Kovacs v. TD Financial Group et al, 2010 ONSC 6111

Court File and Parties

CITATION: Kovacs v. TD Financial Group et al, 2010 ONSC 6111 COURT FILE NO.: 447/10 DATE: 20101105 SUPERIOR COURT OF JUSTICE – ONTARIO – DIVISIONAL COURT

RE: IMRE KOVACS, Plaintiff (Responding Party) -and- TD FINANCIAL GROUP, TD CANADA TRUST, TD WATERHOUSE and CSABA NAGY, Defendants (Moving Parties)

BEFORE: MOLLOY J.

COUNSEL: Mahmud Jamal and Adam Hirsh, for the Moving Parties (Defendants other than Nagy) Charles F. Scott and Daniel Naymark, for the Responding Party (Plaintiff)

HEARD: September 30, 2010 at Toronto

ENDORSEMENT

Introduction

1The TD Defendants seek leave to appeal to the Divisional Court from the Order of Cameron J. dated June 17, 2010.

2At the heart of this lawsuit is a dispute over lottery winnings which had been deposited in a TD bank account. The plaintiff alleges that, at the behest of her former boyfriend, the TD defendants transferred her share of the winnings beyond the reach of this court, notwithstanding their knowledge of her interest and in the face of a court order requiring that the funds be paid into court.

3The TD defendants moved under Rule 21 to strike the plaintiff’s claim as disclosing no cause of action. Cameron J. dismissed that motion. The TD defendants now seek leave to appeal on the following issues:

(a) the viability of the claim for a declaration that the TD defendants were in contempt of court;

(b) the validity of the preservation order made by the Master;

(c) the cause of action for negligence; and

(d) the causes of action framed in breach of fiduciary duty and breach of trust.

4The parties accept that the motion judge correctly identified the test to be applied on a Rule 21 motion. The issues raised relate to the manner in which he applied that test in the context of these particular causes of action.

5For the reasons that follow, I find that the defendants have satisfied the test for leave to appeal with respect to the contempt of court issue, but not for any of the others. The motion for leave is dismissed with respect to the other causes of action. Further, if the plaintiff drops her claim for a declaration that TD committed a contempt of court, then the motion for leave is dismissed in its entirety. Otherwise, leave is granted, but only on the narrow issue with respect to contempt of court.

Factual Background

6For purposes of a Rule 21 motion, the allegations of fact in the statement of claim must be accepted as proven. Accordingly, the analysis on this motion for leave should proceed as if all the facts set out below had been established at trial.

7The history of this dispute begins in Toronto in 2004, where the plaintiff Imre Kovacs was living with her boyfriend Csaba Nagy. The couple had a winning lottery ticket and deposited their $5 million prize into a joint account in both their names at a Toronto branch of the TD Canada Trust. Each owned a 50% interest in the prize.

8Subsequently, without the knowledge or consent of Ms Kovacs, Mr. Nagy took all of the money out of the joint account and placed it into another TD Canada Trust account in his own name. From there, he transferred over $4 million into a trading account in his name at TD Waterhouse.

9In February 2005, Ms Kovacs sued Mr. Nagy for her half-share of the lottery winnings. Mr. Nagy did not defend; he left the jurisdiction. Counsel for Ms Kovacs brought a motion before a master seeking an order under Rule 45.02, preserving her share of the money that had been deposited into the joint account.

10On April 29, 2006, Master MacLeod made an order that $2.65 million in the joint account, or in any account in the name of Mr. Nagy to which the funds can be traced, be preserved or paid into court. That Order was served on the TD Canada Trust and in-house counsel for the TD Financial Group corresponded with plaintiff’s counsel about the issue (none of the lawyers involved at that time were counsel on this motion).

11TD Financial Group advised that Mr. Nagy had closed the joint account and transferred all the funds to a TD Canada Trust account in his own name, where there was approximately $174,000 remaining. TD Financial Group paid that sum into court. However, counsel for TD Financial Group refused to disclose where the rest of the plaintiff’s money had gone, except to say that it was not in another TD Trust bank account. He specified that he considered “TD Canada Trust” to include several entities which he listed. He did not list or mention TD Waterhouse, notwithstanding that is included within the broader TD Financial Group, and notwithstanding his knowledge that the plaintiff’s money could be traced there.

12Counsel for TD raised with plaintiff’s counsel his concern that the Master lacked jurisdiction to make the Order he did, particularly with respect to the tracing aspect of that order. He also raised concerns about privacy issues. He urged counsel for the plaintiff to get a broader court order from a judge.

13Counsel for the plaintiff maintained that the order was valid and binding on anybody with knowledge of it. He did nothing further.

14In November 2005, Mr. Nagy gave instructions to TD Waterhouse to transfer all of his funds (in excess of $4 million) into a bank account in Romania. TD Waterhouse complied.

15Meanwhile, Ms Kovacs’ action against Mr. Nagy continued, and in April 2006 she obtained default judgment against him in the amount of $2,628,301.34. However, when she attempted to collect on her judgment, she learned for the first time that her share of the joint account had been transferred into the TD Waterhouse account and that, with knowledge of her claim and of the Master’s Order, TD Waterhouse transferred it to an offshore account inaccessible to her. Her money was gone.

16Ms Kovacs commenced this action against the three TD defendants and Mr. Nagy. Only the TD defendants have responded. In her action, Ms Kovacs seeks a declaration that the TD defendants are in contempt of court for breaching the Order of Master MacLeod. She also seeks, inter alia, damages of $3 million against TD for negligence, breach of fiduciary duty and breach of trust, as well as punitive damages.

The Test for Leave to Appeal

17Rule 62.02(4) provides that leave to appeal “shall not be granted” unless one of two tests is met. Each test has two parts and both parts of the test must be satisfied before leave can be granted. Under Rule 62.02(4)(b), leave may be granted where there is “reason to doubt the correctness” of the order in question, and the proposed appeal raises issues of general importance relevant to the development of the law or the administration of justice, transcending the interests of the immediate parties. Under Rule 62.02(4(a), leave may be granted if there are conflicting decisions in Ontario or elsewhere on a point of principle, and it is in the opinion of the judge hearing the motion “desirable” that leave to appeal be granted. Typically, this involves a situation where the law is not yet settled and an appellate level decision would be of assistance in the development of the legal principle at issue.

Analysis: The Claim for a Declaration of Contempt of Court

18In her action, the plaintiff seeks, inter alia, a declaration that the defendants committed a contempt of court by breaching the order of Master MacLeod. The TD defendants argue that this claim should be struck for two reasons:

(i) a contempt declaration cannot be used to advance a civil action; and

(ii) a contempt order can only be obtained pursuant to Rule 60.11 and in the proceeding in which the order to be enforced was made.

19The motion judge held that the plaintiff was not advancing a civil cause of action for contempt because “no remedy is sought” in that the plaintiff seeks “merely a declaration that a contempt exists.” On the second point, the motion judge held that the language of Rule 60.11 was not sufficiently unequivocal to oust the jurisdiction of the court to grant the declaration sought. He ruled that the court had an inherent jurisdiction to make a contempt declaration and that a plaintiff can seek such relief either by a motion pursuant to Rule 60.11 or by a fresh action.

20In my view, there is reason to doubt the correctness of the motion judge’s ruling that no remedy is sought for contempt. The plaintiff seeks a declaration, which has consistently been recognized by the courts as a form of remedy.¹ It is a formal declaration by the court that a defendant has committed the quasi-criminal offence of contempt of court.

21It is not quite as clear whether Rule 60.11 constitutes a complete code for how a contempt of court order may be obtained, or whether there is an additional jurisdiction in the court to grant relief for contempt of court in a separate proceeding. The Rule refers only to contempt of court orders, so it is clear that other forms of contempt (such as contempt in the face of the court) fall within the court’s inherent jurisdiction rather than Rule 60.11. Also, Rule 60.11 states that it applies to “a contempt order to enforce an order.” The motion judge in this case held that the declaration sought by the plaintiff was not for the purpose of “enforcing” the master’s preservation order, as the funds are gone and TD cannot get them back. He therefore held that the requirements of Rule 60.11 did not need to be met.

22In Kopaniak v. MacLellan² the Court of Appeal referred to Rule 60.11 as being a comprehensive code for dealing with civil contempt, including definition, procedure and remedy. However, that was in the context of determining whether the time period for appealing a contempt order was the 30 day period for civil appeals in the Rules, or the longer period under the Criminal Appeal Rules. The court held that the time period in the civil Rules applied, and in the course of that analysis referred to the comprehensive nature of Rule 60.11. There was no issue in that case as to whether an alternative civil route might exist outside Rule 60.11.

23The moving part also relies on the Court of Appeal’s decision in Forrest v. LaCroix Estate³ in which Morden J.A. held that Rule 60.11 is “intended to occupy the field in proceedings under the Rules of Civil Procedure relating to the enforcement of court orders which require an act to be done, with the result that there is no power to commit for non-payment of a money judgment.” However, again the context is different from the situation here. There was no issue in Forrest as to whether the relief sought related to “enforcement” of the court order; the issue was whether an order for the payment of money was excluded.

24What is crystal clear from the case authority is that a contempt proceeding is quasi-criminal in nature and involves an element of public law even where it is used to enforce a purely private order.⁴ As such, different procedural rules apply than in an ordinary civil proceeding, including the requirement that guilt be established beyond a reasonable doubt and that the person against whom the order is sought is not compellable.⁵ The Supreme Court also stressed that a contempt order ought not to be used as a method of putting pressure on a defaulting party or a “means of an aggrieved party to seek indemnification.”⁶ Similarly in SNC-Lavalin v. Profac, Laskin J.A. stated that the contempt power “does not have and should not appear to have the function of a civil action in tort or for breach of contract.”⁷

25None of these cases deals directly with the identical issue before the motion judge, which was whether Rule 60.11 still applies when the court order in question is no longer capable of enforcement. There is therefore some force to argument of plaintiff’s counsel that these are not conflicting decisions within the meaning of the test for leave to appeal.

26However, even if Rule 60.11 did not apply to require the application for a declaration of contempt to be made in the action in which the order was made, I am still of the view that there is good reason to doubt the correctness of allowing this relief to be pursued in conjunction with a civil action seeking damages against the TD defendants for the same conduct. The procedural safeguards for the persons accused of contempt are lost in that setting, particularly the right not to be compelled to testify against oneself.

27I therefore find that the first branch of the leave to appeal test is met. I am also satisfied that this is a matter upon which appellate direction would be useful earlier rather than later, otherwise the defendants’ procedural rights may be irreparably compromised. This is an issue relating to the administration of justice generally. The contempt power is not a purely private remedy; it relates to the court’s interest in protecting the public’s perception of the justice system and ensuring that court orders are not disobeyed. The procedural protections available and the type of proceeding in which such relief can be sought are important issues with a broad impact beyond the parties involved here. Accordingly, I find that the second branch of the test is also met and leave to appeal should be granted with respect to whether the plaintiff’s claim for a declaration of contempt of court should be struck out.

28Many of the other causes of action pleaded rely, at least in part, on the fact that the TD defendants were aware of the Master’s Order and failed to comply with it. However, it is not essential to those causes of action that there be a formal declaration of contempt. It is not even necessary that all of the elements of contempt be proven beyond a reasonable doubt to establish that TD had sufficient notice of the plaintiff’s interest to give rise to a duty to act in a certain way (whether that duty be framed in negligence, breach of trust, or breach of fiduciary duty). Accordingly, it does not follow that the various other causes of action that plead breach of the court order as part of the factual underpinning for the claim must fail merely because the declaration remedy with respect to contempt of court is struck from the prayer for relief. I will therefore deal with the other causes of action for which leave to appeal is sought.

Analysis: Cause of Action in Negligence

29The motion judge held that the claim in negligence not only was not “certain to fail” (which is essentially the test under Rule 21), but that it had “a good prospect for success.” In coming to that conclusion, the motion judge addressed a number of the arguments raised by the defendants as to why the cause of action could not succeed, and rejected all of them. For present purposes, it is only necessary for me to consider the argument relating to the recognition of novel causes of action under the line of cases flowing from the English House of Lords decision in Anns v. Merton London Borough Council.⁸ Even if there might be reason to doubt the correctness of one of the other findings of the motion judge in relation to the negligence claim, I see no error in his reasoning on the Ann analysis.

30The Anns test involves a two-stage analysis to determine first if there is sufficient proximity between the parties to give rise to a duty of care and then whether there are any policy considerations that ought to negate or limit the scope of the duty.

31The motion judge referred extensively to the recent Supreme Court of Canada consideration of these issues in Design Services Ltd. v. Canada⁹ and other cases. In those authorities, the proximity test is largely held to relate to foreseeability and whether the plaintiff is so closely and directly affected by the act of the defendant that the defendant ought to reasonably have had her in its contemplation as being so affected. As noted by the motion judge, it is “indisputable” on the facts as pleaded that TD knew about Ms Kovak’s interest in the funds and knew that she would be directly affected by TD’s decision to comply with Mr. Nagy’s request to move those funds to Romania. He therefore held that the foreseeability test was met, and I see no reason to doubt the correctness of that finding.

32On the policy consideration aspect of the test, the motion judge noted the importance to society of having court orders obeyed and stated that this type of policy analysis is best conducted on a full record and after a trial.

33Again, there is no reason to doubt the correctness of that ruling. There is abundant authority for the proposition that novel causes of action, particularly ones involving public policy concerns, are best determined within the factual matrix developed at trial, rather than on a summary basis on a motion.

34Accordingly, the first branch of the test for leave to appeal under Rule 62.02(4)(b) (reason to doubt correctness) is not met. It is at least arguable that the plaintiff has pleaded a valid cause of action in negligence.

35The defendants also rely on Rule 62.02(4)(a) and submit that there is a conflicting decision on this issue and that it is desirable that leave be granted on that basis. The conflicting decision relied upon is the House of Lords decision in Customs and Excise Commissioner v. Barclays Bank¹⁰. The Rule with respect to leave to appeal is not restricted to conflicting decisions from within Ontario. However, decisions from courts completely outside our jurisdiction are less likely to be persuasive on the issue of whether it is desirable to grant leave in order to settle the law. In this case, there are factual distinctions between the two cases that may explain the different conclusions reached. Further, and more importantly, since the Anns case was decided, the law in England has developed quite differently than has been the case here in Canada. English courts have retreated from the Anns test, whereas Canadian courts, including the Supreme Court of Canada, have continued to apply it. Therefore, the fact that in a similar situation to this one, an English court negated the negligence duty of care without undertaking an Anns analysis, does not persuade me that Canadian law is unsettled on this point or that it is desirable to grant leave so that the law can be clarified. The Canadian law may easily develop in a different direction. I accept that the point is novel, but that does not mean it should be struck on a Rule 21 motion. I agree with the motion judge that the law in this area is best developed upon a full evidentiary record after trial.

36Accordingly, leave to appeal is not granted with respect to the cause of action in negligence.

Analysis: Cause of Action in Breach of Trust and Breach of Fiduciary Duty

37The causes of action asserted with respect to breach of trust and breach of fiduciary duty are interconnected in that an essential element of each is the existence of a duty on the part of the TD defendants to act in the interests of the plaintiff. The TD defendants argue that no such duty can arise based on a joint account that was closed in accordance with its contractual terms before any notice to TD as to the plaintiff’s claim and on a court order subsequently obtained.

38The motion judge held that there could be a basis in law and fact for concluding that an ad hoc fiduciary relationship should be imposed in these circumstances. Although there is considerable authority for the contrary proposition that the relationship between a bank and its customer is not a fiduciary one, there is no case that deals directly with a situation such as this one. Essentially, the plaintiff told the TD that Mr. Nagy was attempting to steal money belonging to her. Although the TD knew the funds had initially been held jointly, and although the plaintiff’s allegations were supported by a court order that the funds be paid into court, TD facilitated the wrongdoer and enabled him to transfer the plaintiff’s money out of the country beyond her reach. It would have been a simple matter for TD to pay the funds into court so that the interests of both Ms Kovacs and Mr. Nagy were protected. It chose instead to act in a manner that was highly detrimental to Ms Kovac’s interests. The motion judge was of the view that it was at least arguable that equity should impose a duty in these circumstances because good conscience requires it.

39I agree with the motion judge that the difficulties in imposing a fiduciary or trust obligation are not so clear-cut that the plaintiff’s claim should be struck out at this point. Further, there are other causes of action proceeding to trial, including claims for conspiracy, punitive damages and breach of contract (which are not the subject of this motion) and the negligence claim upon which I have refused leave to appeal. The same facts underlie all of these causes of action. As with the negligence claim, the trial judge will be in a better position to make these difficult legal determinations based on a full evidentiary record, which will then be subject to a full right of appeal. These are unusual facts and novel legal issues. It is preferable that the trial judge have the full range of possible causes of action and remedies before him or her.

40I do not doubt the correctness of the motion judge’s conclusion that there is some possibility of success on the breach of fiduciary duty and breach of trust claims and the test for leave is therefore not met. Although there is some case law favouring the TD defendants, the facts are sufficiently different that this case may be distinguished. In any event, even if there is a conflict with some of the authorities, I do not consider it desirable to grant leave on these somewhat related causes of action. It is preferable that all of the claims be heard together.

41Accordingly, leave to appeal is denied with respect to the breach of trust and breach of fiduciary duty causes of action.

Analysis: Validity of the Master’s Order

42Finally, the TD defendants argue that the motion judge erred in holding that the Master had jurisdiction to make the order that he did. The defendants argue that the Order is injunctive in purpose and effect and therefore beyond the jurisdiction of a master. In particular, the defendants argue that the tracing aspect of the order is in the nature of a Norwich order, which is outside the jurisdiction of the Master.

43The motion judge held Rule 45.02 authorizes a master to make an order for preservation or payment into court where there is a “specific fund” in question. Since there was a specific fund in issue here, he found that the master had jurisdiction to make the order he did. He distinguished the cases to the contrary relied upon by the defendants on the basis that they did not deal with Rule 45.02. The motion judge further held that in any event the defendants were not free to disregard the order because of their own view that it was made without jurisdiction. Rather, their options were either to comply with the order or seek clarification from the court as to whether it was binding on them.

44I agree with the observations of the motion judge that the rule of law requires compliance with court orders. It is simply not open to citizens to refuse to obey orders of the court and later seek to excuse their conduct on the grounds that the order was improperly made in the first place. I also share his view that this principle applies even where the initial order was made without jurisdiction. Regardless of whether the order is a nullity (which is far from clear) and regardless of whether the rule against collateral attack on court orders applies, the plaintiff has advanced an arguable case that as long as the order was in existence, the defendants were required by law to obey it.

45Accordingly, the test for leave to appeal from this finding by the motion judge is also not met.

Conclusion and Order

46In the result, leave to appeal is granted with respect to that aspect of the Order of Cameron J. dismissing the motion to strike the claim for a declaration of contempt of court, as pleaded in paragraph 1(a) of the Fresh as Amended Statement of Claim.

47I suggested during the course of argument that the prayer for relief with respect to the declaration was superfluous to the plaintiff’s claims and could be struck without any impact on the rest of her claim. That suggestion was met with some level of agreement from plaintiff’s counsel, albeit in the course of argument without an opportunity to reflect on it fully.

48In these circumstances, I consider it appropriate to give the plaintiff an option. She may elect to strike paragraph 1(a) from the statement of claim and proceed with the action without seeking a declaration as to the contempt of court. If she exercises that option within 30 days of the release of these reasons, the leave to appeal motion shall be dismissed in its entirety.

49Alternatively, the appeal will proceed with respect to the declaration of contempt of court and the leave to appeal motion is dismissed with respect to all other issues.

50If the parties are unable to agree upon costs, written submissions may be forwarded to the court within 60 days.

Footnotes

1. 1Sokolosky v. The Queen, 1979 9 (SCC), [1980] 1 S.C.R. 821 at 830.
2. 2(2002) 2002 44919 (ON CA), 212 D.L.R. (4th) 309 (C.A.) at para 27
3. 3(2000), 2000 5728 (ON CA), 48 O.R. (3d) 619 (C.A.) at para 23.
4. 4Bell ExpressVu Limited Partnership v. Torroni (2009), 2009 ONCA 85, 94 O.R. (3d) 614 (C.A.) at para 20; SNC-Lavalin Profac Inc. v. Sankar (2009), 2009 ONCA 97, 94 O.R. (3d) 236 (C.A.) at paras 14-17.
5. 5ProSwing Inc. v. Elta Golf Inc., 2006 SCC 52, [2006] 2 S.C.R. 612 at para 35, and cases referred to therein.
6. 6Ibid.
7. 7Supra, footnote 4, at para 14.
8. 8[1978] A.C. 728 (H.L.)
9. 92008 SCC 22, [2008] 1 S.C.R. 737
10. 10[2006] 4 All E.R. 256 (H.L.)