CITATION: Boal v. International Capital Management Inc., 2022 ONSC 1280

DIVISIONAL COURT FILE NO.:: 197/21

DATE: 2022/03/01

ONTARIO

SUPERIOR COURT OF JUSTICE

DIVISIONAL COURT

McWatt ACJSCO, Sachs and Kristjanson JJ.

BETWEEN:

REBECCA LEE BOAL

Plaintiff/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

David Milosevic, Cameron Fiske and Garth Myers, for the Plaintiff/Appellant

David F. O’Connor and Sean M. Grayson, for the Defendants/Respondents

HEARD at Toronto by videoconference: November 8, 2021

H. Sachs J. (dissenting)

Overview

[1] This is an appeal of the decision of Perell J. dated January 26, 2021 refusing to certify the Plaintiff’s class proceeding for breach of fiduciary duty against her investment advisor: 2021 ONSC 651. The certification judge found that it was plain and obvious that the Plaintiff’s Statement of Claim did not disclose a cause of action for breach of fiduciary duty since it did not set out sufficient material facts to support a finding that the relationship between the Plaintiff and the putative Class Members and their financial advisors was a fiduciary relationship.

[2] The Plaintiff also brought claims against the corporate defendants for knowing receipt and knowing assistance. Without establishing a breach of fiduciary duty, it is accepted that these claims cannot succeed.

[3] The Defendant International Capitol Management Inc. (ICM) was a Member of the Mutual Fund Dealers Association (“MFDA”), and the defendants, John and Javier Sanchez were Approved Persons under the MFDA’s By-laws and Rules. These defendants are collectively referred to as the “ICM Defendants”. John Sanchez was the President and a director of ICM, the Ultimate Designated Person of ICM within the meaning of the MFDA By-laws, and a registered mutual fund salesperson or dealing representative. Since, 2002, John Sanchez had also been an Approved Person within the meaning of MFDA By-laws and the designated compliance officer or Chief Compliance Officer (“CCO”) of ICM. Javier Sanchez was registered in Ontario as a mutual fund salesperson (now known as a dealing representative). He served as Vice-President and a director and officer of ICM. He was also an Approved Person and alternative CCO of ICM. In addition, John and Javier Sanchez were members of the Financial Planners (“FP”) Council and subject to the FP Canada Standards Council’s Code of Ethics. The rules of these organizations imposed an obligation on them to deal fairly, honestly and in good faith with their clients, to place their clients’ interest above their own and to fully disclose all conflicts or potential conflicts of interest. These duties mirror fiduciary duties.

[4] The ICM Defendants were disciplined by the MFDA. ICM’s membership was terminated, and John and Javier Sanchez were permanently prohibited from conducting securities related business while in the employ of, or associated with, any Member of the MFDA for a number of violations of the MFDA rules including actions in relation to the investments at issue in this proceeding. These violations included falsely describing the investments as secured investments, failing to adequately disclose the nature of the Sanchez brothers’ interest in the company that issued the investments (which were in the form of promissory notes) and failing to provide adequate disclosure about the commissions the Sanchez brothers received each time a note was issued.

[5] The Claim pled these facts as a basis for the Plaintiff’s assertion that her relationship with her investment advisor was a fiduciary one. The certification judge acknowledged that one of the factors that must be looked at in determining whether there is a fiduciary relationship is the professional rules and regulations that govern the advisor in question. However, he failed to deal with the question of whether, considered in conjunction with the other facts pled about the relationship, the fact that the ICM Defendants were subject to professional rules that mirrored fiduciary duties meant that it was not plain and obvious that the Plaintiff’s claim for breach of fiduciary duty could not succeed.

[6] In my view this was an error in principle that requires that the appeal be allowed. In Hodgkinson v. Simms, 1994 70 (SCC), [1994] 3 S.C.R. 377, 97 B.C.L.R. (2d) 1, the leading case on when investment advisors can be found to have a fiduciary relationship with their clients, the Supreme Court makes clear the important role that industry standards and regulations play in determining the nature of the duties that investment advisors owe to their clients. As put in that decision: “[i]t would be surprising indeed if the courts held the professional advisor to a lower standard of responsibility than that deemed necessary by the self-regulating body of the profession itself.”

Background

Events Giving Rise to the Proceeding

[7] The Plaintiff used John Sanchez as her investment advisor. John and his brother, Javier, were both registered as mutual fund salespeople with the MFDA and were certified as financial planners with the FP Canada Council. John Sanchez is the primary directing mind of ICM, which was a registered mutual fund dealer. Invoice Payment Systems (“IPS”) is an Ontario corporation that purchases other businesses’ accounts receivable at a discount. The majority of the shares of IPS were owned by John and Javier’s holding companies and by companies associated with them or their family members. IPS has accounts from Amazon, Costco, Loblaws and Nike and is a leader in Canada’s invoice financing industry.

[8] In 2003 ICM and IPS signed an agreement whereby IPS would issue promissory notes and ICM would distribute them. IPS financed its factoring business by selling the promissory notes, which paid a good rate of return. IPS has never defaulted on its promissory notes or breached any of the terms of its notes. If a noteholder wished to redeem any of their notes, ICM would be able to do so.

[9] In 2014 the Plaintiff purchased an IPS promissory note through ICM for $101,224.00. Interest was payable on the note at the rate of 7 percent annually. John Sanchez told the Plaintiff about the opportunity. Mr. Sanchez received a commission of 2 percent for each note sold. The claim at issue alleges that the Sanchez brothers did not fully disclose to the Plaintiff or the putative class members their interest in IPS or the commissions they were receiving.

[10] The Plaintiff qualifies as an “accredited investor” with net realizable assets exceeding $1 million. Her risk tolerance is medium to high and she would make her own investment decisions on the advice of John Sanchez.

[11] In 2004, the MFDA investigated the ICM Defendants about whether their distribution of the IPS Promissory Notes complied with the MFDA Rules and other securities legislation. As a result of that investigation, the ICM Defendants entered into an Agreement and Undertaking with the MFDA on October 11, 2006 which included, among other things, an undertaking to only allow people with a tolerance for high risk investments to invest in the Promissory Notes and to require anyone who was investing in the Promissory Notes to sign a written acknowledgment that they were aware of any commissions being paid to the Sanchez brothers in relation to the notes and of any interest that the Sanchez brothers had in ICM. The undertaking also required the ICM Defendants to continue to report to the MFDA about their implementation of the terms of the Agreement and Undertaking and their compliance with same.

[12] In late December of 2016 the Plaintiff was advised that the MFDA was investigating the ICM Defendants (the MFDA’s second investigation). The Plaintiff discovered that the MFDA had issued a Notice of Hearing seeking to disqualify both John and Javier Sanchez as accredited financial dealers and to stop them from selling any IPS Promissory Notes. The basis for this request was the allegation that the Sanchez Defendants breached the MFDA Rules by failing to deal fairly, honestly and in good faith with their clients and engaged in dealings that gave rise to a conflict of interest. There was also an allegation that the ICM Defendants breached the Agreement and Undertaking they had entered into in October of 2006 and that they had provided false or misleading information to the MFDA concerning their activities. The MFDA asserted that the ICM Defendants failed to provide written disclosure to the ICM clients about the risk of investing in IPS, their role in the companies that owned IPS and the fees they received for soliciting investments. The MFDA also stated that the Sanchez Defendants failed to take adequate steps to ensure that the IPS investments were suitable for the clients who were investing in those investments.

[13] When learning of the allegations the Plaintiff retained a lawyer and in February of 2017, she commenced the proposed class action.

[14] On June 29, 2018, John and Javier Sanchez entered into a Settlement Agreement with the MFDA, admitting to all of the allegations that had been made against them in the Notice of Hearing issued by the MFDA. However, these admissions were made solely for the purpose of the Settlement Agreement, which contained the following language:

Staff and the Respondents agree with the facts set out in Part IV herein for the purpose of this Settlement Agreement only and further agree that this agreement of facts is without prejudice to the Respondents or Staff in any other proceeding of any kind including, but without limiting the generality of the foregoing, any proceedings brought by the MFDA (subject to Part IX) or any civil or other proceeding which may be brought by any other person or agency, whether or not this Settlement Agreement is accepted by the Hearing Panel.

[15] In the Settlement Agreement the ICM Defendants admitted, among other things, that between 2006 and 2016 they sold or facilitated the sale of at least $25.8 million worth of investments in IPS, a company they had an interest in, to at least 170 ICM clients, “thereby engaging in conduct that gave rise to conflicts of interest which they failed to address by the exercise of responsible business judgment influenced by the best interests of the clients.” (Certification Judge’s Reasons, at para. 47).

[16] As a result of the MFDA proceedings, ICM’s membership in the MFDA was terminated and the Sanchez Defendants were barred from conducting any securities related business.

[17] In 2019, $7,109,431 worth of IPS Promissory Notes were redeemed by IPS noteholders. The Plaintiff did not redeem her IPS Promissory Note, which she has continued to renew.

[18] When the Plaintiff commenced her class action in February of 2017, she believed that the putative class members would lose their investments and suffer damage. This proved not to be the case. Because of this the Plaintiff did not seek to certify five of her pleaded causes of action (which could not be sustained without a finding of damages). At the certification hearing she advanced five causes of action: breach of fiduciary duty; knowing assistance; knowing receipt; breach of contract; and oppression. She also sought to make the personal defendants liable for the actions of the various corporate defendants.

The Certification Judge’s Decision

[19] The certification judge first examined whether he could certify the Plaintiff’s breach of fiduciary duty claim. He noted that the ICM Defendants did not dispute that the Plaintiff had satisfied the cause of action criterion with respect to this claim. However, he did not agree with this concession.

[20] The certification judge made several observations about the law of fiduciary duty that were relevant to his analysis.

[21] First, he adverted to the case law that distinguishes between a fiduciary relationship and a duty of care relationship. The former imposes higher obligations than the latter and allows for greater and more powerful remedies than the latter. Thus, the law is careful in determining which relationships qualify as fiduciary relationships.

[22] Second, he noted that the mere fact that an investment advisor has given investment advice to a client does not create a fiduciary relationship. It is only “[w]here the elements of trust and confidence and reliance on skill and knowledge and advice are present” that the relationship is considered fiduciary: Hodgkinson v. Simms, at p. 381. The indicia of such a relationship are described by the certification judge as follows:

[93] The indicia, which are not a comprehensive code, but rather guidance to a court in analyzing the legal classification of a relationship are: (1) the alleged fiduciary has scope for the exercise of some discretion or power; (2) the alleged fiduciary can unilaterally exercise that power or discretion so as to affect the beneficiary’s legal interest ; (3) the alleged beneficiary is peculiarly vulnerable to or at the mercy of the fiduciary holding the discretion or power; (4) the alleged fiduciary either implicitly or expressly has undertaken or accepted a responsibility to act in the best interest of the alleged beneficiary and to act in accordance with a duty of loyalty.

[23] Third, he found that misconduct by itself does not establish a fiduciary duty. As put by the certification judge:

[96] It is fallacious in determining fiduciary status and fiduciary duty by reasoning from misbehaviour to remedy or from remedy to duty. This result-driven reasoning process begs the question of whether a person has fiduciary status by moving from the breach of a duty or the desired remedy to a finding that the person had a duty.

[24] The certification judge reviewed the Plaintiff’s Third Fresh as Amended Statement of Claim (the “Claim”) with respect to the breach of fiduciary duty claim and found that its central allegation was an allegation that “the ICM Defendants undertook to act with loyalty and in the best interests of the Class Members when providing advice or recommending investments, and this fiduciary duty made all the Class Members vulnerable to the ICM Defendants’ exercise of control or discretion.” (para. 83).

[25] According to the certification judge, the Plaintiff’s Claim engages in the fallacious reasoning he warned about. It pleads the existence of the duties that arise when a fiduciary relationship is present, without pleading the necessary material facts to establish that the relationship between the Plaintiff and the putative Class Members and the Sanchez brothers was a fiduciary relationship. Moreover, there were facts that indicated that it may not have been such a relationship, e.g., the fact that the Plaintiff was an educated and relatively sophisticated investor who had made high risk investments and the fact that the Plaintiff was the one who made the decisions about her investments and John Sanchez did not have any discretion to invest without her approval.

[26] The certification judge was careful to point out that John Sanchez’s alleged non-disclosure to the Plaintiff and any false misrepresentations he may have made may well give rise to causes of action, including negligence and negligent misrepresentation. However, for this misconduct to constitute a breach of fiduciary duty there must be material facts pleaded that, if accepted as true, would support a finding that the relationship between the relevant parties was a fiduciary one.

[27] The certification judge also found that the issue of whether there was a fiduciary relationship between the Sanchez Defendants and the 170 class members is one that would have to be determined based on the individual circumstances of each case, including how vulnerable each class member was, how suitable the investment was for each class member and how much discretion each class member gave the Sanchez brothers. As put by the certification judge at para. 104:

The IPS Promissory Notes were not unsuitable for everyone and the evidence of Ms. Casey, Mr. Hubbard, Mr. Orr, Mr. Wallis, and even Ms. Boal, reveals that while the disclosure about the notes and about the Sanchez brothers’ relationship to the borrower may not have been as comprehensive as it might have been, it was adequate for the investors to make an independent decision about whether the risk of purchase was worth lending money to IPS.

[28] On this basis the certification judge found that the breach of fiduciary claim did not satisfy the common issues or the preferability criteria. With respect to the latter, the certification judge stated, at para. 192: “It is axiomatic that if there are no common issues, then there is no basis-in-fact for a class action satisfying the preferable procedure criterion.”

[29] The certification judge did find that the identifiable class and suitable representative plaintiff criteria were satisfied.

[30] The certification judge went on to make it clear that the fact he did not certify the Plaintiff’s claim for breach of fiduciary duty on a class wide basis did not mean that the Plaintiff did not have a claim on an individual basis. He also made it clear that he was “not deciding that breach of fiduciary duty claims are generally not certifiable in class proceedings.” As he acknowledged, such claims have been certified (at para. 109).

[31] The certification judge reviewed the Plaintiff’s other causes of action and found that none of them were capable of being certified.

Issues Raised on the Appeal

[32] The Plaintiff is appealing the certification judge’s failure to certify her actions for breach of fiduciary duty, knowing assistance and knowing receipt. She is not appealing the certification judge’s failure to certify her other causes of action. Further, the Plaintiff concedes that her actions for knowing receipt and knowing assistance cannot be certified if her action for breach of fiduciary duty is not certified.

Standard of Review

[33] In AIC Limited v. Fischer, 2013 SCC 69, [2013] 3 S.C.R. 949, at para. 65, the Supreme Court of Canada confirmed that “a decision of a certification judge is entitled to substantial deference”, especially a certification judge’s decision as to preferable procedure as it involves the weighing of a number of factors. However, “deference does not protect the decision against review for errors in principle”.

Did the Motion Judge Commit an Error in Principle in Failing to Certify the Claim for Breach of Fiduciary Duty?

[34] As outlined above, the certification judge’s decision not to certify the Plaintiff’s claim for breach of fiduciary duty turned on his finding that the Claim did not set out the material facts necessary to support a finding that the relationship between the Plaintiff, the putative Class Members and the ICM Defendants was a fiduciary one. Thus, this issue was the main focus of the appeal.

[35] The Plaintiff concedes that the certification judge articulated the right test for deciding whether a Statement of Claim discloses a cause of action (the plain and obvious test) and that he correctly set out the element of a claim for breach of fiduciary duty, which are (1) a fiduciary relationship; (2) a fiduciary duty; and (3) a breach of the fiduciary duty.

[36] According to the Plaintiff, the Claim pleads the following:

(a) John and Javier Sanchez undertook to act with loyalty and in the best interest of Class Members and to put the Class Members’ interest ahead of their own;

(b) The Class Members were vulnerable to a breach of that duty by John and Javier and their practical and legal interest could be adversely affected by John and Javier’s exercise of discretion or control;

(c) John and Javier breached their fiduciary duty by engaging in self-dealing, including failing to disclose their conflict of interest with IPS, misrepresenting that the IPS Notes were secured investments; and misrepresenting the use of funds raised from the IPS notes.

[37] The paragraphs that the Plaintiff relies on in the Claim to support her submissions in this regard are set out at paragraphs 53 to 59 of her Claim, which the certification judge reproduced at paragraph 60 of his reasons. Those paragraphs read:

Breach of Fiduciary Duty

53. The plaintiff pleads breach of fiduciary duty against the ICM Defendants.

54. The Class Members were clients of the ICM Defendants, who were subject to the rules, regulations and bylaws of the MFDA. The MFDA Rules required the ICM Defendants to, among other things,

(a) deal fairly, honestly, and in good faith with its clients;

(b) observe high standards of ethics and conduct in the transaction of business;

(c) not engage in any business conduct or practice which is unbecoming or detrimental to the public interest; and

(d) immediately disclose any conflict or potential conflict of interest to its clients.

55. The ICM Defendants undertook to act with loyalty and in the best interests of the Class Members when providing advice or recommending investments. The Class Members trusted the ICM Defendants to be honest, transparent, and to put the Class Members’ interests ahead of their own when making recommendations providing investment advice. This trust made the Class Members vulnerable to the ICM Defendants’ exercise of control or discretion. That discretionary power affected the legal and substantial practical interests of the Class Members. [Certification Judge’s emphasis removed]

56. The ICM Defendants owed to the Class Members the following duties:

(a) a duty of loyalty, which required the ICM Defendants to avoid putting themselves in positions where the Class Members’ best interests may be compromised due to their own self-interest or their relationship with a third party;

(b) a duty of honesty and good faith;

(c) a duty to disclose any conflict of interest, and all material facts relevant to a transaction;

(d) a duty to exercise tasks with prudence, care and skill, and in accordance with their professional obligations, including undertaking and fulfilling suitability obligations to determine whether the investment products it recommended were suitable for the Class Members, including:

(i) determining whether IPS Notes were eligible for sale without a prospectus and if so, what exemptions were available;

(ii) ensuring evidence was obtained from each client to whom the IPS Notes were offered to demonstrate their eligibility for any exemptions relied upon;

(iii) document criteria or limitations with respect to the types of clients to whom the investments should be offered having regard to the relevant “know your client” information such as risk tolerance, time horizon, investment objects, net worth, income, and investment knowledge;

(e) a duty to comply with MFDA Rules and the Agreement and Undertaking, including with respect to disclosures to be made to clients in connection with the IPS Notes;

(f) a duty to provide written disclosure about the amount of compensation they were obtaining from soliciting money for IPS.

57. The ICM Defendants breached their fiduciary duties to the Class Members by the conduct described above, including

(a) Failing to disclose to them the non-arms’ length relationship between John, Javier, and IPS, and the commissions that would accrue to them as a result of inducing Class Members to purchase the IPS Notes;

(b) failing to require the Class Members to sign an acknowledgment indicating (i) that the IPS Notes are a high-risk investment; (ii) the rate and amount of commissions being paid to ICM and/or the Individual Defendants; and (iii) the relationship between IPS and ICM and the potential conflicts of interest that may arise from the relationship;

(c) making the misrepresentations in the Fact Sheet and describing the IPS Notes as “secured investments”;

(d) Advising Class Members to purchase the IPS Notes;

(e) failing to undertake sufficient due diligence regarding suitability of the IPS Notes including

(i) the IPS Notes’ eligibility for exempt distributions;

(ii) whether Class Members were eligible for exemptions; and

(iii) the suitability of the IPS Notes as investments for the Class Members;

(f) failing to disclose that the IPS Notes were high-risk investments, the manner in which the money would be used by IPS, or the financial position and performance of IPS;

(g) Advising the Class Members to accept rates of return on the IPS Notes that were 2-3% lower than rates offered by IPS to other investors;

(h) failing to provide any written or financial disclosure to Class Members about IPS;

(i) failing to disclose the risk associated with IPS’s substantial liability to noteholders as well as the risk attributable to the fact that IPS may be unable to collect on all of its outstanding accounts receivable; and

(j) failing to disclose that IPS extended unsecured loans and advances to related parties including a substantial amount due from a company owned by John and Javier.

58. As a result of the ICM Defendants’ breach of fiduciary duties, the Class Members have suffered loss and damage equal to the amount of their investments in the IPS Notes, plus the amount of interest they would have obtained on those notes had they been offered a rate of return of 10% (“Class Investment”).

59. In addition, the ICM Defendants’ breach of fiduciary obligations to the Class allowed John and Javier to profit by

(a) taking commissions of more than $3 million from the sale of IPS Notes to Class Members, which were paid to them and/or deposited into one or more of the Holding Companies (“Commissions”); and

(b) collecting, through the Holding Companies, the profits of IPS which were financed by the Class Members’ investments in the IPS Notes (“IPS Profits”).

[38] The certification judge had this to say about the Plaintiff’s pleading in relation to the claim for breach of fiduciary duty:

[83] An analysis reveals that the cause of action criterion for a breach of fiduciary duty is not satisfied. In the immediate case, the existential predicate of a common fiduciary duty for the class is the allegation in paragraph 55 of Ms. Boal’s Statement of Claim that the ICM Defendants undertook to act with loyalty and in the best interests of the Class Members when providing advice or recommending investments, and this fiduciary duty made all the Class Members vulnerable to the ICM Defendants’ exercise of control or discretion.

[84] That allegation, however, turns the law of fiduciary duties for investment advisors backwards, upside down, and inside out, because an undertaking of loyalty and the presence of vulnerability are indicia, among others, of a fiduciary relationship, and Ms. Boal, instead of treating the undertaking of loyalty and the presence of vulnerability as preconditions to the formation of a fiduciary relationship to be proven to genuinely exist, instead make these indicia presumptive based simply on advice being given.

[39] In other words, the certification judge found that the Claim’s basis for pleading a fiduciary relationship (with the undertakings it involves) is based on the fact that the Sanchez brothers gave the Class Members investment advice.

[40] In my view, this is where the certification judge committed an error in principle. The Plaintiff’s claim is not just based on the allegation that John Sanchez gave her investment advice, but that he did so when he was subject to professional rules that required him to act in a way that a fiduciary must act, which in turn led to reasonable expectations on her part. This fact, plus the following additional facts, are the ones that the Plaintiff relies on in support of her claim that there was a fiduciary relationship. The additional facts pled are that John Sanchez was giving her financial advice, he was not simply acting as a broker by buying what the Plaintiff instructed him to buy; John Sanchez recommended the investment to the Plaintiff; John Sanchez would profit from the investment and it was John Sanchez, not the Plaintiff, that had access to all of the information about the investment. Essentially, all of these of these facts are pled in relation to all of the putative class members. Thus, the Plaintiff’s claim goes beyond alleging that a fiduciary relationship existed simply because of the professional rules that governed the Defendants. Rather, it alleges that these rules are one of the facts that support her claim that the relationship between her and her financial advisor when the investment at issue was made was a fiduciary one.

[41] The certification judge was aware of the importance of the professional standards of the MFDA and the FP Standards Council to the Plaintiff’s claim, but he failed to appreciate that these standards, taken together with the other aspects of the relationship between the Plaintiff and the Defendants, could and did form an important basis for the Plaintiff’s allegation that there was a fiduciary relationship. This is clear from paras. 98 to 101 of his reasons.

[42] At paragraph 98 of his reasons, the certification judge accepted that “there is undoubtedly some basis in fact for the allegations that the Sanchez brothers breached the professional standards of the MFDA and of the FP Standards Council and that they misrepresented information and were negligent in the performance of their professional obligation.” (para. 98). However, he found that it did not follow that there was a fiduciary relationship between all or any of the putative Class Members. As put by the certification judge:

[99]…“Ad hoc” means “for this specific purpose” which is to say an ad hoc fiduciary relationship involves an individual case-by-case analysis of the Class Member’s financial circumstances, net worth, sophistication, expertise, experience, tolerance for risk, dependency, and vulnerability.

[100] It does not follow that there was a common fiduciary duty because a breach of a duty of care by a fiduciary is not the same thing as a breach of fiduciary duty.

[101] And in the circumstances of the immediate case, it does not follow that if there was a fiduciary relationship, and a fiduciary duty owed to each and every putative class member, that there is some basis in fact for concluding that there was a common breach of the fiduciary duty.

[43] Nowhere in his analysis does the certification judge deal with the role that professional standards play in the analysis of whether there is a fiduciary relationship. Yet the existence of industry standards is an important factor in the leading authority on this issue – Hodgkinson v. Simms. The following excerpts from that decision highlight this point;

(a) The existence of a fiduciary duty in a given case will depend upon the reasonable expectations of the parties, and these in turn depend on factors such as trust, confidence, complexity of subject matter, and community or industry standards. For instance, in Norberg, supra, the Hippocratic Oath was evidence that the sexual relationship diverged significantly from the standards reasonably expected from physicians by the community. (at p. 412, emphasis added)

(b) More importantly for present purposes, courts have consistently shown a willingness to enforce a fiduciary duty in the investment advice aspect of many kinds of financial services relationships…In all of these cases, as here, the ultimate discretion or power in the disposition of funds remained with the beneficiary. In addition, where reliance on the investment advice is found, a fiduciary duty has been affirmed without regard to the level of sophistication of the client, or the client’s ultimate discretion to accept or reject the professional’s advice…Rather, the common thread that unites this body of law is the measure of the confidential and trust-like nature of the particular advisory relationship, and the ability of the plaintiff to establish reliance in fact. (at p. 418, citations omitted).

(c) Further, in many advisory relationships norms of loyalty and good faith are often indicated by the various codes of professional responsibility and behaviour set out by the relevant self-regulatory body. The raison d’etre of such codes is the protection of parties in situations where they cannot, despite their best efforts, protect themselves because of the nature of the relationship. These codes exist to impose regulation on an activity that cannot be left entirely open to free market forces. I have already referred to the function of the professional standards expected of doctors in Norberg, supra. The professional rules of conduct governing lawyers was considered in Granville Savings and Mortgage Corp. v. Slevin (1990), 1990 11088 (MB KB), 68 Man. R. (2d) 241 (Q.B.), rev'd 1992 2770 (MB CA), [1992] 5 W.W.R. 1 (Man. C.A.), trial judgment restored 1993 39 (SCC), [1993] 4 S.C.R. 279. There, the defendant law firm undertook to prepare certain mortgage documents in connection with a mortgage transaction between their client (the mortgagor) and the plaintiff mortgagee. As it turned out, the lawyers negligently represented to the plaintiffs that their mortgage constituted a first charge on the property. The plaintiff sued in tort, contract, and fiduciary duty. The trial judge allowed the claim on all three heads of liability. This was reversed by the Court of Appeal, but on further appeal to this Court, the trial judge’s judgment was restored. The finding of fiduciary duty was consistent with Commentary 8, Chapter 19 of the Canadian Bar Association’s Code of Professional Conduct, which instructs lawyers to urge unrepresented parties to seek representation, and, failing that they may have an obligation to a person whom the lawyer does not represent. (at p. 423).

(d) In sum, the rules set by the relevant professional body are of guiding importance in determining the nature of the duties flowing from a particular professional relationship; see MacDonald Estate v. Martin, 1990 32 (SCC), [1990] 3 S.C.R. 1235. With respect to the accounting profession, the relevant rules and standards evinced a clear instruction that all real and apparent conflicts of interest be fully disclosed to clients, particularly in the area of tax-related investment advice. The basis of this requirement is the maintenance of the independence and honesty which is the linchpin of the profession’s credibility with the public. It would be surprising indeed if the courts held the professional advisor to a lower standard of responsibility than that deemed necessary by the self-regulating body of the profession itself. (at p. 425, emphasis added).

[44] Thus, the focus of the fiduciary relationship is on the reasonable expectations of the party who is dealing with the alleged fiduciary. As Hodgkinson v. Simms makes clear there is a distinction to be made between arms length commercial relationships, “which are characterized by self-interest”, and professional advisory relationships. In a professional advisory relationship, such as that of a financial advisor, the client may have the reasonable expectation that their advisor will put the client’s interests above their own and will not profit from the relationship except to receive the expected level of renumeration for a financial advisor. This in turn would cause the investor, even a sophisticated and wealthy investor, not to make inquiries as to whether their advisor is “making secret profits as his expense” (Hodgkinson v. Simms, at p. 415, quoting from Burns v. Kelly Peters & Associates Ltd. (1987), 1987 2620 (BC CA), 16 B.C.L.R. (2d) 1), 41 D.L.R. (4th) 577, at p. 44. The investor would not expect this to be the case and would expect full disclosure if it was the case.

[45] The Claim pleads that the Plaintiff and the putative class members had a reasonable expectation that the ICM Defendants would act towards them with loyalty, honesty, good faith and would put their interests above their own. That expectation was based on the rules of the professional organizations that regulated the ICM Defendants’ behaviour. It is not plain and obvious that if a regulator of a profession states to the public that its members will act in a certain way, then the public (including the clients who engage the members of that profession) will not have a reasonable expectation that this is indeed the way they will act.

[46] According to the certification judge in this case it is not possible to establish an ad hoc fiduciary relationship without an “individual case-by-case analysis of the individual Class Member’s financial circumstances, net worth, sophistication, expertise, experience, tolerance for risk, dependency, and vulnerability.” (at para. 99). Yet, as Hodgkinson v. Simms makes clear, fiduciary relationships have been affirmed without regard to the level of sophistication of the client and in spite of the fact that the ultimate decision with respect to the investment rested with the client.

[47] In Hunt v. TD Securities Inc. (2003), 2003 3649 (ON CA), 66 O.R. (3d) 481, 229 D.L.R. (4th) 609 (C.A.) at para. 40, the Ontario Court of Appeal summarized the five interrelated factors identified in Hodgkinson v Simms to be considered when determining whether a financial advisor stands in a fiduciary relationship to their clients, namely, vulnerability, trust, reliance, discretion and professional rules or conduct. In that case, the Court of Appeal agreed that the financial advisors in question had failed to comply with industry standards for dealing with clients, but that the conduct in question occurred after the unauthorized sale that gave rise to the action for breach of fiduciary duty. Therefore, the industry standards in question could not be used to inform the nature of the relationship between the financial advisor and their client when the unauthorized sale occurred. Thus, the analysis in Hunt did not focus on whether a reasonable expectation of a fiduciary relationship had been engendered by virtue of the specific rules and regulations that governed the financial advisor in question. It focused on the other factors that may engender such an expectation.

[48] In the case at bar, the Claim alleges that the Plaintiff and the putative class members were clients of financial advisors who were members of a professional association that contained rules and regulations that required its members to act towards their clients in the way that a person in a fiduciary relationship would be expected to act. Specifically:

(i) Rule 2.1.1 of the MFDA Rules requires that every mutual fund dealer shall “deal fairly, honestly and in good faith with its clients; [and] observe high standards of ethics and conduct in the transaction of business.”

(ii) Rule 2.1.4 of the MFDA Rules requires that in the event of a conflict of interest or potential conflict of interest, a mutual fund dealer “shall ensure that it is addressed by the exercise of responsible business judgment influenced only by the best interests of the client.” As the certification noted in para.93 of his decision (quoted earlier in these reasons), one of the indicia of a a fiduciary relationship is whether “the alleged fiduciary either implicitly or expressly has undertaken or accepted responsibility to ace in the best interest of the alleged beneficiary.”

(iii) Principle 1 of the FP Canada Standards Council Code of Ethics requires a duty of loyalty. “The Duty of Loyalty encompasses: The duty to act in the client’s best interest by placing the client’s interests first. Placing the Client’s interest first requires the Certificant place the client’s interest ahead of their own and all other interests; [and] The obligation to disclose conflicts of interest and to mitigate conflicts of interest in the client’s favour. Paragraph 93 of the certification judge’s decision also confirms that when an alleged fiduciary has undertaken, either implicitly or expressly, to act in accordance with the duty of loyalty, this is an indication that there was a fiduciary relationship.

(iv) Principle 2 of the FP Canada Standards Council Code of Ethics requires that all of its members act with integrity: “A Certificant shall always act with integrity. Integrity means rigorous adherence to the moral rules and duties imposed by honesty and justice. Integrity requires the Certificant to observe both the letter and the spirit of the Code of Ethics.”

[49] In Hodgkinson v. Simms, La Forest J. summarizes what is required to establish a fiduciary relationship outside of those relationships that are considered category relationships in this way:

Thus, outside of the established categories, what is required is evidence of a mutual understanding that one party has relinquished its own self-interest and agreed to act solely on behalf of the other party.

[50] Given the rules that the Plaintiff alleges the ICM Defendants were subject to, taken together with the other aspects of the relationship that existed when the investment at issue was made, it is not plain and obvious that this mutual understanding has not been made out The ICM Defendants were required by their professional organizations to put their client’s interests above their own, especially in the event of a situation where there was a conflict of interest or potential conflict of interest.

[51] The Claim for breach of fiduciary duty is in relation to an investment, the IPS Notes, that the ICM Defendants suggested, could profit from, and where all the knowledge about that investment rested with the ICM Defendants. This in turn arguably put the putative class members in a position where they were necessarily relying on their investment advisor for advice and disclosure.

[52] In other words, this was not a situation where the Sanchez brothers were simply “order-takers” for their clients, which would put them outside the spectrum where there can be a fiduciary relationship (Hodgkinson v. Simms, at p. 419; Hunt v. TD Securities, at para. 42).

[53] In Sharp v. Royal Mutual Funds Inc. 2020 BCSC 1781, the certification judge found that the plaintiff had not “pled any material facts to support a finding of fiduciary duty” in a situation where the basis for the assertion of the relationship were the rules that governed the defendant as a registered investment dealer. In that decision the court states:

[52] In other words, the plaintiffs’ position is that a fiduciary relationship between the defendant and the class members arises from the regulatory prescriptions that govern the defendant as a registered investment dealer. Under this reasoning, the fiduciary duties arise from the nature of the relationship between any registered investment dealer and its client, not the facts surrounding a particular relationship between a particular dealer and a particular client. This is the definition of a per se fiduciary duty. If the plaintiffs are correct, this would give rise to a fiduciary relationship between any and all registered investment dealers and their clients.

[53] As the plaintiffs have admitted, a per se fiduciary relationship does not exist in the financial services context, although on certain facts an ad hoc fiduciary relationship could be established (citations omitted.)

[54] In the case at bar, as already pointed out several times, the Plaintiff’s pleading does plead facts that are particular to the relationship between the Defendants and all of the putative plaintiffs when the investment at issue was made to support her submission that the relationship was a fiduciary one. She does not simply rely on the professional standards to effectively allege a per se fiduciary relationship.

[55] Further, if the reasoning in Sharp stands for the proposition that it is plain and obvious that if professional regulators (who regulate professions outside of the established categories of fiduciary relationships) require their members to act in a fiduciary capacity towards their clients when their clients rely on them for advice, this cannot form one of the bases for asserting that clients of the members of that profession have reasonable expectations that are engendered by the members’ professional rules, I do not agree. As Hodgkinson v. Simms make clear, regulators such as the MFDA or the FP Council may choose to enhance the credibility and reputation of their professions by imposing such duties on their members. In Hodgkinson v. Simms, the following expression of this concept is quoted with approval, at p. 421:

Professor Finn puts the matter in this way in “Conflicts of Interest and Professionals”, supra, at p. 15: “In some spheres of conduct regulation would appear to be coming an end in itself and this because there can be a public interest in reassuring the community -- not merely beneficiaries -- that even the appearance of improper behaviour will not be tolerated. The emphasis here seems, in part at least, to be the maintenance of the public’s acceptance of, and of the credibility of, important institutions in society which render ‘fiduciary services’ to the public.”

[56] Further, there may be valid policy reasons why society, including the courts, would support such an effort, especially in a field where the potential for abuse of trust has been endemic. As put in Hodgkinson v. Simms, at p. 420:

Apart from the idea that a person has breached a trust, there is a wider reason to support fiduciary relationships in the case of financial advisors. These are occupations where advisors to whom a person gives trust has power over a vast sum of money, yet the nature of their position is such that specific regulation might frustrate the very function they have to perform. By enforcing a duty of honesty and good faith, the courts are able to regulate an activity that is of great value to commerce and society generally.

[57] Since there is no issue with respect to the other elements of the claims for breach of fiduciary duty (the existence of a fiduciary duty and the breach of that duty), I would allow the appeal and set aside the certification judge’s finding that the cause of action criterion with respect to breach of fiduciary duty has not been satisfied.

Other Issues

[58] This still leaves it necessary to determine whether the other criteria for certification (common issues and preferable procedure) have been satisfied with respect to the claim for breach of fiduciary duty and whether the pleaded claims of knowing receipt and knowing assistance are certifiable. The certification judge’s analysis on these issues is of little assistance since it was driven by his view of the cause of action criterion with respect to the breach of fiduciary duty claim. Thus, the question becomes whether this court should conduct the analysis with respect to the remaining issues or send the matter back to another certification judge to determine in accordance with these reasons.

[59] Economic and efficiency considerations would dictate that this court perform the analysis. However, to do so in this instance would be to distort the judicial process for determining class actions in a way that is unacceptable. The Divisional Court is not a court of first instance and the findings that need to be made are considerable and do not flow inevitably from the one issue we have considered. Further, if we were to make first instance findings on the remaining issues this could interfere with the appeal rights that the parties may have with respect to the remaining issues.

[60] For these reasons, I would allow the appeal and direct that the matter go back to another class action judge for determination, taking into account these reasons.

H. Sachs J.

kristjanson J. (mcwatt acjsco concurring)

[61] The motion judge found that the Class Members’ action against John and Javier Sanchez and ICM for breach of fiduciary duty did not satisfy the cause of action criterion on a class wide basis, nor the common issues and preferable procedure criteria. I agree with the decision of the motion judge.

[62] The proposed class consists of clients of ICM who purchased IPS Promissory Notes from ICM and the Sanchez brothers from January 1, 2004 to present. The basis for the claim of breach of fiduciary duty is essentially and in its entirety that the Class Members were clients of the ICM Defendants, who were subject to the rules and bylaws of the MFDA and, in respect of the Sanchez brothers, the FP Canada Standards Council Code of Ethics. There are no other indicia pleaded other than the rules, regulations, and bylaws of the MFDA and the FP Code of Ethics.

[63] The Appellant's claim rests on the argument that an ad hoc fiduciary duty with an investment advisor can be established on a class wide basis (for over 170 individual clients) based on MFDA rules and by-laws and the FP Code of Ethics. I do not agree. In evaluating whether an ad hoc fiduciary duty arises between a financial advisor and a client, the courts must apply a multi-factor test on case-by- case, client-by-client basis. Whereas the per se categories describe relationships in which the fiduciary character is “innate”, ad hoc fiduciary relationships arise from the specific circumstances of a particular relationship (Galambos v. Perez, 2009 SCC 48, [2009] 3 S.C.R. 247 at para. 48). The approach taken in the dissenting decision, in my view, inappropriately turns one factor – professional rules and ethics codes – into the sole factor in determining whether a fiduciary duty exists.

[64] In determining whether financial or investment advisors stand in a fiduciary relationship with their clients, the Court of Appeal summarized the five interrelated factors established by LaForest J. in Hodgkinson as follows in Hunt v. TD Securities Inc. (2003), 2003 3649 (ON CA), 66 O.R. (3d) 481, 229 D.L.R. (4th) 609 (C.A.) at para. 40:

1. Vulnerability -- the degree of vulnerability of the client that exists 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 that a client reposes in the 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.

5. Professional Rules or Codes of Conduct -- help to establish the duties of the advisor and the standards to which the advisor will be held.

[65] The pleadings in this case focus only on the fifth factor, professional rules or ethical codes, and then reason backward – if the advisor has a duty of loyalty, then the Class Members are vulnerable to failure to disclose, for instance. Reliance is from the moment the account is open; there is no review of the history of reliance. This puts the cart before the horse. Conflicts are an effect, rather than a cause, of fiduciary liability, in that conflict of interest is an outcome of the relationship that is regulated by fiduciary law.

[66] The dissenting decision relies in part on MFDA 2.1.4, for example, to support the creation of a fiduciary relationship. As set out above, in the event of a conflict of interest or potential conflict of interest, the rule requires the MFDA dealer to “ensure that it is addressed by the exercise of responsible business judgment influenced only by the best interests of the client.” It sets out expectations by the regulator about how existing or potential material conflicts of interest are to be addressed by Approved Persons like the Sanchez brothers and the client, as well as between the Dealer Member and clients generally.

[67] I do not agree that that the use of the phrase “best interests of the client” in itself creates a fiduciary duty relating to existing or potential material conflicts of interest for all clients of the advisor. I am of the view that the regulatory best interests standard is not an unqualified common law fiduciary standard. Whether or not a fiduciary duty exists in a financial advisory relationship depends on the facts of each case, including the other factors in the test. Imposing a common-law fiduciary standard based on the MFDA rules and by-laws or the FP Code of Ethics could have a significant impact on elements of the capital markets including those with restricted advice business models (like many mutual fund dealers), and could have significant negative effects on both investors and capital markets.

[68] The pleading does not identify four of the five factors essential to a determination of the fiduciary nature of the relationship but derives them from the existence of the professional rules and ethics codes only. I agree with the motion judge that it is plain and obvious that the claim fails. The approach that rests only on the rules and codes of the regulatory organization replaces the court’s discretion to apply its principled and fact-based analysis of whether or not a fiduciary relationship exists with a “one-size-fits-all” duty that would apply to every investor, regardless of discretionary authority over the account, or the sophistication of the client. It fails to take into account the multi-factorial analysis required at common law.

[69] Simply casting away an analysis of discretionary authority in the case of financial advisors casts the net too wide. As stated in Galambos at para. 70:

Underpinning all of this is the focus of fiduciary law on relationships. As Dickson J. (as he then was) put it in Guerin v. The Queen, 1984 25 (SCC), [1984] 2 S.C.R. 335, at p. 384: “It is the nature of the relationship . . . that gives rise to the fiduciary duty. . . .” The underlying purpose of fiduciary law may be seen as protecting and reinforcing “the integrity of social institutions and enterprises”, recognizing that “not all relationships are characterized by a dynamic of mutual autonomy, and that the marketplace cannot always set the rules”: Hodgkinson, at p. 422 (per La Forest J.). The particular relationships on which fiduciary law focusses are those in which one party is given a discretionary power to affect the legal or vital practical interests of the other: see, e.g., Frame v. Smith, 1987 74 (SCC), [1987] 2 S.C.R. 99, per Wilson J., at pp. 136-37; Norberg, per McLachlin J., at p. 272; Weinrib, at p. 4, quoted with approval in Guerin, at p. 384.

[70] The goal of the imposition of fiduciary duties is to protect a relationship the law recognizes as one of high trust and confidence, based on the implicit dependency and vulnerability to another. With the recognition of the relationship comes the imposition of proscriptive duties, notably the no-profit rule and the no-conflict rules, as well as the prescriptive duties of good faith and confidence. But duties of good faith, care, confidentiality, and disclosure apply to a variety of non-fiduciaries as well. As the motion judge set out, the fiduciary standard is exceptional. Other legal concepts which may apply – protection in contract, tort, and unjust enrichment – are available to regulate the conduct alleged here, albeit not on a class, but an individual basis. While the MFDA rules and the FP Code are a part of the analysis, they are not the whole of the analysis.

[71] For these reasons, the appeal is dismissed. In accordance with the agreement of the parties, the Plaintiff shall pay the Defendants their costs fixed in the amount of $40,000.00, all inclusive.

Kristjanson J.

I agree _______________________________

McWatt ACJSCO

Released: March 1, 2022

CITATION: Boal v. International Capital Management Inc., 2022 ONSC 1280

DIVISIONAL COURT FILE NO.:: 197/21

DATE: 2022/03/01

ONTARIO

SUPERIOR COURT OF JUSTICE

DIVISIONAL COURT

McWatt ACJSCO, Sachs and Kristjanson JJ.

BETWEEN:

REBECCA LEE BOAL

Plaintiff/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

REASONS FOR JUDGMENT

H. Sachs J. (Dissenting)

Released: March 1, 2022