Baldwin et al. v. Daubney et al.; Birrell et al. v. JD & Associates Inc. et al.
[Indexed as: Baldwin v. Daubney]
83 O.R. (3d) 308
Court of Appeal for Ontario,
Rosenberg, MacPherson and Gillese JJ.A.
September 27, 2006
Fiduciaries -- Relationship -- Financial institutions which loaned money to investors for investments in mutual funds not having fiduciary relationship with investors.
Torts -- Negligence -- Duty of care -- Financial institutions which loaned money to investors for investments in mutual funds not having duty of care towards investors to advise them of risks involved in investments.
The plaintiffs obtained loans from the defendant financial institutions and used the proceeds to purchase mutual funds on the advice of their financial advisors. The loans all had margin requirements. The plaintiffs alleged that they suffered damage because the investments failed to perform as promised and, when that occurred, they faced margin calls that resulted in losses or debts that they said they would not have incurred had they not borrowed the funds and invested them in mutual funds. They brought actions against their financial advisors, investment dealers and the financial institutions. The financial institutions successfully moved for summary judgment on the basis that there was no cause of action against them. The plaintiffs appealed.
Held, the appeal should be dismissed.
It is settled law that, barring a special relationship or exceptional circumstances, the relationship between a bank and its customer is that of debtor and creditor. There was no evidence of a special relationship or exceptional circumstance such that a duty of care to advise was owed by the financial institutions to the plaintiffs. The motion judge did not err in dismissing the plaintiffs' claims against the financial institutions in negligence.
The motion judge did not err in finding that the financial institutions did not owe the plaintiffs a fiduciary duty to advise them adequately about the loans. The ordinary relationship of lender and borrower does not involve or give rise to a fiduciary duty on the part of the lender towards the borrower.
APPEAL from the order of Spence J. (2005), 2005 ONSC 46087, 78 O.R. (3d) 693, [2005] O.J. No. 5330 (S.C.J.), granting summary judgment dismissing an action as against the moving parties.
Cases referred to Pierce v. Canada Trustco Mortgage Co., 2005 ONCA 15706, [2005] O.J. No. 1886, 197 O.A.C. 369, 254 D.L.R. (4th) 79, 5 B.L.R. (4th) 178 (C.A.) (sub nom. Canada Trustco Mortgage Co. v. Pierce) [page309]
Counsel: Peter R. Jervis and Michael Varpio, for appellants. Valerie A.E. Dyer, for respondent M.R.S. Trust. Matthew J. Latella, for respondents B2B Trust and Laurentian Bank of Canada. Irving Marks, for respondent Bank of Montreal. F. Paul Morrison and Peter M. Neumann, for respondents National Trust Company and Toronto-Dominion Bank.
Endorsement
[1] BY THE COURT: -- The appellants appeal the order of Spence J. dated December 13, 2005, granting summary judgment to the respondent financial institutions and dismissing the appellants' claims as against the financial institutions.
[2] For the reasons that follow, we would dismiss the appeal.
Background
[3] The appellants bought mutual funds based on the advice of their financial advisors. They obtained loans from the various respondent financial institutions and used the proceeds of the loans to purchase the mutual funds.
[4] In order to obtain the loans, with the assistance of their financial advisors the appellants completed loan applications. The advisors then submitted the loan applications to the various financial institutions for consideration. When a financial institution accepted an application, it would authorize the loan and advance the funds to the financial advisor. The financial advisor would then invest the borrowed money in mutual funds in accordance with the instructions of the client.
[5] The loans all had margin requirements. The margin call feature is a term of the loan which provides that if the value of the investment made with the loan falls below a certain prescribed percentage of the amount of the loan (the "margin"), the borrower may be called upon to pay down the loan in an amount sufficient to bring the loan back "into margin", that is, to a level at which the outstanding amount of the loan does not exceed the margin. If the borrower fails to meet the margin call from the lender, the lender may call the loan.
[6] In the present action, the appellants seek compensation from the financial advisors, investment dealers alleged to have been involved in the transactions and the respondent financial institutions. The appellants allege they have suffered damage because the investments failed to perform as promised and, when [page310] that occurred, they faced margin calls that resulted in losses or debts they say they would not have incurred had they not borrowed the funds and invested them in mutual funds. While the appellants acknowledge that they obtained their loans and purchased the mutual fund investments relying solely on the advice and recommendations of their financial advisors, they contend that the respondent financial institutions owed them a duty to ensure that they had been advised of, and understood, the margin mechanism and the risks associated with their loans.
[7] The respondent financial institutions successfully moved for summary judgment on the basis that there was no cause of action against them.
[8] The appellants ask this court to set aside the summary judgment order. They say the motion judge erred in dismissing their claims in negligence, as against the respondent financial institutions, and in failing to recognize that the appellants' relationships with the respondent financial institutions created fiduciary duties that gave rise to genuine issues of fact for trial as to whether those duties had been breached.
Analysis
[9] We agree with the motion judge's determinations in this matter and for the reasons that he gave, reasons which are a model of excellence.
[10] The motion judge considered the loan documentation of each of the respondent financial institutions. Those documents contained various provisions by which the borrowers acknowledge responsibility for the borrowing and investment decisions, and disclaim any responsibility on the part of the lender.
[11] Relying on settled law, the motion judge rejected the appellants' argument that they were not bound by such provisions because they had not read the documents. As he noted at paras. 47 and 51 of the reasons:
There was nothing to suggest to the financial institutions that they ought to infer that, contrary to what the signed documents said, the plaintiffs had not read the documents. On the face of the documents and in view of the fact that they came from the financial advisors, the financial institutions were entitled to rely on them and they did so in making the loans which they approved based on those documents. . . . . .
The plaintiffs acknowledge that they knew the loans had to be repaid. The record does not show what beliefs, if any, they had about what the terms of the loans provided as to repayment. They all say they did not read the terms in the loan documents. So they had no basis for any particular supposition as [page311] to when the lenders could require repayment. The subsequent occurrence of the margin calls on the discovery of the margin terms may have come to them as a very bad surprise but the lenders had done nothing to contribute to any such reaction on the part of the plaintiffs, since the terms were fully set out in the loan documents.
[12] It is settled law also that, barring a special relationship or exceptional circumstances, the relationship between a bank and its customer is that of debtor and creditor. The motion judge set out the applicable law at para. 78 of the reasons, as recently summarized by this court in Pierce v. Canada Trustco Mortgage Co., 2005 ONCA 15706, [2005] O.J. No. 1886, 254 D.L.R. (4th) 79 (C.A.), at para. 27:
Generally speaking, the relationship between a financial institution lender and its customer borrower is a purely commercial relationship of creditor and debtor. Absent any special relationship or exceptional circumstances such as would give rise to a fiduciary duty (which is not pleaded by Mrs. Pierce), the courts have consistently held that the lender owes no duty to the borrower in connection with the making of the loan. In particular, the bank owes no duty to its customer to advise the customer not to undertake the loan: see Bertolo v. Bank of Montreal, (1986), 1986 ONCA 150, 57 O.R. (2d) 577, 33 D.L.R. (4th) 610 (C.A.), and Bank of Montreal v. Duguid (2000), 2000 ONCA 5710, 47 O.R. (3d) 737, 185 D.L.R. (4th) 458 (C.A.).
[13] We agree with the motion judge that there were no genuine issues of material fact with respect to the relationship between the appellants and their respective financial institutions. We adopt the reasons of the motion judge in paras. 81 to 84 and 87 to 88, as to why there is no evidence of a special relationship or exceptional circumstance such that a duty of care to advise was owed by the respondent financial institutions to the appellants:
It is undeniable that if a person cannot borrow money, that person cannot incur a risk of being unable to repay it and that person cannot incur a risk of agreeing to borrow without adequately understanding and assessing the advisability of the risk. But if the mere fact of lending made a lender liable in respect of such risks, it would seem to follow that in virtually all circumstances a lender would have a duty to advise a borrower about such risks. That position is the exact contrary of the position set out in the Pierce decision and the cases referred to in that decision.
It is understandable that the courts have taken the position set out in Pierce and not the contrary position outlined above. The simplest kind of case of negligence such as the faulty inspection case in Anns does not involve any deliberate action on the part of the complainant taken under an agreement with the alleged tortfeasor in which all the terms of the agreement that give rise to the special risk have been duly disclosed, as is the case here.
With these additional factors of agreement and disclosure, the situation between the parties as regards the proximity of the alleged tortfeasor to [page312] the prospective risk of harm is materially altered. It remains true that the harm could not occur without the making of the loan. But the making of the loan requires the consent of two parties, the lender and the borrower. And the lender cannot impose the loan on the borrower. So where, as here, the borrower has received disclosure of the terms of the loan and has been placed in a position to make an assessment of the risk (and is in a better position than the lender to do so, because the borrower has knowledge of the proposed investment program which the borrower received from his or her financial advisor) the analysis of proximity must take these relative positions into account. "Proximity" has to do with closeness (and its opposite, lack of closeness or "remoteness") with respect to the cause of the harm. The foreseeable harm here would seem to be the loss incurred by the occurrence of a margin call (or, perhaps, the unrealized but prospective loss where a loan goes out of margin). But the person who is closest to the causing of that harm is the person who decided to borrow funds to make the investments that could result in that loss. That person is the borrower. In the terminology of Anns, the borrower has proximity to the cause of the loss. Next in proximity would be the financial advisor. Compared to the borrower and the financial advisor, the lender does not have proximity. Its loan is necessary but not sufficient for the harm. The borrower's action is necessary and sufficient for the harm.
The fact that a loan transaction is made by way of an agreement between the parties strongly affects the two critical elements of duty of care that are identified in Anns: the nature of the relationship between the parties and the degree of proximity between them. Where the relationship between the parties is only contractual, the contract necessarily determines the reasonable expectations of the parties with regard to each other. Where the contract itself does not give the lender a duty to advise, there is no reason to consider that such a duty is part of the relationship unless there is a special relationship or circumstance which would reasonably give rise to such a duty. Similarly, where the relationship is only contractual, there is no reason to view the parties as having a proximity to the prospective harm that is different from the reasonable expectations created by the terms of their contract. . . . . .
The plaintiffs submit that their cause of action in negligence falls into a recognized category of circumstances where a duty of negligence has been held to exist. How that category might be properly described requires consideration. The plaintiffs say in their factum that a duty of care in negligence arises when a person's conduct creates a foreseeable risk of harm to foreseeable persons. But for this formulation to be applicable in this case, it is necessary to conclude that the conduct of lending creates a foreseeable risk of harm to foreseeable persons. This position ignores the point that it is the borrower who decides to take the loan and so creates whatever foreseeable risk may thereby arise. The position also ignores the fact that it is contrary to what the case law has concluded in the case of lending. The case law recognizes that advisors have a duty of care in respect of advising, but it has not recognized that lenders are advisors. The plaintiffs say that the Court ought to discern or draw an analogy between advisors and lenders in this case on the basis of the similarity of their circumstances vis-à-vis the plaintiffs and the prospect of harm to them. But the differences between the circumstances of the advisors and the lenders are more instructive than any similarities. The plaintiffs dealt [page313] with the financial advisors to obtain their financial advice and they say they relied upon that advice. The plaintiffs went to the financial institutions, not for advice, but for loans. There is no evidence that the plaintiffs placed any reliance on the financial institutions with respect to their borrowing and investment decisions other than the self-serving evidence, discussed earlier, that they "trusted" the financial institutions. The financial advisors knew the intended investment programs of the plaintiffs and they were in a position under the applicable regulatory requirements to develop and recommend and implement those investment programs for the applicants and to monitor them over time. The financial institutions were not in this position. No basis for an analogy between the advisors and the lenders is apparent.
On this basis, the relationship between the financial institutions to the plaintiffs in this case does not fit within an existing category that is recognized as giving rise to a duty of care and it is not analogous to an existing category of that kind. So the claim that the lender has a duty of care to advise is a claim to recognize a new duty of care. A new duty of care could be recognized only if it satisfied, first, the Anns test as to proximity. For the reasons given above, that test is not satisfied here. The plaintiffs made submissions about the applicability of the second stage of the Anns test but, since the proposed new duty of care does not get past the first stage of the Anns test, the second stage does not become applicable. So this approach to the issue of duty of care based on recognized and new categories of duty of care does not yield a duty of care.
[14] Like the motion judge, we are of the view that the promotion of the investments by the respondent financial institutions did not create a special circumstance as those promotional efforts were directed to the financial advisors, not to the appellants.
[15] Finally, we reject the submission that the respondent financial institutions owed the appellants a fiduciary duty to advise them adequately about the loans. Again, we do so for the reasons given by the motion judge. At paras. 65 to 66 of the reasons, he explains:
It is well established in the case law that the ordinary relationship of lender and borrower does not involve or give rise to a fiduciary duty on the part of the lender towards the borrower. See Mastercraft, supra, at p. 284 C.C.L.S. in paras. 47 to 49; also Anand v. Medjuck, [1995] O.J. No. 2571, 57 A.C.W.S. (3d) 502 (Gen. Div.) at p. 43 at para. 40 and Bank of Montreal v. Witkin, supra, at paras. 54 and 55 and 59 to 61.
The reason that there is no fiduciary duty is simple. A fiduciary duty arises where a relationship between the parties, such as trustee and beneficiary, is established in order to give one party the responsibility to look out for the best interests of the other. The relationship between a lender and a borrower is not of that kind. Rather, it is a typical commercial relationship in which the interests of the parties are not the same and each party seeks to secure its own interest and can reasonably believe only that the other party is doing the same. [page314]
Conclusion
[16] Accordingly, the appeal is dismissed with costs to the respondent financial institutions fixed at $20,000, inclusive of GST and disbursements.
Appeal dismissed.