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.