A woman who suffered a brain injury in a car crash will not have to pay the interest on a litigation loan made by the wife of her former personal injury lawyer after the Divisional Court declared the agreement “unconscionable.”
Marta Narbutt was 17 when she hired Niagara Falls, Ont. lawyer Ashley Gnys’ firm Sharpe Beresh Gnys on a contingency fee agreement shortly after the 2004 accident that killed her boyfriend when their car was struck by another vehicle. According to the Divisional Court, between 2008 and 2009, Gnys arranged three loans for his client totalling $13,500 with a company called Health Services Recovery Network.
However, Gnys did not tell Narbutt that HSRN was owned and operated by his wife Valerie Gnys, who, according to the firm’s web site, has worked as a paralegal there since 1986, and had done work on Narbutt’s file. Nor did he explain that Timothy Beresh, the man who talked Narbutt through the loan documentation, was actually working for both the law firm and the litigation loan company and not for her.
Narbutt switched lawyers in 2009, and settled for $306,000, but she didn’t repay the loans, so HSRN launched a court action in 2012 to get her to pay up.
By June 2015, when a superior court judge granted HSRN’s motion for summary judgment, Narbutt’s bill had ballooned to $41,649, including about $28,000 in interest alone on the loans, which had an effective annual interest rate of 19.5 per cent. After losing the motion, she paid back the entire $13,500 she had originally borrowed, but continued her fight over the interest owed.
On April 29, a 2-1 majority of the Divisional Court granted Narbutt’s appeal, rescinded the loan agreement, and dismissed HSRN’s claim, expressing concern about the way the identity of the lender was concealed from Narbutt, and the lack of independent legal advice offered to her.
“I find that these agreements are unconscionable because there was an imbalance of power, the Respondent took unfair advantage of the imbalance of power and the bargain was improvident.
“Furthermore, the Appellant had every reason to believe that everyone who spoke with her about the loans was representing her interests,” wrote Ontario Superior Court Justice Julie Thorburn in the Divisional Court decision, with Justice Graeme Mew concurring.
“The Appellant dealt with the lender in the belief that the lender was independent of her lawyer, who had been instrumental in the arrangement of the loan and choice of lender. She reasonably understood her law firm as assisting her in borrowing what was for her a substantial sum of money when in fact the Respondent, Valerie Gnys, was the lender, her lawyer was the lender’s husband and employer and Mr. Beresh, who did accident benefits work for her lawyers, was in fact acting for the lender,” they added.
In a dissent, Justice James Kent, the third member of the panel, saw no reason to interfere with the decision of the motion judge, who found the lack of disclosure around the loan agreement was “irrelevant” because Narbutt could not have got a better deal elsewhere than HSRN gave her, and had, therefore, suffered no loss.
“My client is delighted,” says Margaret Hoy, another Niagara Falls, Ont. lawyer who took over Narbutt’s personal injury case and also acted for her in the loan dispute. “She was always prepared to pay back the principal. The problem was the interest they were charging her. When you have a young vulnerable person, it’s important to get them to realize how much this kind of borrowing will actually cost them.”
In an interview, Ashley Gnys, who represented his wife at the Divisional Court, tells Law Times they will not appeal the majority verdict. Even in the event of a victory at the Court of Appeal, he says the most likely outcome would be an order for a full trial of the matter.
“A full trial is what we were trying to avoid in the first place with the summary judgment motion. It would be a little bit like winning the battle and losing the war,” he says. “The amount of money at stake in the grand scheme of things is not such a huge amount that you would want to devote those kinds of resources to it.”
Gnys says his wife continues to offer litigation loans, but they have adjusted their practice to respond to the concerns raised in the judgment.
“We have learned from this case and made changes,” he says. “All we can hope is to make new mistakes, and not repeat old ones.”
Darryl Singer, a Markham, Ont. personal injury lawyer, says the decision highlights the importance of disclosure by lawyers in cases where they have an interest in a litigation lender.
“I’m not aware of any lawyers who are involved to that extent in loans, but if they are, the lesson is that they need to disclose their connection to the lender, and then send the client down the street to another lawyer for independent legal advice. It’s hard at that point for them to come back later and say they didn’t understand the agreement,” Singer says.
Alison Burrison, a partner at personal injury firm McLeish Orlando LLP, says her firm views litigation loans as a last resort. She says Narbutt got a competitive interest rate, since typical annual rates are currently around 24 per cent. However, she adds that Gnys may have got more sympathy from the judges if the law firm had explored other options apart from a litigation loan, such as an advance from the tort insurer or a personal line of credit.
“The average case takes at least three to four years, so a loan at 24 per cent compounding monthly is going to add up pretty quickly. You don’t want clients incurring that kind of rate if you can avoid it,” Burrison says. “At the same time, a litigation loan can be important for access to justice. If one side is forced into settling prematurely because they are running out of funds, that puts them in an unfair position.”
Hoy says she was stunned to find out the hidden identity behind HSRN in 2012, soon after negotiating Narbutt’s final settlement.
The revelation prompted her to file a complaint with the Law Society of Upper Canada about Ashley Gnys’ conduct, which in turn prompted HSRN to seek costs against Hoy personally after its original success at the summary judgment motion.
However, Ontario Superior Court Justice Robert Nightingale wrote in his Sept, 30, 2015 judgment on costs that the claim was undermined by the fact that the LSUC investigation concluded that the law firm was in an actual or potential conflict of interest regarding the loan situation.
According to the Divisional Court, the law society concluded no disciplinary action was required, deeming the failures matters of “best practice.”