Smith v. National Money Mart Company

Smith v. National Money Mart Company Collection Decisions of the Court of Appeal Date 2006-05-08 Docket numbers C43768 Judges Feldman, Kathryn N.; Blair, Robert Ashley; LaForme, Harry Smith Subject Civil Decision Content DATE: 20060508 DOCKET: C43768 COURT OF APPEAL FOR ONTARIO FELDMAN, BLAIR and LAFORME JJ.A. B E T W E E N : MARGARET SMITH Plaintiff (Respondent) F. Paul Morrison and Chris Hubbard for the appellant - and - NATIONAL MONEY MART COMPANY AND DOLLAR FINANCIAL GROUP INC. Defendants (Appellant) Harvey T. Strosberg Q.C. and David Stratas for the respondent Heard: December 2, 2005 On appeal from the judgment of Justice Ellen MacDonald of the Superior Court of Justice dated June 22, 2005. FELDMAN J.A.: [1] The respondent is the plaintiff in a proposed class action against the Canadian corporation, National Money Mart Company (“Money Mart”) and against its American parent company, the appellant, Dollar Financial Group Inc. (“Dollar Financial”). The appellant moved for an order setting aside service out of the jurisdiction and for an order dismissing or staying the action against it for lack of jurisdiction in the Ontario court. The motion judge dismissed the motions. I agree with the conclusions reached by the motion judge that, (a) the respondent was entitled to serve the appellant out of the jurisdiction and, (b) the Ontario court has jurisdiction because there is a real and substantial connection between the appellant and Ontario in the context of the claims made in this action. FACTS [2] The proposed class action seeks damages from the two defendants on the basis that Money Mart’s “pay-day loan” or “fast-cash advance” product effectively charges customers interest that grossly exceeds the rate prescribed by s. 347 of the Criminal Code. The plaintiff, Margaret Smith, lives only on her Canada Pension. She obtained several small loans from Money Mart at a disclosed interest rate of 59%, 1% below the legal maximum rate. However, with late fees and a cheque cashing fee that are alleged to be built into the timing of the repayment set up for the loan, it is alleged that the effective rate of interest on her loans ranged from 329% to 578%. [3] The action seeks a remedy from Dollar Financial, the sole shareholder of twenty-three subsidiaries including DFG International, Inc., which itself is the sole shareholder of Money Mart, on the basis of conspiracy and unjust enrichment. It also alleges that Dollar Financial totally controls Money Mart and effectively carries on business in Ontario through its Money Mart stores. [4] The appellant says that it is a New York State corporation that does not carry on business in Ontario. It has no offices, employees or physical assets in Ontario. The appellant says that its relationship with Money Mart is a normal parent-subsidiary relationship that does not allow the court to pierce the corporate veil. It denies any conspiracy and says that, in any event, the alleged conspiracy would have merged with the commission of the tort in Ontario by Money Mart. It denies any unjust enrichment in fact or in law. Finally, the appellant says that there is no good, arguable case for any cause of action set out in Rule 17.02 of the Rules of Civil Procedure, and therefore service ex juris was improper and must be set aside. [5] Money Mart has existed in Canada since 1982 and was purchased by Dollar Financial in November 1996. Dollar Financial also purchased the outstanding shares of Canadian Capital Company, Money Mart’s largest franchisee, in May 1997. [6] The motion judge accepted the following as unchallenged evidence on the motion: · Money Mart introduced the pay-day loans into the Canadian market the same year it was acquired by Dollar Financial. · At relevant times, executives of Dollar Financial were also officers and directors of Money Mart. · Dollar Financial received both royalty fees and management fees from Money Mart. The royalty fees were agreed to be paid to compensate Dollar Financial for its management and expertise in developing, maintaining and managing the U.S. “Cash til Payday” product before it was introduced as “Fast Cash” in Canada. The initial royalty rate was 4.5% of Money Mart’s annual revenue, later reduced to 2.5%. · In a study done by Ernst & Young, Money Mart’s auditors, for Dollar Financial, the auditors concluded that the royalty rate was reasonable “given the management and expertise provided by Dollar Financial to Money Mart.” · The auditors also concluded that the high level of management and services of all kinds provided by Dollar Financial to Money Mart justified significant management fees. In 1998 those fees were U.S. $1.289 million. · Dollar Financial’s line of credit with its banker, Wells Fargo, is guaranteed by Money Mart, supported by a security interest in Money Mart’s assets in Ontario and elsewhere. · Not only was Dollar Financial’s Board of Directors required to approve the acquisition by Money Mart of all of its franchisees in Ontario and elsewhere in Canada, but both the CEO and the President and CFO of Dollar Financial were personally involved in all of Money Mart’s franchisee acquisitions in Canada. · Dollar Financial provided $105,000,000 to Money Mart to finance the acquisition of Money Mart franchisees. It did this with the knowledge that the funds would be used in part to expand the network of stores offering pay-day loans. · At all relevant times, Dollar Financial knew about s. 347 of the Criminal Code and knew that the legal interest rate was a matter of federal jurisdiction in Canada. [7] Based on these findings, the motion judge concluded that even without officers and employees in Ontario, the evidence disclosed “a strong link between the Defendants and the claims of Margaret Smith and other proposed members of the class.” She also relied on the pleaded torts that “arguably occurred in Ontario” and referred to Rule 17.02 and concluded that there was a good, arguable case on which to base service out of the jurisdiction. The motion judge concluded that there was jurisdiction in the Ontario court over Dollar Financial in this action. ISSUES (1) The standard of review. (2) Did the motion judge err by failing to articulate how the claims in this action came within the criteria for service ex juris under Rule 17.02 of the Rules of Civil Procedure? (3) Did the motion judge err by concluding that there is a good, arguable case on the alter ego, conspiracy, or unjust enrichment theories, to found jurisdiction in this action? (1) The Standard of Review [8] The issue of the proper jurisdiction of the court is a question of law on which the standard of review on appeal is correctness: see Khan Resources v. W.M. Mining Co. LLC, [2006] O.J. No. 845 (C.A.) and cases cited therein at para. 7. [9] The record on the motion consisted of the amended statement of claim as well as affidavits and cross-examination thereon. The motion judge was required to make findings based on the record for the purpose of determining the issues on the motion. Of course these “findings of fact” are for the limited purpose of the motion and are not the ultimate findings that would be made after a trial. However, such findings are treated as findings of fact for the purpose of appellate review and are accorded deference on that basis on this appeal. [10] Therefore, this court must examine the legal conclusion reached by the motion judge, accepting her findings of fact, subject to palpable and overriding error. (2) Service ex juris under Rule 17.02 and Rule 17.03 of the Rules of Civil Procedure [11] The appellant argues that the motion judge erred in declining to set aside service ex juris, on the basis that the pleaded causes of action do not fall with R. 17.02. However, the respondent did not serve the appellant without leave under Rule 17.02 but rather obtained an order from Winkler R.S.J. allowing service out of the jurisdiction under Rule 17.03. The appellant does not seek to set aside that order on this appeal, but rather argues that service ex juris was improper because there was no real arguable case against the appellant under any of the criteria set out in Rule 17.02. Rule 17.03(1) provides: 17.03(1) In any case to which Rule 17.02 does not apply, the court may grant leave to serve an originating process or notice of a reference outside Ontario. [12] The record on appeal does not contain the Rule 17.03 order, or the affidavit on which it was based, although the parties provided this court with excerpts from their factums on the original motion, which do address the interrelation between the two rules. It is clear that this court is not in a position to consider the propriety of the order or to set it aside. [13] In any event, the real issue on this appeal is jurisdiction simpliciter: whether the motion judge erred in law in concluding that there is a real and substantial connection between the action against the appellant and Ontario in order to found jurisdiction based on a good, arguable case against the appellant on one of the pleaded causes of action. The criteria for service out of the jurisdiction without leave are just examples of the type of connection with the jurisdiction that would allow an Ontario court to take jurisdiction over an out of province party: Muscutt v. Courcelles (2002), 60 O.R. (3d) 20 (C.A.) at pp. 37-38; Vita Pharm Canada Ltd. v. Hoffman-LaRoche et al. (2002), 20 C.P.C. (5th) 351 (Ont. S.C.J.) at para. 91. Finally on this issue, as will be discussed later in the reasons, I agree with the motion judge that there is a valid plea of the tort of conspiracy in Ontario against the appellant, which brings the action within Rule 17.02(g). (3) Is there a real and substantial connection between this action and the appellant based on any of the causes of action pleaded against it? [14] The essence of the appellant’s submission is that the respondent has no good, arguable legal case against it based on any of the causes of action pleaded, and that in those circumstances, it would be unfair for Ontario to take jurisdiction over the appellant as a foreign defendant because of the tenuous nature of the legal connection between Ontario and the appellant. The Alter Ego Theory [15] The appellant says that the respondent is asking the court to pierce the corporate veil in circumstances that amount only to the normal relationship between a parent and subsidiary corporation. However, the motion judge’s findings belie that submission. She accepted facts that show that Dollar Financial was instrumental in introducing the payroll loan product into Canada through its Money Mart subsidiary and in expanding the operation, with the effect of maximizing Money Mart’s revenues and therefore Dollar Financial’s royalty payments based on those revenues. There was clear evidence of control of operations by the parent, combined with knowledge of the prohibition in the Criminal Code against charging over 60% as an effective rate of interest on loans. [16] In my view, these facts are sufficient at this stage to ground a good, arguable case for holding the appellant responsible for the acts of its subsidiary. In Transamerica Life Insurance Co. v. Canada Life Assurance Co. (1996), 28 O.R. (3d) 423 (Gen. Div.), aff’d. [1997] O.J. No. 3754 (C.A.) the test was stated as follows: [T]he courts will disregard the separate legal personality of a corporate entity where it is completely dominated and controlled and being used as a shield for fraudulent or improper conduct. The first element, ‘complete control’, requires more than ownership. It must be shown that there is complete domination and that the subsidiary company does not, in fact, function independently. … The second element relates to the nature of the conduct: is there “conduct akin to fraud that would otherwise unjustly deprive the claimants of their rights”? (pp. 433-434) [17] The motion judge accepted evidence indicating sufficient control over Money Mart, together with the improper conduct of charging well in excess of the criminal interest rate to vulnerable borrowers in Canada who are not able to obtain loans from lenders charging reasonable rates. I agree that there is a good, arguable case against the appellant on the basis that it is Money Mart’s alter ego. Conspiracy [18] The second cause of action is in tort: conspiracy between Dollar Financial and Money Mart to breach the Criminal Code by charging interest to borrowers in Ontario well in excess of the criminal rate. The appellant makes two submissions challenging the efficacy of this claim. The first is that again, the evidence amounts to nothing more than normal relations between a parent and subsidiary corporation with no particulars of a conspiracy. The second is that once Money Mart contravened the Code by making the fast cash loans, any conspiracy merged with the breach. [19] The motion judge relied on the tort claim and found that the tort arguably occurred in Ontario. She was satisfied that there was sufficient evidence of a good, arguable case that the two defendants conspired together to carry out the breach of s. 347(1) of the Code. Contrary to the submission of the appellant, there can be a conspiracy between a parent and a subsidiary corporation. The appellant submits that if Money Mart was controlled by Dollar Financial to the extent alleged in the action, then it follows that any agreement between them would be tantamount to an agreement with oneself, and one cannot conspire with oneself. Although that is an interesting analysis, the appellant’s position is that the two companies are independent of each other and do not operate as one. Either way, where one controls the other, as two separate legal entities each remains responsible in law for its own actions, even if Dollar Financial is also responsible for some or all of the actions of its subsidiary. Nor is this an allegation of a conspiracy under the Competition Act, where s. 45(8) does not recognize a conspiracy with an affiliated corporation. [20] With respect to the argument that a conspiracy to commit a tort merges with the tort, in this case the conspiracy is in respect of a breach of the law. There is no separate tort alleged. Nor is there a separate claim for breaching the law into which the conspiracy claim could merge. The only separate claim into which the conspiracy could merge is for unjust enrichment. The appellant’s position is that there can be no claim against it for unjust enrichment because it had no direct dealings with the Ontario borrowers like the plaintiff: see Boulanger v. Johnson & Johnson Corp. (2003), 174 O.A.C. 44 (C.A.) at para. 20. If the appellant is correct, then again, there is no cause of action into which the conspiracy can merge. At this stage, there is a good, arguable case for the tort of conspiracy, and the issue of merger should be left for trial. I will next deal with the claim for unjust enrichment. Unjust Enrichment [21] On this appeal, it is only necessary to show a good, arguable case for the pleaded causes of action, as a foundation for a real and substantial connection between the appellant and Ontario. In this case, there was evidence in the record to show that the appellant was not merely the ultimate parent of Money Mart, but that it was enriched by receiving substantial royalties and management fees based on its contribution to the pay-day loan portion of Money Mart’s business, that the respondent suffered a deprivation and that the enrichment was unlawful. It is therefore arguable that the Boulanger case is distinguishable on the facts, and that there is a good, arguable case that Dollar Financial was unjustly enriched. Constructive Trust [22] The respondent’s claim for constructive trust is that both defendants hold the alleged illegally charged interest on constructive trust for the respondent and other members of the class. That claim is effectively a remedial one that applies only if the action is made out in respect of the alter ego theory, the conspiracy or the unjust enrichment. Muscutt Factors [23] I agree with the motion judge that the respondent has made out a good, arguable, prima facie case for its three bases of liability against the appellant: that the appellant is the alter ego of Money Mart and responsible for its breach of the Code, that the appellant conspired with Money Mart to breach the Code and that the appellant was unjustly enriched. [24] The next step in the jurisdiction analysis is to apply the eight Muscutt factors for the real and substantial connection test. The motion judge did not address the factors individually. However, the appellant’s argument was not focused on the application of the factors, but rather on the allegedly tenuous nature of the legal case against the appellant. The motion judge summed up her reason for finding jurisdiction by relying on the strong link between the claims of the plaintiff class and the defendants. I read this conclusion as subsuming the Muscutt factors in terms of the ultimate fairness of bringing the action in Ontario. [25] However, for the purpose of the appeal, I will address each factor briefly. The first is the connection between the forum and the claim. The claim is that consumers in Ontario (and the rest of Canada other than British Columbia) were charged a criminal rate of interest and suffered damage as a result. There is a clear connection to Ontario. [26] The second factor is the connection between Ontario and the appellant. That has been discussed in detail in the analysis of the good, arguable case against the appellant. [27] The third factor is unfairness to the appellant if Ontario assumes jurisdiction. The appellant has a very significant financial interest in Ontario and does business here through its subsidiary. Its business practices affected consumers here. It is not unfair for the appellant to respond to a lawsuit brought against it in Ontario by those consumers affected by its practices. [28] The fourth factor is unfairness to the respondent if Ontario does not assume jurisdiction. In that case, the respondent would be obliged to sue the two corporations separately in two different forums. In circumstances where the defendant’s business generates very significant revenue for the appellant from Ontario consumers and where much of that revenue is alleged to have been illegally charged, this factor favours the Ontario respondent/plaintiff. [29] Factor five is the involvement of other parties in the Ontario lawsuit and the concerns about a multiplicity of proceedings and of potentially inconsistent verdicts. The appellant previously challenged the propriety of the action brought against Money Mart, relying on an arbitration clause contained in its loan agreement with borrowers including the respondent. That challenge was dismissed at this stage, but will be one of the considerations in the class certification motion: see Smith v. National Money Mart Co, [2005] O.J. No. 4269 (C.A.), leave to appeal to the S.C.C. denied [2005] S.C.C.A. No. 528. Therefore, at this time, the action against Money Mart remains extant and the concerns regarding a multiplicity of proceedings favour jurisdiction by Ontario over the appellant in the action. [30] The sixth factor is whether Ontario would recognize a U.S. judgment against an Ontario corporation rendered on the same jurisdictional basis. On the basis of international comity, and given the strength of the factors that connect the appellant and the action with this jurisdiction, as well as the fact that the judgment sought is a money judgment and not an in rem judgment involving land in another jurisdiction, it is likely that applying normal principles of private international law, Ontario would enforce such a judgment: see Janet Walker, Canadian Conflicts of Laws, 6th ed. (Markham, Ontario: LexisNexis Canada Inc., 2005) at §14.3 and §14.5. [31] The seventh factor speaks to the fact that courts in Canada are more likely to assume jurisdiction where the defendant is a resident of another province because of the federal nature of the country. This case involves an international defendant, a fact that militates, on its own, against assuming jurisdiction. [32] The final factor is principles of international comity. No evidence was presented as to whether a judgment in this case would be enforceable against the appellant in New York or Pennsylvania. However, given the substantial connection that has been found by the motion judge with this jurisdiction, absent any evidence to the contrary there is no basis to conclude that a judgment of an Ontario court in this case would not be enforceable there. [33] In my view, weighing all of the factors, the motion judge made no error in concluding that the real and substantial connection test has been met and that Ontario has jurisdiction in this case. RESULT [34] In the result, I would dismiss the appeal with costs to the respondent fixed at $25,000 for fees on a partial indemnity basis, $2,180.50 for disbursements, plus G.S.T. Signed: “K. Feldman J.A.” “I agree R. A. Blair J.A.” “I agree H.S. LaForme J.A. RELEASED: “KNF” May 5, 2006