CITATION: Gnyś v. Narbutt, 2016 ONSC 2594

DIVISIONAL COURT FILE NO.: 665/16

DATE: 20160429

ONTARIO

SUPERIOR COURT OF JUSTICE

(Divisional Court)

J. KENT, J. THORBURN, G. MEW JJ.

BETWEEN:

VALERIE GNYŚ CARRYING ON BUSINESS AS HEALTH SERVICES RECOVERY NETWORK

Plaintiff/Respondent

– and –

MARTA NARBUTT

Defendant/Appellant

Shawn Knight and Ashley Gnyś, for the Plaintiff/Respondent

Margaret Hoy, for the Defendant/Appellant

HEARD at Hamilton: February 22, 2016

THORBURN J. (MEW J. concurring)

REASONS FOR DECISION

OVERVIEW

[1] The Appellant was a 17 year old passenger in a motor vehicle that was hit by a car. Her boyfriend who was the driver of the vehicle died at the scene. She sustained serious psychological and physical harm, including a brain injury.

[2] A month after the accident, the Appellant retained the law firm, Sharpe, Beresh & Gnyś, to pursue claims for damages for her injuries and no-fault benefits.

[3] There was never any serious doubt that the Appellant would recover substantial compensation for her injuries. In the interim however, the Appellant told her lawyer that she needed to borrow money. As a result, the law firm made arrangements for the Appellant, and drew up three loans in favour of Health Services Recovery Network in the cumulative amount of $13,500. Interest was charged at the rate of 18% compounded monthly (or 19.5% annually).

[4] The Respondent lender, Health Services Recovery Network, is the business name for Valerie Gnyś. The Respondent, Valerie Gnyś, is the Appellant’s former lawyer’s wife and a 28 year employee of the law firm. According to the Respondent, her main responsibilities at Sharpe, Beresh & Gnyś were “doing investigative work and participating in status review meetings with clients.”

[5] Timothy Beresh is a former bank manager who describes himself as “a self-employed contractor for Valerie Gnyś, who was operating a litigation loan business under the name Health Recovery Services Network (HSRN)” and “a self-employed contractor with the law firm Sharpe, Beresh & Gnyś where I did administrative and personal injury clerk work”.

[6] Valerie Gnyś was paid a processing fee of $40 per $1,000 borrowed, and the Appellant’s law firm was paid $157.50 for the legal fees associated with arranging the litigation loan. In total, the Appellant paid $1,012.50 in associated fees for the $13,500 loan. Some of the money advanced was used to pay fees and disbursements related to the litigation.

[7] At the time she took out the loans, no one told the Appellant that:

i. the lender was the Appellant’s lawyer’s wife who had met her as an employee of the law firm;

ii. Mr. Beresh whom the Appellant met with in connection with her personal injury claims and who explained the terms of the loans and had her sign the documentation, was in fact acting on behalf of the Respondent lender and not on her behalf; and

iii. she should seek independent legal advice.

[8] In 2010, the Appellant retained a new lawyer to represent her in respect of her personal injury claims. Her tort claim was subsequently settled, but the litigation loans were not repaid. In 2012, the Respondent commenced an action to recover the principal amounts advanced as well as contractual interest.

[9] On June 26, 2015, the Respondent, Valerie Gnyś, brought a motion for summary judgment before Nightingale J. in respect of the monies lent to the Appellant. She was (and continues to be) represented by Sharpe, Beresh & Gnyś, notwithstanding the firm’s prior lawyer-client relationship with the Appellant. By the time the motion for summary judgment was heard, the Appellant had agreed to pay the principal owing on the loans but did not agree to pay the interest and fees payable. She has since paid the principal amounts owing on the loans.

[10] On July 22, 2015, the motions judge granted summary judgment in favour of the Respondent, reported at 2015 ONSC 4407.

[11] This is an appeal from that Order including the costs award.

[12] For the reasons that follow, we find that the order granting summary judgment in favour of the Respondent must be set aside. The principal amounts advanced by the Respondent have been repaid by the Appellant, and the remainder of the Respondent’s claims should be dismissed.

THE REASONS OF THE MOTIONS JUDGE

[13] The motions judge noted at para. 4: “The defences raised are breach of fiduciary duty and breach of contract, failure to disclose that the plaintiff was the spouse of her lawyer at the time of the loans, failure to recommend independent legal advice, an unconscionable transaction and ‘questionable repayment of the loan’.” At paragraph 100 of his Reasons, the motions judge also addressed the defence argument that the transaction was unconscionable.

[14] The motions judge held that the Appellant was “fully advised, explained to and knew from the outset the loan rate being charged was 18% annually compounded monthly with an effective interest rate of 19.5% and that the interest charges ran from the date the loans were made and not when she received her settlement funds in her personal injury action” (para. 66).

[15] The motions judge relied on Tim Beresh’s evidence (para. 67) and held that Beresh “admitted he had a duty of utmost good faith toward the clients of the firm” (para. 13).

[16] The Respondent’s counsel conceded the Appellant did not receive independent legal advice before agreeing to the loans and was not advised the lender was her then-lawyer’s wife.

[17] The motions judge found that the Appellant suffered no loss and any failure to disclose was therefore irrelevant. The motions judge held that she wanted two of the loans to pay personal expenses, she was provided with a brochure from two companies that provided litigation loans and those brochures showed comparable rates and terms. He found the Appellant would not have explored or signed other options as the other options would have proven more expensive.

[18] The motions judge rejected the Appellant’s argument that the Respondent breached her obligation to the Appellant by failing to recommend other forms of financial relief such as a bank loan, an advance payment from the tort insurer, or a litigation loan. The motions judge found the Appellant likely would not have qualified for a bank loan and the Respondent knew this.

[19] He noted the Appellant made no third-party claim against her then-lawyer, Ashley Gnyś, or his law firm. (The Appellant did bring a separate action against the law firm in 2015, but this was the subject of another summary judgment proceeding in which the law firm successfully argued the action was statute-barred.)

[20] The motions judge found the interest rate on the litigation loans was “clearly not excessive and the transaction was not harsh and unconscionable”.

[21] The motions judge found there was no genuine issue requiring trial. If there had been an issue, he would have found no need for a trial given his findings of fact (para. 103).

[22] The motions judge ordered the Appellant to pay the principal amount of two of the three loans, that is $10,000 and $1,000 respectively and fees as well as interest at the annual rate of 18% calculated monthly with an effective annual rate of interest of 19.5% calculated from the date the loans were advanced. He ordered the Appellant to pay the principal amount of the third loan in the amount of $2,500. (The lender sought no interest on that loan.)

[23] The motions judge calculated the total amount owing to be $41,649.15. He further ordered post-judgment interest as of the date of the decision at the rate of 19.5%. He also awarded the Respondent costs of the motion in the amount of $15,000 plus HST and disbursements in the amount of $2,494.77.

JURISDICTION TO HEAR THIS APPEAL

[24] The Divisional Court’s jurisdiction to hear this appeal is found in ss. 19(1)(a) and 19(1.2)(a) and (b) of the Courts of Justice Act, R.S.O. 1990, c. C.43.

[25] Section 19(1)(a) provides that appeals lie to the Divisional Court from “a final order of a judge of the Superior Court of Justice, as described in subsections (1.1) and (1.2).” Section 19(1.2) applies to appeals filed on or after October 1, 2007 in respect of a “final order, (a) for a single payment of not more than $50,000, exclusive of costs; (b) for periodic payments that amount to not more than $50,000, exclusive of costs, in the 12 months commencing on the date the first payment is due under the order”.

[26] The Divisional Court can make any order or decision that ought to or could have been made by the court or tribunal appealed from, order a new trial, or make any other order or decision that is just. (Courts of Justice Act, s. 134(1).) In doing so, the Divisional Court can draw inferences of fact from the evidence, provided that the inference is not inconsistent with a finding that has not been set aside. (Courts of Justice Act, s. 134(4).)

[27] Further, the Divisional Court also has jurisdiction to hear the unconscionable transaction issue as found in s. 4(2) of the Unconscionable Transactions Relief Act, R.S.O. 1990, c. U.2. Section 4(2) states, “An appeal lies to the Divisional Court from any order made under subsection (1).”

THE STANDARD OF REVIEW

[28] Pursuant to Rule 20.04, the Court shall grant summary judgment if it is satisfied that there is no genuine issue requiring a trial. In determining whether there is a genuine issue requiring a trial, the Court is to consider the evidence submitted and may weigh the evidence and evaluate the credibility of a deponent and draw any reasonable inference from the evidence, unless it is in the interest of justice for such powers to be exercised only at a trial.

[29] In Hyrniak v. Mauldin, 2014 SCC 7, [2014] 1 S.C.R. 87, the Supreme Court of Canada determined that summary judgment motions must be granted whenever there is no genuine issue requiring a trial (para. 47). The Court stated that there will be no genuine issue requiring a trial when a judge is able to reach a fair and just determination on the merits of a motion for summary judgment. This will be the case when the process (1) allows the judge to make the necessary findings of fact, (2) allows the judge to apply the law to the facts, and (3) is a proportionate, more expeditious and less expensive means to achieve a just result (para. 49).

[30] Rule 20.04(2.1) permits a judge on a motion for summary judgment to consider and evaluate the credibility of a deponent.

[31] The Appellant contends her appeal raises issues of law, fact and mixed fact and law. In Hryniak, at para. 81, the Supreme Court of Canada concluded that absent an error of law the exercise of powers under the new summary judgment rule attracts deference and the exercise of the judge’s fact-finding powers and determination of whether there is a genuine issue requiring trial should not be overturned absent palpable and overriding error. (See also Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235.)

[32] In Housen, at para. 36, the Supreme Court of Canada provided the following direction on the spectrum for issues of mixed fact and law:

Matters of mixed fact and law lie along a spectrum. Where, for instance, an error with respect to a finding of negligence can be attributed to the application of an incorrect standard, a failure to consider a required element of a legal test, or similar error in principle, such an error can be characterized as an error of law, subject to a standard of correctness. Appellate courts must be cautious, however, in finding that a trial judge erred in law in his or her determination of negligence, as it is often difficult to extricate the legal question from the factual. It is for this reason that these matters are referred to as questions of “mixed law and fact”. Where the legal principle is not readily extricable, then the matter is one of “mixed law and fact” and is subject to a more stringent standard. The general rule, as stated in Jaegli Enterprises, supra, is that, where the issue on appeal involved the trial judge’s interpretation of the evidence as a whole, it should not be overturned absent palpable and overriding error.

THE EVIDENCE BEFORE THE MOTIONS JUDGE

Vulnerability of the Client

[33] The Appellant was involved in a serious motor vehicle accident on September 12, 2004. She was 17 years old and had not completed high school. She sustained serious injuries including a brain injury, serious psychological harm and depression. As such, she was vulnerable.

Retainer of the Gnyś law firm

[34] In September 2004, the Appellant retained Ashley Gnyś of the law firm Sharpe, Beresh Gnyś to seek damages for the physical and psychological injuries she sustained while a passenger in a motor vehicle.

[35] Ashley Gnyś owed his client a fiduciary duty to act in her best interest. He was in a position to know the Appellant, the nature of her injuries, assess her chances of success securing an award of damages and know her vulnerability.

[36] The retainer agreement between the law firm and the Appellant dated October 2004 provides that the firm would act for her on a contingency fee basis. The retainer agreement provides that she would be charged 1/3 of the recovery received and would be responsible for disbursements regardless of the result. The retainer agreement further provides that the firm may render interim accounts with respect to periodic benefits paid during the term of the retainer, unless otherwise agreed. “For example, it is common for a services rendered claim to be submitted by [the firm] with regard to housekeeping and home maintenance benefits and attendant care benefits and if such monies are received, interim fees of 1/3 plus 7% GST of those benefits received will be charged.”

Representations by Those Involved with the Loan Transactions

[37] Between July 2008 and February 2009, the Respondent entered into three loan agreements with the Appellant in the amounts of $10,000, $2,500 and $1,000 respectively.

[38] The Appellant disclosed to Ashley Gnyś that she wished to take out loans, and he provided the documents to Mr. Beresh and arranged for funds to be taken from the law firm’s trust account. He did not disclose that the lender was his wife nor did he tell the Appellant to get independent legal advice. Through his silence he lead her to believe that he was at all times acting on her behalf and was considering no one’s interest but hers.

[39] Tim Beresh was engaged as an independent contractor to do accident benefit work for the Gnyś firm (although he was never authorized by the Law Society of Upper Canada.) Mr. Beresh met with the Appellant several times in respect of the three loan agreements to explain the terms to her. He explained the loan documentation to the Appellant and had her sign it, but he neither disclosed that he was not acting on the Appellant’s behalf nor did he tell her to seek independent legal advice. On cross-examination he acknowledged, “My client was Health Services.”

[40] When asked why the Appellant had no legal advice prior to signing the loan agreements Mr. Beresh (who knew the Appellant was young, unsophisticated and suffering a brain injury) replied, “There’s none required.”

[41] Valerie Gnyś was an employee of the firm for 28 years and is and was Ashley Gnyś’ wife. She met the Appellant several times at the law firm while “doing investigative work and participating in status review meetings with clients.” She did not disclose to the Appellant before or after 2008 that she had a litigation loan business or that the loans came from her.

Loans by Valerie Gnyś to the Appellant

A. The First Loan

[42] On July 8, 2008, Mr. Beresh had a brief conversation with the Appellant about her request for a loan. He advised that he knew that the Appellant “had some cognitive problems yes … she had some lasting effects from this head injury.” He also knew Polish was the Appellant’s first language.

[43] His recollection of his first meeting with the Appellant regarding a loan is as follows:

A. Okay. What I told [the Appellant] Marta Narbutt? Here’s what I remember about that. Marta came into the office. She talked to Ashley [Gnyś]. She had a brief conversation with me. I gave her some stuff. She went away.

Q. What stuff did you give her?

A. I don’t know. It would have been stuff about Parapet [a company that provided litigation loans] or something else. But I didn’t have a big conversation with her because she had to go to work. This is what I recall.

[44] He later said he “could not say” whether he provided the Appellant with any documentation before the day she signed the loan on July 17, 2008.

[45] On July 17, 2008, Mr. Beresh had been told by Ashley Gnyś that the Appellant wished to proceed with the loan and he had therefore drawn up the documentation in advance of the meeting. He had the cheque signed and ready for delivery.

[46] At the meeting, he provided her with a signed letter on the firm’s letterhead that stated that the cost of borrowing the money was “18% compounded monthly which is about 19.5% annually” and “you begin to pay interest when you draw from your loan”. He gave her a Parapet loan application form that provided a loan at the rate of 19.5% calculated monthly or an effective interest rate of 21.34%. He said he also told her that other litigation lenders charge annual interest of between 25 and 29%.

[47] Mr. Beresh provided no explanation of compound interest to the Appellant over and above the wording in the loan document set out above.

[48] He told her she would only have to repay the money if she won her case. He said, “This is what you’re doing just to make you aware and it’s a cursory overview of what the documents are saying. And I would have gone through all these points by points right through the whole thing.” He said he asked her if she had any questions and, if she wanted to, she could read it. She signed it.

[49] On cross-examination Mr. Beresh was asked and answered the following questions:

Q. Did you advise her that the law firm should seek an advance payment from the tortfeasor which would be interest free?

A. No, I would not have advised her that.

Q. Why not?

A. Because that was not within my realm of involvement.

Q. Well, you knew there were advanced payments possible from the tortfeasor, correct?

A. I don’t know at the time if I did.

Q. Did Mr. Gnys ever advise you or did you ever have any discussion with Mr. Gnys that perhaps the two of you should approach the tortfeasor for an advanced payment?

A. I can’t recall having a conversation like that.

Q. She was a passenger in the vehicle. You were aware of that…She wasn’t driving the car.

A. Right.

Q. And she wasn’t driving the car that hit her, correct?

A. Right.

Q. And I take it, it never occurred to you to advise her that perhaps rather than taking out a loan that she should attempt to get an advanced payment from the tortfeasor, is that correct?

A. I just told you that I wasn’t involved in any of that.

Q. Do you know why none of the needs for money, rehabilitation or medical benefits or simply for personal expenses were sent off to the tort claim for payment?

A. I don’t know.

Q. Did Mr. Gnys ever advise you as to why that was not done?

A. No.

[50] At the end of the meeting he provided her with the cheque for $10,000 payable on the law firm’s account after the Appellant had signed the documents.

[51] The Appellant, Marta Narbutt, claimed,

I was not told of the actual cost of borrowing the litigation loan, that I would be charged 18% monthly compounded interest on the money the lawyer used to pay his fees and disbursements. During the time period that I applied for the litigation loan, I was emotionally distraught and struggling with depression as a result of the motor vehicle accident that I have been involved in that claimed the life of my boyfriend. I did not fully understand or realize the terms and conditions of the loan, and as the lawyer and his wife both benefitted from me taking out a litigation loan I was not given legal advice that was honourable or with integrity.

[52] She went on to say,

He [Ashley Gnyś] took out a loan. Did not disclose to me who the lender was, and that the fact that the lender was his wife who worked in the same law firm, and who I had personal interaction with whenever I went to the law office. He charged me a processing fee that essentially was his wife’s cut. He shared my knowledge – he shared my case information with her. If Mr. Gnyś had advised me and done his duty to tell me that I can take out a loan from the insurer as per his retainer—it does state it on there, I wouldn’t have been paying this compounded interest. So yes, I am taking a financial hit. A $10,000…now up to…$33,000$...Mr. Gnyś never advised me of this. So I did not even have the ability to ask the insurer whether this was. If I had the ability, and the insurer said no, then I would have had –looked at other options.

B. The Second and Third Loans

[53] An expert report was prepared and rendered in February 2007.

[54] The law firm did not pay the account and did not ask the Appellant to pay it. In November 2008, the Appellant received $9,541 from Aviva insurance company for accident benefit rehabilitation and medical expenses. The law firm took one-third and also asked her to pay the fee for the expert’s report.

[55] As a result of having to pay the fee for the expert’s report in the amount of $2,247.75 and the fact that one-third of the amount she received was paid to the firm for legal fees, the Appellant needed more money than she was given by Aviva to pay her ongoing expenses.

[56] Mr. Beresh said that the Appellant asked for $1,000 to be able to pay her expenses. The Appellant received another $1,000 loan, the Respondent charged a $200 processing fee and $157.50 was paid to the Appellant’s law firm account.

Financial Benefit to the Respondent and the Law Firm

[57] The Appellant was charged a service fee of $400 payable to Health Services Recovery Network ($40 for each $1,000 borrowed), a processing fee of $157.50 payable to the law firm (for each loan) and interest at the rate of 18% compounded monthly with an effective annual rate of interest of 19.5% calculated from the date the loan was advanced. Tim Beresh was remunerated for his services by the firm.

[58] Mr. Beresh acknowledged that Mr. Gnyś’ wife and the law firm would make money as a result of providing this loan. Mr. Beresh stated that, “I did not see it as a conflict of interest. I saw it as a win-win situation for Marta [the Appellant] and for the law firm or for Val [Gnyś].”

[59] Following a failed mediation, the Appellant terminated the retainer of Sharpe, Beresh & Gnyś. She later settled her claim with new counsel for $306,000.

LEGAL ANALYSIS

[60] Generally, parties negotiating a contract expect that each will act in his or her own best interest. The Supreme Court recently recognized a new general duty of honesty in contractual performance such that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. (Bhasin v. Hyrnew, 2014 SCC 71, [2014] 3 S.C.R. 494, at para 73.)

Special Relationships

[61] A party to a contract will owe an enhanced duty where there is a special relationship with the other party. There are three types of enhanced duties:

a) a duty not to engage in an unconscionable transaction. Each party may act in his or her own best interest but is not permitted to engage in “excessively self-interested or exploitative conduct”;

b) a duty of good faith. Each party can act in his or her best interests, but must do so in good faith with regard to the legitimate interests of the other; and

c) a fiduciary duty. One party must act selflessly in the interests of the other and with undivided loyalty.

(978011 Ontario Ltd. v. Cornell Engineering Co. (2001), 2001 8522 (ON CA), 53 O.R. (3d) 783 (C.A.), at para 33.)

[62] In order to claim there was a special relationship, there has to be some inequality between the parties and, from the terms of the arrangement, evidence that advantage was taken of the inequality. (Angela Swan and Jakub Adamski, Canadian Contract Law, 3^rd ed. (Toronto: Butterworths, 2012) at 896.)

Unconscionable Transactions

[63] In Harry v. Kreutziger (1978), 1978 393 (BC CA), 95 D.L.R. (3d) 231 (B.C.C.A.), at para. 26, Lambert J.A. held that questions as to whether use of power was unconscionable or unfair, whether consideration was grossly inadequate or bargaining power grievously impaired are really aspects of one question, which is: was the transaction as a whole, sufficiently divergent from community standards of commercial morality that it should be rescinded?

[64] The courts have characterized such improper behaviour as “unconscionable”.

[65] The three-part test to determine whether an agreement is unconscionable is set out in Teitelbaum v. Dyson, [2000] O.J. No. 4583 (S.C.), at para. 40, aff’d, 2001 32771 (ON CA), [2001] O.J. No. 3483 (C.A.), as follows:

i. the defendant abused its bargaining power,

ii. took unfair advantage of the plaintiff, and

iii. the bargain was improvident.

[66] The agreement must be unconscionable at the time it was made. (Morrison v. Coast Finance Ltd. (1965), 1965 493 (BC CA), 54 W.W.R. 257 (B.C.C.A.), at p. 259.)

[67] Unconscionable contracts are generally unenforceable because no reasonable informed person would otherwise agree to them. The party is not allowed to benefit because the consideration for entering into the agreement is lacking and it would therefore be unfair to the party seeking to escape the contract to enforce it. (Ekstein v. Jones, [2005] O.J. No. 3497 (S.C.), at paras. 57-58; Birch v. Union of Taxation Employees, Local 70030, 2008 ONCA 809, 93 O.R. (3d) 758, at para. 20.)

[68] In Bertolo v. Bank of Montreal (1986), 1986 150 (ON CA), 57 O.R. (2d) 577 (C.A.), the borrower was a bank customer who had no capital of his own and sought a loan from the Bank to purchase a restaurant. The borrower induced his mother, Mrs. Bertolo, “a widow of meagre means who has had little schooling and is not fluent in the English language” to put up her house as security for the loan (para. 1). To assist him in obtaining the loan, Mrs. Bertolo signed a promissory note and mortgaged her home to the Bank. "All she knew", the trial judge found"was that her son Eric was buying a restaurant and she was willing to help him" (para. 4).

[69] Before she signed the promissory note, the Bank realized she needed to get independent legal advice and sent her to the lawyer who acted for the Bank on the loan.

[70] The business failed a year later, and the Bank demanded that she pay the loan.

[71] The Court of Appeal held that the Bank did not owe her a fiduciary duty but should have ensured that she obtained independent legal advice. The Court held that it would be unconscionable for the Bank to be able to enforce its security against Mrs. Bertolo. The Court therefore set aside the transaction holding that promisors must know what they are getting into and understand or have the opportunity to understand the risks they face.

[72] In Ontario, s. 2 of the Unconscionable Transactions Relief Act provides that where, in respect of money lent, the court finds that, having regard to the risk and to all the circumstances, the cost of the loan is excessive and that the transaction is harsh and unconscionable, the court may:

(a) reopen the transaction and take an account between the creditor and the debtor;

(b) despite any statement or settlement of account or any agreement purporting to close previous dealings and create a new obligation, reopen any account already taken and relieve the debtor from payment of any sum in excess of the sum adjudged by the court to be fairly due in respect of the principal and the cost of the loan;

(d) set aside either wholly or in part or revise or alter any security given or agreement made in respect of the money lent, and, if the creditor has parted with the security, order the creditor to indemnify the debtor.

The Remedy of Rescission

[73] Rescission is a remedy that can be granted where there is an unconscionable transaction or breach of a fiduciary duty. It is also available for duress, undue influence, frustration, innocent misrepresentation, fraudulent misrepresentation, breach of contract where there is a total failure of consideration, and for mistake at common law and in equity. Rescission allows the rescinding party to treat the contract as if it were void ab initio. (Guarantee Co. of North America v. Gordon Capital Corp., 1999 664 (SCC), [1999] 3 S.C.R. 423, at paras. 39-40.)

CONCLUSION

[74] I find that these agreements are unconscionable because there was an imbalance of power, the Respondent took unfair advantage of the imbalance of power and the bargain was improvident. Furthermore, the Appellant had every reason to believe that everyone who spoke with her about the loans was representing her interests.

Imbalance of Power

[75] In this case, there was an imbalance of power because:

a) the Appellant was vulnerable. She was young, unsophisticated, had a brain injury and was suffering from depression;

b) the Respondent had special knowledge that the Appellant was vulnerable. She also had special knowledge about the Appellant’s personal injury claim (because she was a long-time employee of the firm, had met the Appellant many times at the firm about her claim, participated in status review meetings and because she was married to the Appellant’s personal injury lawyer);

c) the Appellant did not have independent legal advice; and

d) the Respondent knew the Appellant had been led to believe she had received independent legal advice.

Unfair Advantage of the Imbalance of Power

[76] With the knowledge that there was an imbalance of power, the Respondent:

a) never told the Appellant to get independent legal advice;

b) lead the Appellant to believe this was an arm’s length transaction by using the name Health Services Recovery Network and never disclosed that this was her business name;

c) engaged Tim Beresh (someone who was acting on the Appellant’s behalf) to act on her behalf but did not advise the Appellant that she had done so; and

d) used her special knowledge derived from the law firm and from her husband, the Appellant’s personal injury lawyer, to get a very profitable financial return on her investment knowing the risk was extremely low. (As a passenger in a motor vehicle who sustained serious injuries, the chances of the Appellant recovering a significant sum were high and settlement funds would be deposited to the firm’s account.) She lent money at 19.5% interest from the date of the loans and received $400 in service fees (which amounts to over 30% in the first year).

[77] The Respondent concedes the Appellant was not provided with independent legal advice. The Appellant’s lawyer (and Respondent’s husband), Ashley Gnyś, did not file an affidavit and therefore was not cross-examined to determine whether he was retained by the Respondent. He and his firm represented and continue to represent the Respondent in these proceedings against their former client.

[78] Furthermore, part of the proceeds of one of the loans was used to pay for an expert report and for an interim bill presented by Sharpe, Beresh & Gnyś in respect of the recovery of an accident benefit payment for rehabilitation and medical expenses.

The Bargain was Improvident

[79] The following is evidence that the bargain was improvident:

a) it is agreed that there was some likelihood that the Appellant could have obtained an advance from the tortfeasor and this possibility was never pursued;

b) the Appellant could have considered other sources of funding. (There is no evidence to suggest that litigation loans differ from any other type of loan in that the interest charged bears a relationship to the risk assumed by the lender. Moreover, while two pamphlets from litigation loan companies were provided by the Respondent, there is no evidence as to the loan terms that would have been demanded on the specific facts of this case.); and

c) the Appellant could have considered whether under the circumstances she should be borrowing as much or at all.

[80] The only reasonable inference to be drawn from the fact that the Respondent and those acting on her behalf decided not to tell the Appellant the true identity of the lender or suggest she obtain independent legal or financial advice was that they did so to ensure that the transaction would close. In so doing, the Appellant did not receive independent advice and she lost the chance to consider her options including the possibility of not having to borrow money at all.

[81] There is no evidence that her lawyer provided advice with respect to the wisdom of proceeding to borrow money from his wife. The Appellant testified on her cross-examination that,

Mr. Gnyś signed it. I didn’t ask him for that piece of paper. I didn’t say, ‘Let me sign a piece of paper.’ He put it in front of me, he said ‘Sign.’ He is my lawyer. What he tells me to do, I do.” (Page 50, line 248)

From my understanding, my lawyer is to do what is in my best interest. So if he provides me with a document to sign, it is because he has my best interests. That is his – he has an obligation to be honest to me.” (Page 52, line 256).

[82] Given the relationship between the Appellant and her lawyer and his role with respect to the loan, she would reasonably believe that he thought it reasonable to proceed. She looked to him to protect her interest and he introduced her to the lender. It was reasonable for her to believe he was comfortable with her taking out these loans.

[83] Like the situation in the Bertolo case, monies were advanced by the Respondent lender on the terms set out in a written Agreement and the Appellant played no role in the negotiation of those terms. Like Mrs. Bertolo, the Appellant was given no access to independent legal or financial advice, but she thought she had been. Like Mrs. Bertolo, it was impossible to know for sure whether the Appellant would have taken out the loans if she had received independent legal advice. However, like the situation in Bertolo, where the Appellant was not provided with independent legal advice but believed that she had received independent legal advice on a transaction that was advantageous to the lender, “it would be unconscionable to permit the [lender] to take advantage of the security it obtained from Mrs. Bertolo in the absence of proper independent legal advice” (Bertolo, at para. 19).

[84] The Law Society of Upper Canada reviewed the conduct of Mr. Gnyś in connection with the loans giving rise to this appeal. The Law Society concluded that Mr. Gnyś was in an actual or potential conflict of interest with respect to the litigation loan situation and that Mr. Gnyś should have recommended to the Appellant that she obtain independent legal advice. However, these failures were deemed to be matters of “best practices” rather than supporting further regulatory or disciplinary proceedings (it does not appear from the record before us that the role of Mr. Beresh would have been readily evident to the Law Society’s review counsel).

[85] The Respondent’s dealings were unconscionable. The Respondent in this case should not be entitled to enforce the terms of the loans.

[86] I find that the motions judge who granted summary judgment in favour of the Respondent made a palpable and overriding error of fact and law in deciding that the concealment of the identity of the lender, the interests of those purporting to act on her behalf and the failure to provide independent legal advice were “irrelevant”.

[87] Rather, given the relationship between the lender’s employer/husband and the Appellant, she was entitled to believe that her lawyer was looking out for her best interest alone and had no relationship with or interest in the lender. The name chosen for the lender had the effect of concealing the identity of the lender and her relationship to the Appellant’s lawyer and others involved in the loans. Having chosen such a name, it was all the more important that the Respondent disclose her identity and relationship to the Appellant’s trusted advisors, that her interests be clearly disclosed and for the Appellant to be given independent legal advice. Had she received independent legal advice, she likely would have been advised that she had alternatives to borrowing money at an effective interest rate of 30%.

[88] In short, the Appellant dealt with the lender in the belief that the lender was independent of her lawyerwho had been instrumental in the arrangement of the loan and choice of lender. She reasonably understood her law firm as assisting her in borrowing what was for her a substantial sum of money when in fact the Respondent, Valerie Gnyś, was the lender, her lawyer was the lender’s husband and employer and Mr. Beresh, who did accident benefits work for her lawyers, was in fact acting for the lender.

[89] Secondly, the motions judge incorrectly stated that, “Mr. Beresh’s evidence is also more credible and reliable than hers [the Appellant’s] when he stated he gave her sample litigation lender loan documentation to review for a few days before she returned to the office to sign the loan application documentation for the initial loan in July 2008.” (para. 45.) In fact, Mr. Beresh conceded on cross-examination that he “could not say” whether he provided the Appellant with any documentation before she signed the loan on July 17, 2008.

[90] Finally, the motions judge made a palpable and overriding error in finding that the Appellant “clearly understood the terms of the loan agreement” without considering that in addition to the Appellant’s evidence that she did not understand the terms:

• the Appellant had only a Grade 9 education,

• her first language was Polish,

• she had a brain injury and was suffering serious psychological harm at the time she entered into the agreements,

• Mr. Beresh himself conceded the Appellant “had some cognitive problems yes… she had some lasting effects from this head injury”, and

• the Appellant had no legal or financial advice.

[91] The motions judge’s task was challenging due to the fact that the allegations were not clearly pleaded. However, the Appellant did assert that the Respondent had special knowledge and knew she was vulnerable, concealed her identity, and denied the Appellant independent legal or financial advice and instead acted in concert with the Appellant’s lawyer and financial adviser.

[92] For these reasons, the decision of the motions judge granting summary judgment in favour of the Respondent must be set aside.

[93] The Appellant seeks rescission of the loan agreements on the basis that the loan agreements were unconscionable: she was misled and, on the basis of those misrepresentations she entered into the loan agreements. She asserts that she is not bound by those terms and the loan agreements should be rescinded and parties put back to the position they were in before the agreements were entered into.

[94] The Respondent’s dealings with the Appellant were unconscionable; the Respondent gained an unfair advantage and induced the Appellant to enter into an improvident agreement. As such, the loan agreements should be rescinded.

[95] The Appellant has paid back the principal owing on all three loans. As such, the Respondent’s position has been restored to the position in which she stood before the agreements were entered into.

[96] It is open to a motions judge to grant judgment in favour of a party who had not given advance notice of the claim for summary judgment: King Lofts Toronto I Ltd. v. Emmons, 2014 ONCA 215 at para. 14; Whalen v. Hillier (2001), 2001 24070 (ON CA), 53 O.R. (3d) 550 (C.A.). Although the Appellant did not bring a cross-motion for summary judgment, given our findings as well as the fact of repayment of the principal by the Appellant, there is nothing left of the Respondent’s action. It should therefore be dismissed.

[97] The appeal is therefore allowed. The Respondent’s action is dismissed.

[98] The parties agreed that the successful party on this appeal should have its costs of the appeal fixed at $4,500 and we so order. The motions judge awarded the Respondent costs of the motion of $15,000 plus disbursements of $2,494.77 (reported at 2015 ONSC 5924). Instead, the Appellant should have her costs of the motion which we will fix if they cannot be agreed. Given the Appellant’s failure to repay the principal amount owed to the Respondent when she settled her tort claim, the Respondent cannot be faulted for starting an action, albeit that the interest component greatly exceeded the principal amount claimed. Accordingly, there should be no other costs of the action payable to the Appellant.

__________________________ _ THORBURN J.

MEW J.

KENT J. (Dissenting)

[99] I share the view of my colleagues concerning the manner in which the Appellant was dealt with by the lawyer, the staff and the agents of the law firm that was representing the Appellant at the time of the impugned loan transactions.

[100] I cannot, however, agree that the motions judge made palpable and overriding errors. Rather, he conducted the very exercise that the Supreme Court of Canada required of him in Hryniak v. Mauldin, 2014 SCC 7, [2014] 1 S. C. R. 87. He concluded that, given the amount in question, the summary judgment process provided the court with sufficient evidence to make the necessary findings of fact, apply the law to those facts and fairly and justly adjudicate the dispute in a timely, affordable and proportionate manner. Having concluded that process; he satisfied himself that there was no genuine issue for trial and granted summary judgment against the then Defendant, now Appellant.

[101] The motions judge had available to him transcripts of examinations for discovery, transcripts of cross-examinations on affidavits, all of the loan documentation and correspondence between the parties. His following findings of fact and the reasonable inferences that were drawn by him were based on the evidence before him:

The Appellant approached her lawyer regarding the litigation loans and was provided with information concerning the higher interest rates charged by other litigation loan lenders.
The Appellant knew the effective interest rate on her litigation loans and that the interest ran from the date the loans were made.
The Appellant never suggested that she did not understand the terms of the loans until she learned that the lender was the spouse of her former lawyer.
The Appellant’s allegation that it was not explained to her that the loan interest was compounded, if made out, would have made no difference to her as a borrower.

[102] It must be remembered that the Appellant came to her lawyer’s office needing a litigation loan. There was no evidence that she could have obtained a litigation loan on the same or better terms anywhere else.

[103] There was evidence that, although the precise effect of the compounding of interest was not explained to her, it was more probable than not that she was shown a chart demonstrating by using an example of a $1,000.00 loan, how compound interest caused a debt to balloon when no payment was made on account of principal.

[104] It must also be remembered that when the Appellant made the loans she was 21 and 22 years of age, had at least one credit card and was employed full time.

[105] For the above reasons, I am unable to agree with my colleagues that there were palpable and overriding error(s) made by the motions judge. Nor can I agree that the loan transactions were unconscionable.

KENT J.

Released: April 29, 2016