IN THE SUPREME COURT OF BRITISH COLUMBIA

Citation: Connor Financial Services International Inc. v. Laughlin, 2015 BCSC 587

Date: 20150325

Docket: 10‑5076

Registry: Victoria

Between:

Connor Financial Services International Inc.

Plaintiff

And

Christopher Bryce Laughlin and Pauline Louella Laughlin

Defendants

Before: The Honourable Mr. Justice Macintosh

(appearing by teleconference)

Oral Reasons for Judgment

Counsel for the Plaintiff: W. Eric Pedersen Counsel for the Defendant Pauline Laughlin: Crispian D. Starkey

Andrew W. Tomilson Appearing on his own behalf: Christopher B. Laughlin Place and Date of Trial: Victoria, B.C. March 16-20, 2015 Place and Date of Judgment: Victoria, B.C. March 25, 2015





Introduction

[1] This is a claim in debt. The Plaintiff was the lender. The question is whether the terms of the loan agreement, and the Plaintiff's conduct, bar the Plaintiff from collecting any further payments on the loan. The Defendant borrowers, who were then a married couple, allege that the loan agreement was unconscionable. They raise other defences, as well, all of which place the lender's conduct under the spotlight. The Defendants have not counterclaimed. They ask to be allowed to walk away without making further payment.

Who are the parties and how sophisticated are they?

[2] Mr. Gerry Connor wholly owns, controls and operates the Plaintiff, Connor Financial Services International Inc., or CFSI. He also wholly owns, controls and operates a company named Connor Financial Corporation, or CFC. For many years, Mr. Connor, with a staff of two or three, operated both companies from an office in Victoria.

[3] Mr. Connor has been working in the investment business since 1971. He started CFC in 1983. He treats the Plaintiff CFSI as the lender for this claim, but the funds came from CFC and the Laughlins made all or most of their payments to CFC.

[4] For the purposes of this action, any difference is meaningless between Mr. Connor, CFSI and CFC. Mr. Connor and his two companies can be treated as partners or agents of one another. Mr. Connor did nothing to separate the operations of either company from the other. There was difference only in name. Sometimes I will refer to Mr. Connor and his two companies as the Connor Group.

[5] The Laughlins married in 1982. They divorced last December. They have two children, now in their 20s. The Laughlins, as a couple, approached Mr. Connor in 2000, as I will discuss in more detail later in these reasons.

[6] The Laughlins are unsophisticated in financial matters. After high school, Mr. Laughlin worked for a time as a drywaller. Later he earned a diploma in public health from BCIT. He is a health inspector. After her high school education, Ms. Laughlin earned a certificate in medical transcription from Vancouver Vocational Institute. She is an admitting clerk at a hospital.

[7] The Laughlins were homeowners when they met Mr. Connor in 2000. They were in their third house and they had taken a mortgage on each house. They also had RSPs. They always purchased safe RSP investments through their bank or their credit union. They never had other investments and had always shied away from any investment with any risk. Their financial mistake was that by 2000, they had overspent with their credit cards and were carrying the resulting debts. I expect, from the evidence, that overusing the credit cards was more the fault of one of them than the other, but that distinction is irrelevant here.

The Agreements

[8] Mr. Connor testified that when the Laughlins came to him in February of 2000, they faced substantial debt and were having difficulty with their payments. Their primary concern, he said, was to learn how to manage and eventually eliminate their debt load.

[9] Mr. Laughlin said in evidence that he had seen a CFC sign advertising an RSP investment in something called the Working Opportunity Fund or WOF. It was RSP season, and each year, Mr. Laughlin considered whether to add to his RSP investments. His bank did not sell units in the WOF. He contacted Mr. Connor at CFC. The two met on February 18, 2000. Their second meeting, when Ms. Laughlin also attended, was on February 21, 2000.

[10] The Laughlins signed many documents that day, making many commitments. Ms. Laughlin found it to be overwhelming. Neither of the Laughlins knew what they were getting into. Their backgrounds did not equip them to appreciate the implications from signing all that they did sign.

[11] They agreed to borrow money. The main lender was CFSI, although, as I noted earlier, the funds came from CFC. They agreed to use the borrowed money partly to buy mutual funds, which Mr. Connor was selling through CFC. Those funds included units in the WOF and in other funds as well. The funds the Laughlins invested in that day were high risk. That was corroborated by the fact that in the following four or five years, the mutual fund investments steadily declined in value. The advertised attraction of the WOF investment was that investors could claim a tax credit for buying WOF units, and hold them in their RSPs, to thereby claim a tax deduction. Mr. Connor had placed an ad in the Victoria Times Colonist business pages on January 19, 2000. It said to call CFC to learn how to spend as little as $900 for a $5,000 RRSP in the WOF. That was the sort of advertisement Mr. Laughlin had seen before meeting Mr. Connor on February 18.

[12] The meeting on February 21, 2000 lasted about an hour. In it, the Laughlins took further steps, in addition to borrowing and buying mutual funds. They signed papers authorizing the Connor Group to collapse the Laughlins' safe RSP investments, or some of them, and transfer the resulting money into WOF units and other risky investments as directed by Mr. Connor. For most of the steps flowing from the February 21 meeting, the borrowing of money, the collapsing of the Laughlins' former RSPs, and the purchasing of WOF and other mutual fund units, the Connor Group was to receive not only interest on the loan to the Laughlins, but commissions or other takings from almost every aspect of the array of transactions which were authorized that day.

[13] Mr. Connor argues that on February 21, 2000, the agreements were confined to a straightforward loan agreement and an agreement for the Laughlins to buy mutual funds. The Laughlins thought there was more. They thought the Connor Group was also agreeing to give them financial advice to help get them out of their plight as debtors. They thought such advice was part of the bargain from their having agreed to borrow from the Connor Group and to buy mutual funds from CFC.

[14] The Laughlins were right. Mr. Connor steered them into every step they took on February 21. They had a general sense that they were borrowing money and buying mutual funds, but they relied entirely on Mr. Connor for every particular step they took that day. They were babes in the woods when it came to these high-risk investments, and they believed Mr. Connor when he told them on February 21 that if they followed his suggestions, they would be out of debt in three years. The agreements made on February 21 included the Connor Group's obligation to provide the Laughlins with the financial guidance associated with the steps Mr. Connor induced them to take.

The sums lent, paid, and claimed

[15] On February 21, 2000, the Laughlins signed, among other things, a standard form document Mr. Connor had prepared and entitled as a promissory note. The document was not enforceable in law as a promissory note. In substance, it authorized a $24,000 line of credit to the Laughlins. I will call it the loan agreement. It consisted of a face page with small print on the reverse side. Sums advanced were repayable on demand. In the meantime, repayments on sums advanced were to commence March 30, 2000, at $300 a month. Interest was charged at 13% compounded monthly. However, from the small print on the reverse side of the document, the lender could at any time change the rate of interest on 30 days' notice. No criteria were included for determining the new interest rates. For example, there was no link to a change in the prime lending rate. As matters unfolded, Mr. Connor changed the interest rate to 36% compounded monthly, or 42% annual interest, in September of 2012.

[16] The loan agreement also provided that security for sums advanced included all investment funds held on account with CFC. That included the mutual funds the Laughlins agreed to buy from CFC. Eventually, the Laughlins' deteriorating investments in the WOF, and other fund purchases induced by CFC, were liquidated, and used in this way to help pay down their indebtedness to CFSI.

[17] Another provision of the loan agreement introduced on the front page, but elaborated upon in the small print on the reverse side, was that all the lender's legal costs of collecting on sums advanced would not only be paid by the borrowers, but would be treated as further amounts advanced by the lender, and thus subject to the interest rates charged for the loan itself.

[18] The flow of funds resulting from the February 21 meeting can be summarized as follows:

(1) CFSI lent the Laughlins $22,221. The loan never went above that. Of that amount, $9,412 was in turn spent by the Laughlins to buy units in the WOF. The balance of the $22,221 was spent to pay off the Laughlins' credit card debts. The largest credit card debt was $7,392. The interest rate charged on that by the credit card company was only 11%. I did not hear a satisfactory explanation of how substituting a debt at 11% interest with a new debt payable at 13% interest was to the Laughlins' advantage, nor was it explained why the Laughlins, who had substantial debt troubles, should have been borrowing money from the Connor Group to buy risky investments from the Connor Group before their other debts were paid off. I add that the line of credit could not be accessed by the Laughlins for any expenditure not authorized by the Connor Group.

(2) The Laughlins authorized the Connor Group taking approximately $14,000 from their low‑risk RSPs and spending it in the high‑risk mutual funds sold by CFC. That was an irresponsible step, but I doubt that the Laughlins had any idea of there being any risk associated with it. They were lured by Mr. Connor's description of income tax savings associated with buying the WOF units.

(3) The Laughlins embarked on repayment of their $22,221 loan by paying $300 per month for the first four years. That got them nowhere. The principal owing on the loan never seemed to go down. In the meantime, as I noted earlier, the value of the high‑risk mutual funds that they had bought from CFC steadily declined.

(4) The Laughlins wrote to Mr. Connor on June 20, 2004. They had been making their payments, but that was not reducing their debt. They asked to know where they stood. They said they would then make final payment. They heard nothing. Occasionally the Connor Group sent one‑page statements recording the steady decline of the Laughlins' mutual fund investments. The Laughlins wanted to use what was left of their mutual funds to reduce their indebtedness. In response, they received a very brief statement from the Connor Group in August 2004, saying that the mutual funds were locked in until 2008 and so could not be applied to pay debt before then.

(5) Ms. Laughlin met with Mr. Connor about the debt in December 2007. The Laughlins had not paid anything since writing their letter back in June of 2004. The loan, in which the sum borrowed was $22,221, now stood at $28,854. Mr. Connor said to Ms. Laughlin that the Laughlins should apply the balance in the mutual fund holdings to pay down the debt when those holdings came available in 2008. By then, there was only $7,000 left in the mutual funds, which had begun at about three times that amount. The $7,000 was applied accordingly. Mr. Connor had no incentive to demand payment of the loan. When the Laughlins ended their monthly payments back in 2004, he was getting a high rate of interest from them and he knew they owned a house against which I expect he thought he could eventually obtain full payment if necessary. Also in the December 2007 meeting, Mr. Connor obtained a $100 payment from Ms. Laughlin on the outstanding debt. As he admitted in testimony, he did that partly to extend the limitation deadline for eventually suing the Laughlins.

(6) CFSI commenced this proceeding suing in debt on December 15, 2010. The loan then stood at $32,838, notwithstanding that the Laughlins had already paid $21,400 against the $22,221 loan they had borrowed.

(7) In September 2012, as I noted earlier, Mr. Connor increased the interest rate to 36% compounded monthly, or 42% annually.

(8) CFSI now seeks $118,907. The loan agreement would yield that amount. It includes $32,838 as the amount claimed when the action was commenced, plus interest at 13% and 36% respectively, compounded monthly, for a total owing of $99,513, plus the actual costs, that is, the full legal fees of collecting on the debt. $118,907 is the total to the commencement of trial. To that, CFSI would add the further legal bills from its lawyers and court‑ordered interest and the costs for the trial. The law will not countenance such a claim, as I will set out later in these reasons.

Mr. Connor's regulatory experience

[19] Mr. Connor had run‑ins with the regulators of his industry before he met the Laughlins in 2000. He and CFC were parties before the B.C. Securities Commission in 1995. Unbeknownst to its clients, CFC was taking 85% of the interest earned on its clients' trust accounts. The Commission explained his technique for doing that and referred to it as kiting. This Court, in a judgment of Bruce Macdonald J. on October 15, 1994, had found that CFC is a trustee of its clients for the interest earned on their accounts. The Commission found that CFC deceived both its clients and the Commission by pocketing the interest. The Commission prohibited CFC from holding or handling client funds. It also found CFC owed a fiduciary obligation to its clients concerning their funds.

[20] In 2005, the Commission had Mr. Connor and CFC before it again. It prohibited CFC and Mr. Connor from lending money to its mutual fund clients, either directly or indirectly.

[21] In 2011, the Mutual Fund Dealers Association of Canada (MFDA) held a hearing naming Mr. Connor and CFC as respondents. Mr. Connor had continued many of his questionable practices. He was found to have engaged in practices that were unbecoming or detrimental to the public interest. CFC resigned from the MFDA that year.

Analysis and decision

Unconscionability

[22] The Laughlins argue that the loan agreement was unconscionable. I agree that it was. Many times our Court of Appeal has expressed the test as follows for setting aside an agreement on the ground of unconscionability. A party must establish inequality in the position of the parties arising from the ignorance, need, or distress of the weaker which left him in the power of the stronger, and must establish proof of substantial unfairness in the bargain. See McNeill v. Vandenberg, 2010 BCCA 583 at para. 15, as one relatively recent instance where that expression of the test was adopted in that court.

[23] The Laughlins were ignorant when they were in the hands of Mr. Connor when he met with them for an hour or so on February 21, 2000, and induced them to sign over to the Connor Group the rights which they gave up that day. The Laughlins appeared to be honest witnesses, and I was satisfied that they had not the faintest idea of what they were getting themselves into in February of 2000. They had no independent advice. They were not offered that and did not request it, because they mistakenly thought they were getting sophisticated guidance from Mr. Connor. Yet it was ludicrous for them to be borrowing money to invest when they had many debts still unpaid; to be cancelling a loan at 11% for one at 13% compounded monthly and subject to any increase the lender chose; to be giving up safe RSP investments for risky ones; and to be borrowing from the party who was offering to sell them the risky investments with their newly borrowed money. They did not realize they were not getting a loan in any conventional sense of the word. Instead, they were authorizing the Connor Group to advance them funds only when and for what purpose the Connor Group permitted.

[24] The elements of the transaction noted above are relevant to the second part of the test for unconscionability, that is, the substantial unfairness of the bargain, but they also are informative when addressing the first part of the test. No one who was not naïve and gullible in financial matters would have agreed to any of Mr. Connor's suggestions and proposals.

[25] Turning expressly to the second part of the test, the substantially unfair bargain, I refer to what is already said above and what follows here. The Connor Group lent a total of $22,221 to the Laughlins. The Laughlins have paid $21,400 on that debt, yet the Plaintiff asserts that its loan agreement with the Laughlins entitles it to a further $119,000 approximately, up to the start of trial, with more to be claimed after that. Simply to state those numbers is to expose the agreement for the radically unfair arrangement that it was. That does not take into account the loss of the Laughlins' safe RSP investments, some or all of which they collapsed to buy CFC's mutual funds.

[26] Accordingly, the loan agreement is set aside for unconscionability. The Laughlins, as I have noted, have not counterclaimed against the Connor Group, either in negligence, in fraud, for breach of fiduciary duty or on any other ground. They ask only to be relieved of any further obligation to the Plaintiff. In dismissing the Plaintiff's claim, I grant that relief.

[27] The Laughlins also argue unconscionability on statutory grounds, citing s. 8 of the Business Practices and Consumer Protection Act, S.B.C. 2004, c. 2. It is common ground, as I understood the arguments, that transitional provisions in that legislation allow s. 8 to have application to an agreement made in 2000. Section 8 largely codifies the common law of unconscionability. I would allow the unconscionability defence on the statutory grounds as well, but the statutory remedy would be the same as I have granted in the common‑law analysis, and I will therefore say no more about it.

Fiduciary duty

[28] The Laughlins also say that the Connor Group breached a fiduciary duty to them. They advance that argument to seek the same result, the dismissal of the Plaintiff's claim, which I have already granted on the ground that the loan agreement was unconscionable. To argue that a fiduciary relationship existed here, the Laughlins point to the indicia of that relationship as described by Wilson J. when she dissented in Frame v. Smith, [1987] 2 S.C.R. 99 at p. 136, where she said:

Relationships in which a fiduciary obligation have been imposed seem to 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.

(3) The beneficiary is peculiarly vulnerable to or at the mercy of the fiduciary holding the discretion or power.

That passage, though originating in dissent, has now become established as a test for finding whether a fiduciary relationship is present. It has application here, and I find that Mr. Connor and his companies owed and breached a fiduciary duty to the Laughlins.

[29] Counsel for the Plaintiff submitted that the Laughlins failed to plead breach of fiduciary duty. I agree with him that the Defendants' pleadings barely, if at all, get around to advancing a defence on that ground. However, the Plaintiff was not surprised and is not prejudiced by the vagueness of the plea. The Plaintiff included and highlighted in its brief of authorities the following Ontario authority which is responsive to the fiduciary defence. In Junko v. Canaccord Capital, 2012 ONSC 6966, Goldstein J. said:

[50] The relationship between a stockbroker and a client can range from that of mere agent (taking orders and executing trades) to a relationship where a stockbroker trades securities on behalf of a client in a discretionary account. The relationship can become a fiduciary one. In 820823 Ontario Ltd. v. Kagan, [2003] O.J. No. 3425, [2003] O.T.C. 788 (S.C.J.), Dambrot J. stated [at para. 69]:

In reaching this conclusion, I begin with a finding that there was no fiduciary relationship between the plaintiffs and the defendants. The relationship of a client and broker is primarily one of principal and agent. The terms of the relationship are governed by the contract between them. In general, in exchange for the payment of fees or commissions, a broker is required to execute trades on behalf of the client in accordance with the client's instructions and within the parameters of the client's stated investment objectives, and to provide investment advice if requested.

(See 875121 Ontario Ltd. v. Nesbitt Burns Inc. (1999), 50 B.L.R. (2d) 137 at 155 (Ont. S.C.J.)). While a fiduciary relationship can arise between the broker and client, it will only do so where the client is vulnerable to the broker and does not make his or her own investment decisions. (See for example, Parks v. Midland Walwyn Capital Inc., [1998] O.J. No. 1038 (C.A.)). Here Mr. Lavergne was not vulnerable to the broker, and most emphatically made his own investment decisions. The relationship was not fiduciary.

[51] The nature of the relationship is a question of fact to be determined from the contract and the actions of the client and the stockbroker. [Underlining added]

[30] The Plaintiff presented that passage in arguing that, even if fiduciary duty was adequately pleaded, there was no such duty owed in this case. However, part of what Goldstein J. said above was that a fiduciary duty can arise between a broker and client where the client is vulnerable to the broker and the broker is the decision maker, practically speaking. That was the case in the relationship between Mr. Connor and the Laughlins for the reasons I have set out earlier. If an amendment to the Laughlins' pleadings is required for them to advance the defence based on breach of fiduciary duty, I am granting the amendment, because it does not prejudice the Plaintiff for me to do so, even at this stage.

Illegality

[31] In the further alternative, the Laughlins say that the loan agreement is void because it is illegal. As I understand their submission, the Connor Group or the Plaintiff, in particular, in its agreement with the Laughlins, knowingly violated the orders of the British Columbia Securities Commission made in 1995, which orders in turn became orders of this Court when they were filed here as authorized under the securities legislation. If I were to address that interesting submission, I would be adding more dicta to what is already found above in my analyses of unconscionability on statutory grounds and breach of fiduciary duty. That is enough dicta for one judgment, and I will not address further the argument based on illegality.

Conclusion

[32] I find the Plaintiff's loan agreement with the Laughlins to be unconscionable. The Laughlins are relieved from further obligations under that agreement. The Plaintiff's claim is dismissed.

[33] The Laughlins are entitled to their costs on the ordinary scale. I note that Ms. Laughlin appeared with counsel and Mr. Laughlin appeared on his own. I leave it to the parties to determine how costs are to be apportioned and whether separate costs are available to Mr. Laughlin. The parties can apply to me in writing if they wish on the costs questions.

[34] I thank counsel for presenting helpful submissions. Mr. Pedersen, in my view, said all that could reasonably be said in a difficult brief.

"MACINTOSH J."