Fridays with Rogers Partners
At our weekly meeting, Samuel Pevalin discussed the recent decision of the Ontario Court of Appeal in Boal v. International Capital Management Inc., 2023 ONCA 840, in which the Court considered the criteria to establish an ad hoc fiduciary duty and whether a claim against the appellant’s financial advisor disclosed a cause of action for breach of fiduciary duty on a class-wide basis.
Facts
John Sanchez was a registered mutual fund salesperson and a financial planner. Along with his brother, Javier Sanchez, an investment advisor and registered mutual fund salesperson, the two conducted business through their jointly owned investment management company, International Capital Management Inc. (“ICM”). ICM was registered as a mutual fund dealer in Ontario and was a member of the Mutual Fund Dealers Association of Canada (the “MFDA”).
In 2001, John Sanchez began acting as Rebecca Lee Boal’s investment advisor. In 2014, John Sanchez presented Ms. Boal with an opportunity to invest in promissory notes in Invoice Payment Systems Corp. (“IPS”). Ms. Boal, acting on John’s advice, purchased an IPS Note for $101,224.26 on May 20, 2014.
What Ms. Boal alleges to not have known, however, is that the Sanchez brothers and other members of their immediate family owned 75% of the IPS shares through their holding companies and companies owned by them or other family members. She also alleged that he did not advise her the IPS notes were a high-risk investment and, instead, misled her about the nature and risks of investing in IPS.
Ms. Boal claims to only have learned these things when, in 2016, she received a letter from ICM informing her the MFDA ordered certain terms and conditions against it, notably that the Sanchez brothers cease any regulated activity relating to ICM and IPS.
The MFDA entered into a settlement agreement with the Sanchez Defendants in June 2018. In the settlement agreement, the brothers admitted to, amongst others, engaging in conduct that gave rise to conflicts of interest which they “failed to address by the exercise of responsible business judgment influenced only by the best interests of the clients.”
Ms. Boal brought forth a proceeding under the Class Proceedings Act, 1992, S.O. 1992, c. 6 (the “CPA”) in 2017 on behalf of the approximately 170 ICM clients who purchased IPS Notes from the Sanchez Defendants.
The Sanchez brothers, ICM, along with other companies were listed as the defendants.
History – Certification Motion
Ms. Boal claimed for breach of fiduciary duty to the Proposed Class. The Claim was based on Ms. Boal’s personal experience with the Sanchez Defendants and MFDA materials.
At the certification motion, the motion judge dismissed the motion because they viewed the Claim as failing to disclose a cause of action for breach of fiduciary duty on a class-wide basis.
History – Divisional Court
On appeal to the Divisional Court, the majority of the Court agreed with the certification motion judge and dismissed the appeal, stating that the claim in breach of fiduciary duty is “essentially and in its entirety” based on the MFDA rules and by-laws. The Claim did not meet the Hodgkinson requirements for establishing an ad hoc fiduciary relationship, because the Claim focused only on “professional rules and ethics codes.”
The dissent found the certification motion judge had erred in concluding that the claim of breach of a class-wide fiduciary duty was based solely the MFDA rules and by-laws. Rather, those rules were one factor supporting the claim that the relationship between the appellant and her financial advisor was a fiduciary one. When considered with the other facts pleaded about the relationship, it was not “plain and obvious” that the appellant’s claim for breach of fiduciary duty could not succeed.
Ms. Boal appealed to the Ontario Court of Appeal.
Issue
The issue on appeal was whether the majority of the Divisional Court erred in holding that the Claim did not disclose a cause of action for breach of fiduciary duty on a class-wide basis. The standard of review on appeal was correctness.
Relevant Legal Principles – Ad Hoc Fiduciary Duty
Before 1987, Canadian law recognized categories of fiduciary relationships which included: directors and corporations, solicitors and clients, trustees and beneficiaries, principals and agents, and partners. While the jurisprudence acknowledged that the categories of fiduciary relationships were not closed, there were no general principles governing when the courts would impose a fiduciary obligation on a particular relationship, outside of the established categories, known as an ad hoc fiduciary relationship.
In 1987, in the case of Frame v. Smith, [1987] 2 S.C.R. 99 (“Frame”), Wilson’s dissenting reasons stated that relationships with fiduciary obligations have three general characteristics:
1. the fiduciary has scope for the exercise of some discretion or power;
2. the fiduciary can unilaterally exercise that power or discretion so as to affect the beneficiary’s legal or practical interests; and,
3. the beneficiary is peculiarly vulnerable to, or at the mercy of, the fiduciary holding the discretion or power.
Then, in Hodgkinson v. Simms, [1994] 3 S.C.R. 377 (“Hodgkinson”), Justice La Forest, writing for the majority of the Supreme Court, adopted Justice Wilson’s reasons to determine whether an ad hoc fiduciary relationship existed between a professional financial advisor and his client. La Forest held that in view of the professional relationship between the parties, which was based on trust, confidence, and independence, and the client’s reliance on the accountant’s advice, there was an ad hoc fiduciary relationship between the parties. In that case, the accountant breached his fiduciary obligations by failing to disclose the financial benefit he obtained as a result of his client having invested in the projects that he had recommended.
When considering whether an ad hoc fiduciary duty exists, La Forest stated that the question to ask is whether, given all the surrounding circumstances, one party could reasonably have expected that the other would act in the former’s best interests with respect to the subject matter in issue?
In Hunt v. TD Securities Inc. (2003), 66 O.R. (3d) 481 (C.A.), leave to appeal refused, [2003] S.C.C.A. No. 473 the Ontario Court of Appeal summarized the five interrelated factors that La Forest J. identified for consideration when determining whether a financial advisor stands in a fiduciary relationship to their client:
1. Vulnerability – the degree of the client’s vulnerability, due to such things as age, or lack of language skills, investment knowledge, education, or experience in the stock market;
2. Trust – the degree of trust and confidence the client reposes in their advisor and the extent to which the advisor accepts that trust;
3. Reliance – whether there is a long history of relying on the advisor’s judgment and advice, and whether the advisor holds him or herself out as having special skills and knowledge upon which the client can rely;
4. Discretion – the extent to which the advisor has power or discretion over the client’s account; and,
5. Professional Rules or Codes of Conduct – which help to establish the advisor’s duties and the standards to which the advisor will be held.
Application to Case
The Court held that by reviewing the Proposed Class members’ financial plans and choosing whom to recommend the “opportunity” to invest in the IPS Notes to, the Defendants unilaterally exercised their discretion in respect of the Proposed Class members. The Defendants controlled all information concerning the IPS Notes and chose what to reveal about IPS and the IPS Notes to the Proposed Class members, rendering them vulnerable to the Sanchez Defendants’ exercise of discretion.
The Defendants admitted to the common method used to sell the IPS Notes, and their common breaches in so doing in the 2018 MFDA Settlement Agreement. These admissions were pleaded as showing an abuse of their discretion and to demonstrate that they profited from their conflict of interest.
The relationships between the Defendants and the members of the Proposed Class were long-standing. As La Forest J. points out in Hodgkinson,the Proposed Class members had the right to expect that their professional advisors would act in their best interests, to the exclusion of all other interests, because the contrary had not been disclosed to them. As the investment “opportunity” was brought to the appellant and the other members of the Proposed Class by the Sanchez Defendants,they should not have needed to protect themselves from the advice and recommendation of their financial advisors.
The Court remarked that the Proposed Class members were vulnerable due to the information imbalance between them and their advisors. The information they received was controlled by the Defendants and they relied on the Defendants for the accuracy of that information, including about the risk level associated with the purchase of the IPS Notes. The knowledge that the Defendants were bound by professional rules and codes of conduct requiring them to act in their clients’ best interest created reasonable expectations on the part of the clients and created an environment in which they were vulnerable.
Accordingly, the Court held it is not “plain and obvious” that the claim for breach of a class-wide fiduciary duty has no reasonable prospect of success. The Court allowed the appeal and declared that the claim discloses a cause of action for breach of a class-wide fiduciary duty. The matter was remitted to the Superior Court of Justice for a fresh determination of the common issues and preferable procedure certification criteria.