COURT OF APPEAL FOR ONTARIO DATE: 20231220 DOCKET: COA-22-CV-0258

Gillese, Trotter and Coroza JJ.A.

BETWEEN

Rebecca Lee Boal Plaintiff/Appellant (Appellant)

and

International Capital Management Inc.*, John Sanchez a.k.a. John Paul Sanchez*, Javier Sanchez a.k.a. Javier Andreas Sanchez*, Invoice Payment Systems Corp., 1361655 Ontario Inc.*, 1634792 Ontario Inc.*, The Savel Corporation, 2029984 Ontario Ltd.* and 2029986 Ontario Ltd.* Defendants/Respondents (Respondents*)

Proceedings under the Class Proceedings Act, 1992

Counsel: David Milosevic and Garth Myers, for the appellant Rebecca Lee Boal David F. O’Connor and Sean M. Grayson, for the respondents International Capital Management Inc., John Sanchez, Javier Sanchez, 1361655 Ontario Inc., 1634792 Ontario Inc., 2029984 Ontario Ltd., and 2029986 Ontario Ltd.

Heard: September 19, 2023

On appeal from the order of the Divisional Court (Associate Chief Justice Faye E. McWatt and Justice Freya Kristjanson, Justice Harriet E. Sachs dissenting), dated March 1, 2022, with reasons reported at 2022 ONSC 1280, dismissing an appeal from the order of Justice Paul M. Perell, dated January 26, 2021, with reasons reported at 2021 ONSC 651.

Gillese J.A.:

[1] Does the claim in this class action proceeding disclose a cause of action for breach of fiduciary duty between certain investment advisors and a group of their clients? Hodgkinson v. Simms, [1994] 3 S.C.R. 377, provided much guidance on how to decide precisely this question. Despite that guidance, as this appeal demonstrates, such a determination remains challenging.

[2] The certification judge held that the claim did not disclose such a cause of action. That decision was appealed to the Divisional Court. A majority of the Divisional Court agreed with the certification judge. However, Sachs J., in dissent, found that it did. The matter now comes before this court on further appeal. I would allow the appeal, substantially for the dissenting reasons of Sachs J.

I. BACKGROUND

The Key Players

[3] John Sanchez was registered as a mutual fund salesperson and a financial planner in Ontario in 1989. He was also a member of the Financial Planners (“FP”) Canada Standards Council and subject to the FP Canada Standards Council’s Code of Ethics (the “FP Code of Ethics”). [^1]

[4] Starting in 2001, John Sanchez acted as Rebecca Lee Boal’s (“Ms. Boal” or the “appellant”) investment advisor. His brother, Javier Sanchez, was also an investment advisor and registered mutual fund salesperson. The Sanchez brothers conducted business through their jointly-owned investment management company, International Capital Management Inc. (“ICM”).

[5] ICM was registered as a mutual fund dealer in Ontario. It was a member of the Mutual Fund Dealers Association of Canada (the “MFDA”). The Sanchez brothers were “Approved Persons” under the MFDA by-laws and rules. ICM and the Sanchez brothers are named defendants in this action (together, the “Sanchez Defendants”).

[6] The MFDA rules imposed an obligation on the Sanchez Defendants to deal fairly, honestly, and in good faith with their clients, disclose any conflict or potential conflict of interest, and address conflicts of interest by the exercise of responsible business judgment influenced only by the best interests of the clients. [^2]

The IPS Promissory Notes

[7] In 2014, John Sanchez presented Ms. Boal with an opportunity to invest in promissory notes in Invoice Payment Systems Corp. (“IPS”). IPS is a factoring company that purchases other businesses’ accounts receivable at a discount.

[8] ICM was the exclusive agent for the IPS promissory notes (the “IPS Notes”). The Sanchez brothers sold IPS Notes to certain of their ICM clients whom they had specifically selected.

[9] The Sanchez brothers and other of their immediate family members owned 75% of the IPS shares, through their holding companies and companies owned by them or their family members. Ms. Boal alleges that John Sanchez did not disclose that information to her. She also alleges he did not advise her that the IPS Notes were a high-risk investment and, instead, misled her about the nature and risks of investing in IPS.

[10] Ms. Boal purchased an IPS Note for $101,224.26 on May 20, 2014.

The MFDA Proceedings

[11] In late 2016, Ms. Boal received a letter from ICM telling her that the MFDA had ordered certain terms and conditions against it. The letter provided her with a link to the MFDA website. Through that website, Ms. Boal learned of various orders the MFDA was seeking against the Sanchez brothers, including that they cease any regulated activity relating to ICM and IPS due to their failure to comply with the MFDA rules and by-laws (the “2016 MFDA Investigation”). She also learned of the allegedly undisclosed information described above. Ms. Boal further learned that the Sanchez brothers had received referral fees equal to 2% of the total amount invested by ICM clients in IPS Notes.

[12] The MFDA entered into a settlement agreement with the Sanchez Defendants in June 2018 (the “2018 MFDA Settlement Agreement”). The Sanchez Defendants were severely disciplined by the regulator. Among other things, ICM’s membership in the MFDA was terminated and the Sanchez brothers were permanently banned from conducting securities related business while in the employ of, or associated with, any member of the MFDA. John Sanchez was also disciplined by the FP Canada Standards Council and had to cease acting as a certified financial planner with them.

[13] Part V of the 2018 MFDA Settlement Agreement is entitled “Contraventions” and sets out admissions by the Sanchez Defendants. [^3] The Sanchez Defendants’ admissions include: between 2006 and 2016, they sold or facilitated the sale of at least $25,800,000 of investments in a non-arm’s length company (IPS) to at least 170 ICM clients; they engaged 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”; they recommended that at least 170 ICM clients purchase investments distributed by two non-arm’s length companies without conducting adequate due diligence to know the products; and, they did not maintain sufficient records to demonstrate they had complied with the obligation to “Know-Your-Client” and ensure the recommended products and orders obtained from clients were suitable.

[14] Additionally, the MFDA reasons for decision from the settlement hearing, dated July 13, 2018, indicate that, not including what they earned as IPS shareholders, holding companies controlled by the Sanchez brothers earned around $3,000,000 in commissions from the sales of the IPS Notes to ICM clients.

The Class Action Proceeding

[15] Ms. Boal started this proceeding under the Class Proceedings Act, 1992, S.O. 1992, c. 6 (the “CPA”) in 2017. The proposed class consists of approximately 170 ICM clients who purchased IPS Notes from the Sanchez Defendants (the “Proposed Class”).

[16] In the third amended statement of claim (the “Claim”), as against the Sanchez Defendants, Ms. Boal claims for breach of fiduciary duty to the Proposed Class. The Claim is based on Ms. Boal’s personal experience with the Sanchez Defendants and MFDA materials. The Claim also names various companies the Sanchez brothers or their family owned and/or controlled [^4] (the “Corporate Defendants”) for knowing assistance and knowing receipt. Ms. Boal alleges the Corporate Defendants received the monies the Sanchez Defendants obtained from the sale of the IPS Notes to the Proposed Class. The Claim seeks, among other things, disgorgement of all “revenue earned” from the use of the funds from the sale of IPS Notes to the Proposed Class.

The Certification Motion

[17] After learning of the sanctions the MFDA imposed on the Sanchez Defendants, Ms. Boal moved to have the action certified (the “Certification Motion”).

[18] The respondents conceded that the cause of action criterion was satisfied for the breach of fiduciary duty claim. Nonetheless, the Certification Motion was dismissed, principally because the certification judge viewed the Claim as failing to disclose a cause of action for breach of fiduciary duty on a class-wide basis. Based on that view, the certification judge also held that the Claim did not satisfy the common issues and preferable procedure criteria. And, because the claims of knowing assistance and knowing receipt were dependent on the existence of a trust or fiduciary relationship, he held they too failed.

[19] By order dated January 26, 2021, the Certification Motion was dismissed.

[20] Ms. Boal appealed that order to the Divisional Court.

The Divisional Court Decision

[21] A majority of the Divisional Court agreed with the certification judge and dismissed the appeal (the “Majority Decision”). They said the claim of breach of fiduciary duty is “essentially and in its entirety” based on the MFDA rules and by-laws to which the Sanchez Defendants were subject: “[t]here are no other indicia pleaded”. [^5] Because the Claim focuses only on “professional rules and ethics codes”, the majority held that it failed to meet the Hodgkinson requirements for establishing an ad hoc fiduciary relationship.

[22] In dissenting reasons, Sachs J. would have allowed the appeal and set aside the certification judge’s finding that the cause of action criterion with respect to the breach of fiduciary duty claim was not satisfied. She would have sent the matter back for redetermination as to whether the common issues and preferable procedures criteria for certification are satisfied with respect to that claim and whether the pleaded claims for knowing receipt and knowing assistance are certifiable.

[23] Justice Sachs found the certification judge erred in principle in concluding that the claim of breach of a class-wide fiduciary duty was based solely on the professional rules and regulations that governed the Sanchez Defendants and the fact that the Sanchez brothers gave the Proposed Class investment advice. She said those rules are but one factor supporting the claim that the relationship between the appellant and her financial advisor, when the investment in issue was made, was a fiduciary one. When considered in conjunction 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. She noted other pleaded facts that include: the professional rules governing John Sanchez required him to act as a fiduciary would act, leading to reasonable expectations on the appellant’s part; John Sanchez gave the appellant financial advice – he did not simply act as a broker, buying what the appellant instructed him to buy; John Sanchez recommended the investment to the appellant; John Sanchez profited from that investment; and, John Sanchez – not the appellant – had access to all the information about the investment. These additional facts are pleaded in relation to all of the Proposed Class members.

[24] The Divisional Court dismissed the appeal by order dated March 1, 2022 (the “Order”).

[25] With leave, Ms. Boal appeals the Order to this court.

II. THE ISSUE

[26] The main issue to be decided on appeal is 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.

[27] While the appellant also addressed whether the claim for breach of fiduciary duty could be determined in common and whether the claims for knowing assistance and knowing receipt are adequately pleaded, I decline to decide these additional matters.

[28] In her dissenting reasons, Sachs J. stated that the certification judge’s analysis of the additional matters is “of little assistance” because it was driven by his view of the cause of action criterion with respect to the breach of fiduciary duty claim. She acknowledged that judicial economy and efficiency considerations dictated that the Divisional Court should perform an analysis of them but concluded that was unacceptable in this case. She observed that, because the Divisional Court is not a court of first instance and considerable factual findings would have to be made to decide the additional matters, making such first instance findings could interfere with the parties’ appeal rights.

[29] That same reasoning applies in this court. Accordingly, I have not addressed the additional matters.

III. THE STANDARD OF REVIEW

[30] The certification judge refused to certify this proceeding, principally on the basis that the Claim did not disclose a cause of action for breach of a fiduciary duty on a class-wide basis, as required by s. 5(1)(a) of the CPA. The test under s. 5(1)(a) is the same as the test on a motion to strike for no reasonable cause of action: Pro-Sys Consultants Ltd. v. Microsoft Corporation, 2013 SCC 57, [2013] 3 S.C.R. 477, at para. 63. That test is whether, assuming the facts pleaded to be true, it is “plain and obvious” the claim has no reasonable prospect of success: Hollick v. Toronto (City), 2001 SCC 68, [2001] 3 S.C.R. 158, at para. 25.

[31] Whether the cause of action criterion is met is reviewable on a correctness standard: Hodge v. Neinstein, 2017 ONCA 494, 136 O.R. (3d) 81, at para. 52, leave to appeal refused, [2017] S.C.C.A. No. 341. Therefore, this court must review the Majority Decision on the cause of action criterion on a correctness standard.

IV. ANALYSIS

[32] The Majority Decision agreed with the certification judge, stating that the Claim failed to plead the facts necessary to establish a breach of a class-wide fiduciary duty. They said that claim was based entirely on the fact that the Proposed Class members were clients of the Sanchez Defendants who were subject to the MFDA rules and bylaws – “no other indicia” of a fiduciary relationship were pleaded. In my view, that is not correct.

[33] I agree with Sachs J. that the professional rules governing the Sanchez Defendants are but one fact supporting the claim that, when the Proposed Class members purchased IPS Notes, there was a fiduciary relationship between them and their financial advisors, and those advisors were acting in breach of their fiduciary duties. The certification judge erred in principle in failing to consider those other facts in conjunction with the Sanchez Defendants’ breaches of professional rules.

The Relevant Legal Principles

[34] The law governing ad hoc fiduciary relationships in Canada was profoundly changed in 1987 by Wilson J.’s dissenting reasons in Frame v. Smith, [1987] 2 S.C.R. 99. At that time, the law recognized categories of fiduciary relationships including: 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, outside of the established categories, the courts would impose a fiduciary obligation on a particular relationship (an “ad hoc fiduciary relationship”).

[35] At p. 136 of Frame, Wilson J. remedied that deficiency. She said that relationships in which fiduciary obligations have been imposed possess 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.

[36] Since Frame was decided, the Supreme Court has repeatedly used this analysis as the foundation for identifying ad hoc fiduciary relationships. Hodgkinson is one such case. It is particularly helpful because, in Hodgkinson, the Supreme Court addressed whether an ad hoc fiduciary relationship existed between a professional financial advisor and his client.

[37] In Hodgkinson, a stockbroker with little experience in tax planning, hired an accountant to advise him regarding his tax planning needs, particularly with respect to real estate investments. The stockbroker relied on the accountant’s advice and invested in four multi-unit residential building projects. He lost heavily when the value of the properties fell during a decline in the real estate market. It was later revealed that the accountant had a financial relationship with the developers of the projects during the relevant period which he failed to disclose to his client.

[38] The trial judge allowed the client’s action for breach of fiduciary duty and breach of contract and awarded him damages. The British Columbia Court of Appeal upheld the trial judge on the breach of contract issue but reversed on the issue of fiduciary duties.

[39] On further appeal to the Supreme Court of Canada, the majority allowed the appeal. Justice La Forest, writing for the majority, 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. 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.

[40] Justice La Forest expanded considerably on Wilson J.’s three-step analysis in Frame. His comprehensive judgment was considered by this court 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. At para. 40 of Hunt, this court 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.

[41] In Hodgkinson, La Forest J. 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: at p. 409. He noted that the essence of professional advisory relationships is trust, confidence, and independence, and that clients in such relationships have a right to expect their professional advisors will act in their best interests, to the exclusion of all other interests, unless the contrary is disclosed: at pp. 415, 417. In the advisory context, the advisor’s ability to cause harm and the client’s susceptibility to be harmed arise from the simple but unassailable fact that the advice given by the independent advisor is not likely to be viewed with suspicion but, rather, is likely to be followed: at p. 431.

The Claim Discloses a Cause of Action for Breach of a Class Wide Fiduciary Duty

[42] As Hodgkinson makes clear, the existence of industry standards is an important factor in determining whether there is an ad hoc fiduciary relationship between a professional investment advisor and their client. However, the Claim in this case does not rely solely on the fact that in selling IPS Notes to the Proposed Class, the Sanchez Defendants breached – in many ways – the professional rules and regulations to which they were subject. Taken as a whole, in the Claim, the appellant pleads that her investment relationship, and that of each member of the Proposed Class, with the Sanchez Defendants, was one of vulnerability, trust, and reliance, in which the Sanchez Defendants undertook to act in their clients’ best interests.

[43] The Claim pleads that it was the practice of the Sanchez Defendants to prepare and monitor financial plans for each member of the Proposed Class and that they undertook to make investment recommendations based on the clients’ best interests. It pleads that the Sanchez Defendants solicited investment in the IPS Notes by the Proposed Class members and recommended that they purchase the IPS Notes.

[44] By reviewing the Proposed Class members’ financial plans and choosing to whom to recommend the “opportunity” to invest in the IPS Notes, the Sanchez Defendants unilaterally exercised their discretion in respect of the Proposed Class members. The Sanchez 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 investments made by each Proposed Class member, on the advice of their financial advisor, affected that person’s legal or practical interests.

[45] In the 2018 MFDA Settlement Agreement, the Sanchez Defendants admit to the common method used to sell the IPS Notes, and their common breaches in so doing. These admissions are pleaded as showing an abuse of their discretion and to demonstrate that they profited from their conflict of interest.

[46] The facts of this case are very different from those in Hunt. The sole breach in Hunt was an unauthorized sale of stocks from the Hunts’ portfolio. Mr. Hunt controlled the investments he made. While he sought advice from his investment advisor, he made his own decisions on those investments. The relationship between the Hunts and their investment advisor was just over three months in duration before the unauthorized sale was made. With that exception, the investment advisor followed Mr. Hunt’s instructions. Apart from a $600 commission on the unauthorized sale, the investment advisor did not profit from it.

[47] In this case, the relationships between the Sanchez Defendants and the members of the Proposed Class appear to be long-standing: the latter were selected from the roster of existing Sanchez Defendants’ clients, by the Sanchez brothers. 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. That is, the Proposed Class members had the right to trust their financial advisors.

[48] The investment “opportunity” was brought to the appellant and the other members of the Proposed Class by the Sanchez Defendants. As La Forest J. states in Hodgkinson, they should not have needed to protect themselves from the advice and recommendation of their financial advisors.

[49] The Proposed Class members were vulnerable, due to the information imbalance between them and their advisors. The information they received was controlled by the Sanchez Defendants. The Proposed Class members relied on the Sanchez Defendants for the accuracy of that information, including about the risk level associated with the purchase of the IPS Notes. The knowledge that the Sanchez 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.

[50] I pause to note that the focus of the Claim is not that the entire relationship between the Proposed Class members and the Sanchez Defendants was a fiduciary one: it is that there was a fiduciary relationship between the Sanchez Defendants and the Proposed Class members in relation to the sale of the IPS Notes to the Proposed Class members.

[51] Unlike Hunt, where there was a single breach of contract, in this case, the Sanchez Defendants made numerous breaches of industry standards. On this point it is sufficient to point to their admissions in the 2018 MFDA Settlement Agreement, set out above. And, unlike in Hunt where the financial advisor did not profit from his single breach (apart from a $600 commission on the sale), accepting the pleading as true as we must at this point in the proceeding, the Sanchez Defendants profited greatly from their breaches of the professional rules and regulations that governed them.

[52] Accordingly, in my view, it is not “plain and obvious” that the claim for breach of a class-wide fiduciary duty has no reasonable prospect of success.

DISPOSITION

[53] For these reasons, I would allow the appeal and declare that the claim discloses a cause of action for breach of a class-wide fiduciary duty. I would remit the action to the Superior Court of Justice for a fresh determination, by a different judge, of the common issues and preferable procedure certification criteria, and whether the pleaded claims of knowing assistance and knowing receipt are certifiable.

[54] I would order costs to the appellant in the agreed-on sum of $45,000, all inclusive, for the leave motion and the appeal.

Released: December 20, 2023 “E.E.G.” “E.E. Gillese J.A.” “I agree. Gary Trotter J.A.” “I agree. Coroza J.A.”

[^1]: At the hearing of this appeal, counsel for the appellant indicated that the Superior Court and Divisional Court reasons erroneously say that both John Sanchez and Javier Sanchez were members of the FP Canada Standards Council and subject to the FP Code of Ethics. Counsel advised that only John Sanchez was such a member. [^2]: The following are taken from the parties’ factums as the then-operative provisions. MFDA Rule 2.1.1 Standard of Conduct. Each Member and each Approved Person of a Member shall: (a) deal fairly, honestly and in good faith with its clients; 2.1.4 Conflicts of Interest (a) Each Member and Approved Person shall be aware of the possibility of conflicts of interest arising between the interests of the Member or Approved Person and the interests of the client. Where an Approved Person becomes aware of any conflict or potential conflict of interest, the Approved Person shall immediately disclose such conflict or potential conflict of interest to the Member; (b) In the event that such a conflict or potential conflict of interest arises, the Member and the Approved Person shall ensure that it is addressed by the exercise of responsible business judgment influenced only by the best interests of the client and in compliance with Rules 2.1.4(c) and (d); (c) Any conflict or potential conflict of interest that arises as referred to in Rule 2.1.4(a) shall be immediately disclosed in writing to the client by the Member, or by the Approved Person as the Member directs, prior to the Member or Approved Person proceeding with the proposed transaction giving rise to the conflict or potential conflict of interest; (d) Each Member shall develop and maintain written policies and procedures to ensure compliance with Rules 2.1.4(a), (b) and (c). [^3]: In the Acknowledgment section of the 2018 MFDA Settlement Agreement, the Sanchez Defendants agree with the facts set out in Part IV of that agreement only for the purpose of the agreement and without prejudice to them in any other proceeding. Part IV is entitled “Agreed Facts”. Because the Acknowledgment is expressly limited to Part IV of the 2018 MFDA Settlement Agreement, it does not appear to apply to the Sanchez Defendants’ admissions contained in Part V of that agreement. [^4]: IPS, 1361655 Ontario Inc., 1634792 Ontario Inc., The Savel Corporation, 2029984 Ontario Ltd., and 2029986 Ontario Ltd. [^5]: The majority also referred to the FP Code of Ethics, saying the Sanchez brothers were subject to it. However, as noted above at footnote 1, it appears that only John Sanchez was subject to it.