Borrower beware: Lesson on loans learned in court
Borrower beware: Lesson on loans learned in court
Frivolous Lawsuits and Class Action Lawsuits
Saturday, May 19, 2007
Most recent one picked up off the web...
Borrower beware: Lesson on loans learned in court
By James Daw
May 19, 2007
Twenty-two investors now in their 60s and 70s borrowed money to buy mutual funds late in the 1990s. Before long, they suffered losses.
Without the loans, they could not have afforded the mutual funds. On the flip side, they could not afford the loans when stock prices fell.
But stock markets had been roaring ever higher – as in the past four years. Investment seminars drew big crowds, and many advisers pushed people to buy funds using loans secured by the funds, or by home equity.
After all, went the mantra, most of us borrow to buy homes and cars. The big difference with loans secured by mutual funds or securities is that, when the investments fall in value, lenders will usually demand an accelerated payment to reduce their own risk of loss.
Concerns about the risks of leverage led the Ontario Securities Commission, in the wake of the 1987 market crash, to require that mutual fund dealers and salespersons provide investors with a standard explanation of those risks.
For these 22 investors, though, the surprise came when the banks demanded the accelerated payment; they had never read the loan agreements.
While markets have since recovered, two of the investors were eventually driven to bankruptcy, and others came close to insolvency. Most have been left with nothing but their homes and modest savings.
On the advice of experienced securities lawyers, they joined together to sue their advisers, securities dealers and fund management companies.
They also went one step farther. They sued three major banks and three trust companies for lending them the money, arguing the lenders knew full well the investment loans were inherently risky.
The courts have not been sympathetic to the novel argument that the banks owed a duty to care for the investors, to provide a warning or refuse to lend. Now the investors have discovered how risky court battles can be.
Without even holding a full trial, Judge James Spence of the Ontario Superior Court of Justice ruled in favour of a motion the lenders brought in late 2005: "There are no genuine issues of fact for trial."
The loan agreements in question varied in their wordings, but generally required the borrowers to accept responsibility for any losses or damages, and to acknowledge they had received no advice to invest or borrow.
Spence later accepted it would be an undue hardship for the investors to then pay the $1.14 million in legal costs the lenders sought to recover.
He limited his cost award to $440,000, an average of $20,000 per investor or $40,000 per couple, acknowledging they deserved a discount because of the novelty of their arguments and the inevitable overlap in work done to defend the investors' claims.
The novelty of their arguments won them an audience before the Court of Appeal for Ontario last September. But the three justices ruled unanimously that Spence's reasons for tossing out the lawsuit were "a model of excellence."
The judges referred to the loan documents, which were presented to the investors by their advisers, and which absolved the lenders of responsibility.
They noted the lenders had no reason to assume the borrowers would fail to read the loan agreements, and that the investors had no reason to think they could get out of paying the loans.
It is well established in law that lenders have no special duty to protect borrowers from their own decisions, where there is no special relationship or exceptional circumstances, and where the terms of the agreement "that give rise to the special risk have been fully disclosed."
"It is the borrower who decides to take the loan and so creates whatever foreseeable risk may thereby arise," the court responded to the investors' claim that it was the lenders that were negligent.
"The case law recognizes that advisers have a duty of care in respect of advising, but it is not recognized that lenders are advisers," the court wrote. "The plaintiffs went to the financial institutions, not for advice, but for loans."
The lenders promoted their investment loans to the advisers, not to the investors, the court ruled. When the investors accepted the loans, they were seeking to advance their own interest and should have expected the lenders to do the same.
A request to appeal the ruling in the case of Baldwin v. Daubney has now been denied by the Supreme Court of Canada. Both appeal courts have ordered the investors to pay the legal costs of the lenders.
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