud that she perpetrated on the Plaintiffs. This risk could have been prevented with greater oversight.

Key Takeaways
  • Get an independent review of your businesses’ internal controls.
  • Puts checks and balances in place around key employees, particularly those with autonomy in relation to financial matters.
  • Consider whether your business insurance provides adequate coverage for acts of employee dishonesty.

With thanks to Brittany Shales, student-at-law, for her assistance in drafting this blog post.

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Photo of Glenn Gibson Glenn Gibson

Glenn Gibson is a member of Baker McKenzie’s Litigation & Government Enforcement Group in Toronto. Glenn acts for clients in civil fraud proceedings, contractual disputes, jurisdictional disputes, class actions, and on matters involving commercial arbitration. She is a frequent contributor to www.canadianfraudlaw.com, www.globalarbitrationnews.com…

Glenn Gibson is a member of Baker McKenzie’s Litigation & Government Enforcement Group in Toronto. Glenn acts for clients in civil fraud proceedings, contractual disputes, jurisdictional disputes, class actions, and on matters involving commercial arbitration. She is a frequent contributor to www.canadianfraudlaw.com, www.globalarbitrationnews.com, and to the Baker McKenzie International Arbitration and Litigation Newsletter. She also assists the Firm’s pro bono team in providing legal advice to victims of human trafficking and sexual exploitation.

Photo of John Pirie John Pirie

John Pirie leads the Firm’s Canadian Litigation and Government Enforcement Group. He acts for clients in complex litigation and investigations. Mr. Pirie’s practice includes a significant fraud law and asset recovery component, often involving matters in the financial services industry. He routinely acts…

John Pirie leads the Firm’s Canadian Litigation and Government Enforcement Group. He acts for clients in complex litigation and investigations. Mr. Pirie’s practice includes a significant fraud law and asset recovery component, often involving matters in the financial services industry. He routinely acts for our clients in coordination with other Baker McKenzie offices globally. Mr. Pirie has expertise concerning asset recovery strategies and emergency relief measures related to fraud, including Mareva injunctions, Anton Piller orders, Norwich Pharmacal orders, global asset tracing and fraudulent conveyance proceedings. Mr. Pirie has acted as lead counsel on an array of reported cases in this field, and he has been recognized in Lexpert’s Annual Guide to the Leading Canada/US Cross-Border Litigation Lawyers, and in the Legal 500 for Dispute Resolution (Canada). He appeared in the Supreme Court of Canada on a case ranked by Lexpert Magazine as Canada’s #1 business decision for 2007. Mr. Pirie has previously been named one of Lexpert’s Rising Stars, a “top 40” award that recognizes Canadian lawyers with an outstanding record of success.

Photo of Michael Nowina Michael Nowina

Michael Nowina’s litigation practice focuses on a broad range of commercial disputes including advising on the recovery from fraudulent investment schemes, mortgage fraud and credit fraud. Michael’s fraud-related and investigations experience includes representing victims of a Canada-wide investment fraud and ultimately securing recovery…

Michael Nowina’s litigation practice focuses on a broad range of commercial disputes including advising on the recovery from fraudulent investment schemes, mortgage fraud and credit fraud. Michael’s fraud-related and investigations experience includes representing victims of a Canada-wide investment fraud and ultimately securing recovery of a majority of the proceeds from the fraud, advising numerous creditors in proceedings commenced to recover fraudulent conveyances and preferential payments in multi-jurisdictional litigation, and representing financial institutions in identity fraud cases and in proceedings to recover funds from fraudulent borrowers. Michael also frequently advises clients on insolvency matters involving fraud.