We provide this update on the status of the Kovacs decision first addressed in our July 2010 article entitled "Kovacs v. TD Bank Financial Group – Caught between a Rock and a Hard Place". Recall that Cameron, J dismissed the strike motion of the TD Bank Financial Group – a decision which left open the possibility that TDBFG could be found liable to Kovacs, the beneficiary of a preservation order, for losses resulting from TDBFG's failure to implement that order.
TDBFG sought leave to appeal Cameron, J.'s decision. Leave was sought on four grounds, including the viability of: (1) the claim for a declaration that TDBFG were in contempt of court for breaching the preservation order, and (2) the claim for breach of trust and breach of fiduciary duty owed to Kovacs. On November 5, 2010, Molloy, J. dismissed the leave motion on all grounds save for the contempt of court issue.
In April 2005, Kovacs obtained a preservation order in an action against her roommate, Nagy, in which she claimed entitlement to half of the proceeds of a $5 million lottery win. The freeze order required the sum of $2,650,000 held by "TD Canada Trust" in Kovacs and Nagy's joint account, or in any other account in Nagy's name to which the funds could be traced, to be preserved and paid into court.
Counsel for TDBFG acknowledged receipt of the preservation order but advised that the joint account had been previously closed. Applying a narrow interpretation to the order, TDBFG's counsel did not disclose that, at the time, approximately $4 million of the lottery proceeds were then being held by Nagy in an account in his name at TD Waterhouse. Nagy subsequently transferred the $4 million out of this account to a bank situated in Romania.
In February 2009, Kovacs commenced an action against TDBFG. As discussed above, TDBFG moved to strike Kovacs' claim as disclosing no reasonable cause of action. Cameron J. dismissed that motion stating, among other things, that Kovacs had a reasonable argument that a fiduciary relationship existed between her and TDBFG. TDBFG sought leave to appeal.
The Court denied leave to appeal and, in affirming Cameron J.'s decision not to strike any of the principal damages claims, held that they instead could proceed to trial to be decided upon a full evidentiary record. Although leave was allowed on the contempt of court issue, Molloy, J. stated that Kovacs did not need a declaration that TDBFG were in contempt of the preservation order in order to succeed on her damages claims, effectively rendering the contempt declaration a non-issue.
Interestingly, the Divisional Court's analysis of the fiduciary and trust claims included the following comment:
Essentially, the plaintiff told [TD] that Mr. Nagy was attempting to steal money belonging to her. Although [TD] knew the funds had initially been held jointly, and although the plaintiff's allegations were supported by a court order that the funds be paid into court, TD facilitated the wrongdoer and enabled him to transfer the plaintiff's money out of the country beyond her reach. It would have been a simple matter for TD to pay the funds into court so that the interests of both Ms. Kovacs and Mr. Nagy were protected. It chose instead to act in a manner that was highly detrimental to Ms. Kovac[s'] interests. [Cameron, J.] was of the view that it was at least arguable that equity should impose a duty in these circumstances because good conscience requires it ... I do not doubt the correctness of [Cameron, J.]'s conclusion. [emphasis added]
Now that Kovacs' claims have been allowed to proceed, it will be interesting to see whether the matter goes to trial as the resultant decision will go a long way towards clarifying the duties and obligations of FIs asked to exercise a measure of discretion in interpreting a freeze order. At present, it can be said that the preliminary decisions in Kovacs have created considerable uncertainty in this regard. The remarks of Justice Molloy, which are consistent with those of Justice Cameron, suggest that FIs should consider interpreting their obligations under freeze orders broadly and purposively where a degree of ambiguity exists in the terms of such orders.
As is demonstrated by the situation in Kovacs, a significant tension exists between the obligation to honour a preservation order and the contractual duties and confidentiality obligations owed to clients. With that in mind, and until we have the benefit of a decision on the merits, FIs may be well advised, particularly where significant dollar amounts are at issue, to consider seeking clarification of such orders from the issuing court in order to avoid potential liability and greater costs down the road.
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