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Appellate Litigation

In some contexts, the relationship between an investment advisor and their client may be fiduciary in nature.  In that case, damage suffered by a client may lead to a claim against the advisor for breach of fiduciary duty.  Where a group of clients suffers damage due to such a breach, it may give rise to class action proceedings against the advisor, provided the claims raise common issues and meet other requirements of the Class Proceedings Act.  Within the context of a class proceeding, the Ontario Court of Appeal recently reviewed the legal principles at play in determining whether investment advisors owe their clients fiduciary obligations. Milosevic and Associates successfully represented the plaintiffs in this case, resulting in a landmark decision clarifying when investment advisors may owe fiduciary duties to their clients.

Defendants in the Class Action Proceeding Included Registered Mutual Fund Salesmen and Registered Mutual Fund Dealer 

Among other things, the case of Boal v. International Capital Management Inc. concerned an investment opportunity presented to the plaintiff Boal by the defendant, John Sanchez.  Sanchez was a registered mutual fund salesman and financial planner. Starting in 2001, he acted as Boal’s investment advisor.  Sanchez carried on business through the defendant investment management company, International Capital Management Inc. (“ICM”), jointly owned by Sanchez and his brother, Javier.  ICM was registered as a mutual fund dealer and a member of the Mutual Fund Dealers Association of Canada (“MFDA”).  The MFDA imposed various ethical requirements on ICM and the Sanchez brothers.

Plaintiff Was Presented With an Opportunity to Invest in Promissory Notes in a Company Partly Owned by Her Investment Advisors

In 2014, Sanchez presented Boal with an opportunity to invest in promissory notes in a factoring company named Invoice Payment Systems Corp. (“IPS”).  The Sanchez brothers and other family members held an ownership interest in that company.  Boal and other clients of ICM purchased promissory notes.

After Investing, Plaintiff Learned of Various Orders of Mutual Fund Dealers Association of Canada Against Investment Advisors

In 2016, Boal learned of various orders sought by the MFDA against the Sanchez brothers, including an order that they stop any “regulated activity” related to ICM and IPS due to their breach of MFDA rules and by-laws.  Boal also learned that the Sanchez brothers had been receiving referral fees for amounts invested by ICM clients in the IPS promissory notes.

The Sanchez brothers and ICM subsequently signed a settlement agreement with the MFDA and were “severely disciplined.”  As part of this process, they made certain admissions, including that they had sold or facilitated the sale of at least $25.8 million of investments in IPS (which was not an arm’s length company) to at least 170 clients of ICM.   It also became apparent that holding companies owned by the Sanchez brothers had made about $3 million in commissions from selling the IPS notes to clients of ICM.

The Certification Motion Was Dismissed On the Basis the Claim Disclosed No Cause of Action for Breach of Fiduciary Duty on a Class-Wide Basis

Boal commenced a class proceeding alleging breach of fiduciary duty to the approximately 170 clients of ICM who purchased promissory notes in IPS; however, the certification motion was dismissed primarily because the claim failed to “disclose a cause of action for breach of fiduciary duty on a class-wide basis.”  The Divisional Court agreed on appeal, concluding that the claim was based entirely on allegations of breach of MFDA rules and by-laws instead of the common law requirements for establishing an ad hoc fiduciary duty.  The plaintiff appealed.

In its decision, the Court of Appeal reviewed the general legal principles that apply to determining whether a fiduciary duty exists between investment advisors and their clients.  Certain relationships, such as solicitors and clients and directors and corporations, are already recognized by the law as being fiduciary in nature.  The question that often comes before courts is whether fiduciary obligations should be imposed in other ad hoc relationships. 

The Three Characteristics of an Ad Hoc Fiduciary Relationship 

The modern judicial approach to ad hoc fiduciary relationships can be traced back to the dissenting reasons in the Supreme Court of Canada case of Frame v. Smith.  For those reasons, the dissenting judge noted that fiduciary relationships tended to share three different characteristics: (1) the fiduciary holds some discretion or power; (2) they can exercise it unilaterally in a manner that affects the beneficiary’s interests; and (3) the beneficiary is “peculiarly vulnerable to, or at the mercy of,” that fiduciary.  These reasons subsequently formed the basis for much of the Supreme Court of Canada’s decision in Hodgkinson v. Simms, one of the leading decisions on ad hoc fiduciary relationships.

The Five Factors to Consider in Determining Whether or Not a Financial Advisor Owes Fiduciary Obligations to Their Client

The Hodgkinson case was subsequently applied by the Ontario Court of Appeal in Hunt v. TD Securities Inc.  In Hunt, the Court noted the five factors that are to be considered in determining whether or not a financial advisor is in a fiduciary relationship with their client: (1) the vulnerability of the client, (2) the extent of the trust relationship between the advisor and client, (3) the history of reliance on the advisor’s judgment and advice and whether the advisor purports to have special skills and knowledge that can be relied upon, (4) the degree to which the advisor can exercise discretion over the client’s property and (5) standards established by applicable professional rules or codes of conduct.  

Court Finds It is Not Plain and Obvious that the Claim for Breach of Fiduciary Duty Will Fail Since the Claim Includes Alleged Facts that Could Support It

In considering the factors set out in Frame and Hunt, the Court in Boal noted that the claim did not simply allege a breach by the defendants of applicable professional rules and by-laws.  Indeed, the claim as pleaded, indicated an investment relationship characterized by “vulnerability, trust and reliance” in which the Sanchez brothers and ICM “undertook to act in their clients’ best interests.”  

To that end, the Court noted that the claim alleged it was the practice of the Sanchez brothers and ICM to “prepare and monitor financial plans” for each of the 170 clients of ICM that had purchased the promissory notes and to “make investment recommendations based on the client’s best interests.”  According to the Court, this would amount to the unilateral exercise of discretion by the Sanchez brothers and ICM in a way that affected clients’ interests.  If the Sanchez brothers and ICM controlled the information passed along to clients regarding the IPS promissory notes, this “information imbalance” would make those clients vulnerable to exercising their discretion.

The Court concluded that the facts as alleged would mean that the members of the proposed class of plaintiffs “had the right to expect that their professional advisors would act in their best interests”.  Further, the facts, as alleged, supported the notion that the clients could reasonably expect that the Sanchez brothers and ICM would act in their best interests because they were bound by professional rules and codes of conduct that required them to do so.

For these reasons, the Court determined it was not “plain and obvious” that the claim for breach of a class-wide fiduciary duty would fail and allowed the appeal.  The matter was remitted back to the Superior Court of Justice for redetermination of the certification criteria.

Contact the Litigation Lawyers at Milosevic & Associates in Toronto for Advice Respecting Investment Advisor Liability and Class Action Proceedings

The litigation team at Milosevic & Associates has extensive experience in litigating matters involving investment loss, breach of fiduciary duty and class action proceedings.  We will provide strategic advice aimed at an efficient and effective resolution of your dispute.  Contact us online or by phone at (416) 916-1387 for a consultation.