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2009 NWTTC 15 File Numbers: T-01-CV-2009000015 T-01-CV-2009000051 T-01-CV-2009000064 IN THE TERRITORIAL COURT OF THE NORTHWEST TERRITORIES BETWEEN: 5752 NWT LTD. carrying on business as DIAMOND PLACEMENT AND FINANCIAL SERVICES Plaintiff v. JIM DARCY BIGGS Defendant -AND- 5752 NWT LTD. carrying on business as DIAMOND PLACEMENT AND FINANCIAL SERVICES Plaintiff v. LESLIE ALLAN MARIE Defendant -AND- 5752 NWT LTD. carrying on business as DIAMOND PLACEMENT AND FINANCIAL SERVICES Plaintiff v. DERRICK BRIGGS Defendant REASONS FOR JUDGMENT OF THE HONOURABLE JUDGE ROBERT D. GORIN Heard at: Yellowknife, Northwest Territories August 17, 2009 Reasons Filed: August 21st, 2009 IN THE TERRITORIAL COURT OF THE NORTHWEST TERRITORIES IN THE MATTER OF: 5752 NWT LTD. carrying on business as DIAMOND PLACEMENT AND FINANCIAL SERVICES Plaintiff v. JIM DARCY BIGGS Defendant -AND- 5752 NWT LTD. carrying on business as DIAMOND PLACEMENT AND FINANCIAL SERVICES Plaintiff v. LESLIE ALLAN MARIE Defendant -AND- 5752 NWT LTD. carrying on business as DIAMOND PLACEMENT AND FINANCIAL SERVICES Plaintiff v. DERRICK BRIGGS Defendant ________________________________________________________________________ INTRODUCTION [1] These three matters originally came before me to determine whether or not default judgment would be issued as a result of no defence having been filed in each action. While each of the claims appeared to be for debt or liquidated demand, I declined to direct the clerk to enter default judgment due to concerns I had with the apparent illegality of each of the loan agreements entered into by the Plaintiff and the Defendants. My concern was that each of the loan agreements stipulated interest on the principal amount at a rate in excess of 60% per annum and therefore violated s. 347 of the Criminal Code. [2] I set the matters for Monday, August 17th at 2:30 p.m. for default hearings in order to give the Plaintiff an opportunity to respond. On that date, Leonore Kwong, the individual, who in each case filed the statement of claim on behalf of the Plaintiff company, advised the clerk of the court that she was busy and would not be in attendance. [3] After the matters were called and no one appeared for the Plaintiff, I dismissed each of the three claims. I said that written reasons would follow. These are my reasons. THE FACTS [4] I find it useful to set out a summary of each of the claims. In each case the statement of claim is based on a loan supported by a “promissory note”. A copy of the applicable promissory note has been attached to each of the Plaintiff’s Statements of Claim as required by the Civil Claims Rules of the Territorial Court. Loan to JIM DARCY BIGGS [5] In the case of Jim Darcy Biggs the principal amount of the loan was for $700. The amount of interest to be paid on the principal was a lump sum amount of $200. The $200 interest equals 28.57% of the principal amount of the loan. The principal and interest were to be repaid within 15 days of the principal amount being provided to Mr. Biggs. When 28.57% interest over 15 days is expressed as an annual rate, the interest rate is 695.2% per year, exclusive of further charges which were payable under the terms of the promissory note. [6] In its Statement of Claim, the Plaintiff actually claimed interest at a lesser rate - 5% per month (60% per year). However, the Plaintiff also claimed, $337.50 for “disbursements, admin fees” and a further “NSF/Holding” fee of $100. The promissory note states that “All costs, expenses and expenditures including ‘NSF’ charges ……. will be added to the principal…..” However, no real explanation of the costs and expenditures claimed in its Statement of Claim has been provided by the Plaintiff. The total claim was for $1,290.35. [7] The Plaintiff calculated the total amount claimed as follows: principal ($700); plus interest at the rate of 5% per month from October 2, 2008 to February 13, 2009 ($152.85); plus disbursements, administration fees and “NSF/ Holding fees” ($437.50). Loan to LESLIE ALLAN MARIE [8] In Leslie Allan Marie’s case the principal amount of the loan was $100. Interest on the loan was the lump sum amount of $26. The principal along with the interest was to be repaid within 9 days of the loan. The annualized interest rate amounts to 1,054.4% per year exclusive of further charges which were claimed under the note. [9] Once again, the Statement of Claim claimed interest on the principal at the lesser rate of 5% per month (60% per year). Once again, unexplained charges under the terms of the promissory note are claimed. These charges alone total $400 - four times the principal amount of the loan. [10] The Plaintiff calculated the total amount claimed, $538.17, as follows: principal ($100) plus interest at the rate of 5% per month from August 26, 2008 to April 15, 2009 ($38.17), plus disbursements, administration fees and “NSF/Holding fees” ($400). Loan to DERRICK BRIGGS [11] In the case of Derrick Briggs the loan was for the principal sum of $5,000. The amount of interest which was payable was a lump sum amount of $1,200. The principal and interest were to be repaid within 81 days of the loan. The annualized interest rate amounts to 108.1% per year, exclusive of any fee, or other charge or expense payable under the note. [12] The Statement of Claim again claimed interest at the lesser rate of only 5% per month (60% per year). Additional charges were claimed which totaled $500. [13] The total amount claimed, $1,711.66, was calculated as follows: principal ($5,000) plus interest based on 5% per month from December 29, 2008 to May 8, 2009 ($1,075), plus disbursements, administration fees and “NSF/ Holding fees” ($500), minus the total amount that the Defendant paid on the loan ($4,863.34). ANALYSIS [14] The agreements between the Plaintiff and the Defendants were illegal. The rates of interest which were to be paid on each loan exceeded 60% per annum and were therefore criminal. [15] Section 347 of the Criminal Code states: (1) Despite any other Act of Parliament, every one who enters into an agreement or arrangement to receive interest at a criminal rate, or receives a payment or partial payment of interest at a criminal rate is (a) guilty of an indictable offence …………; or (b) guilty of an offence punishable on summary conviction….. (2) In this section, ………………… “criminal rate” means an effective annual rate of interest calculated in accordance with generally accepted actuarial practices and principles that exceeds sixty per cent on the credit advanced under an agreement or arrangement; ………..……… “interest” means the aggregate of all charges and expenses, whether in the form of a fee, fine, penalty, commission or other similar charge or expense or in any other form paid or payable for the advancing of credit under the agreement or arrangement, by or on behalf of the person to whom the credit is or is to be advance, irrespective of the person to whom any such charges and expenses are or are to be paid or payable, but does not include any repayment of credit advanced or any insurance charge, official fee, overdraft charge, required deposit balance, or in the case of a mortgage transaction any amount to be paid on account of property taxes. “official fee” means a fee required by law to be paid to any governmental authority in connection with perfecting any security under an agreement or arrangement for advancing of credit. “overdraft charge” means a charge not exceeding five dollars for the creation of or increase in an overdraft, imposed by a credit union or caisse populaire…….. [16] Section 347.1(1) of the Criminal Code provides for a potential exception in the case of “payday loans”. Subsection (2) provides: (2) Section 347 and section 2 of the Interest Act do not apply to a person, other than a financial institution within the meaning of paragraphs (a) to (d) of the definition “financial institution” in section 2 of the Bank Act, in respect of a payday loan agreement entered into by the person to receive interest, or in respect of interest received by that person under the agreement, if (a) the amount of money advanced under the agreement is $1,500 or less and the term of the agreement is 62 days or less; (b) the person is licensed or otherwise specifically authorized under the laws of a province to enter into the agreement; and (c) the province is designated under subsection (3). [17] Subsection (3) of s. 347.1 provides: (3) The Governor in Council shall, by order and at the request of the lieutenant governor in council of a province, designate the province for the purposes of this section if the province has legislative measures that protect recipients of payday loans and provide for limits on the total cost of borrowing under the agreements. [18] No order has been made by the Governor in Council designating the Northwest Territories for the purposes of s. 347.1 of the Criminal Code. (I note that even if such an order had been made, the loan to Derrick Briggs would not fall within the “payday loan” exception set out in s. 347.1 because it was in an amount that exceeded $1,500 and because it was for a term in excess of 62 days.) [19] The power of a court to refuse to enforce contracts which involve the breach of a statute is undoubted. In the case of Degelder Construction Co. v. Dancorp Developments Ltd., [1998] 3 S.C.R. 90, the Supreme Court of Canada dealt squarely with the issue of criminal interest rates. [20] In Degelder the appellant obtained a mortgage loan from the respondent. The loan agreement required the appellant to pay substantial fees and bonuses in addition to a conventional interest rate. The loan was for 11 months but was not repaid for more than three years. The appellant subsequently challenged the validity of the loan claiming that the trust company had received payments of interest at a criminal rate, contrary to what was then s. 347(1)(b) of the Criminal Code. In support of its contention, the appellant filed a certificate stating that the bonuses, fees and interest received under the mortgage loan produced an effective rate of interest exceeding 75 percent per annum. [21] The Supreme Court of Canada noted that s. 347 created two offences. Subsection 347(1)(a) made it an offence to enter into an agreement or arrangement to receive interest at a criminal rate. Subsection 347(1)(b) made it an offence to receive interest at a criminal rate. I should note that these two separate offences are still set out in the present version of s. 347(1). [22] At paragraph 34 the court summarized the approach to be taken to s. 347(1), as it was then worded: (1) Section 347(1)(a) should be narrowly construed. Whether an agreement or arrangement for credit violates s. 347(1)(a) is determined as of the time the transaction is entered into. If the agreement or arrangement permits the payment of interest at a criminal rate but does not require it, there is no violation of s. 347(1)(a), although 347(1)(b) might be engaged. (2) Section 347(1)(b) should be broadly construed. Whether an interest payment violates s 347(1)(b) is determined as of the time the payment is received. For the purposes of s. 347(1)(b), the effective annual rate of interest arising from a payment is calculated over the period during which credit is actually outstanding. (3) There is no violation of s. 347(1)(b) where a payment of interest at a criminal rate arises from a voluntary act of the debtor, that is, an act wholly within the control of the debtor and not compelled by the lender or by the occurrence of a determining event set out in the agreement. [23] At the time Degelder was decided s. 347(1) stated: (1) Notwithstanding any Act of Parliament, every one who (a) enters into an agreement or arrangement to receive interest at a criminal rate, or (b) receives a payment or partial payment of interest at a criminal rate is guilty of (c) an indictable offence and liable to imprisonment for a term not exceeding five years, or (d) an offence punishable on summary conviction and is liable to a fine not exceeding twenty-five thousand dollars or to imprisonment for a term not exceeding six months or to both. [24] The present construction of s. 347(1) (supra at para. 15) has not altered the applicability of Degelder. [25] The Supreme Court’s decision ultimately hinged on the facts of the case and the manner in which it was argued. Because the loan was not paid off within 11 months, the effective rate was well below the criminal rate. While it might have appeared that the loan violated s. 347(1)(a), the borrower did not challenge the loan on the basis of s. 347(1)(a) but solely on the basis of s. 347(1)(b). [26] Major J. speaking for a unanimous court states at paragraph 35: “As noted, s. 347(1)(a) was not raised in this appeal and there is no need to assess whether the mortgage, on its face would have violated that provision. ….” [27] Swan, at page 783 of his text, Canadian Contract Law (Butterworths 2006), states that it is unclear why the Supreme Court and the courts below did not take the position on their own motion, that the agreement violated s. 347(1)(a). Swan observes that even if s. 347(1)(a) is “narrowly construed” the interest rate was illegal. He also notes that there is no suggestion in Degelder that the court has disclaimed its power to hold an agreement unenforceable on the basis of illegality even if the parties do not choose to argue that it is unenforceable. [28] I have concluded that in each of the matters before me, the loan agreement set out in the promissory note, stipulates an interest rate which is illegal under the first part of s. 347(1) of the Criminal Code. As noted at paragraph 19 of Degelder: “For the purposes of s. 347(1)(a), the appropriate time period for calculating an interest rate is the term of repayment set forth in the loan agreement. If that period produces a criminal rate of interest, then the entire agreement is illegal on its face under subs. (1)(a).” [29] While the Plaintiff has claimed only the maximum legal interest rate of 60% per annum, the actual agreement or arrangement included an interest rate in excess of 60% per annum. Therefore, in each case the entire agreement or arrangement is illegal. It is for this reason that this court has refused to enforce the agreements. [30] There can be no doubt that a lump sum amount of interest payable within a given time period constitutes an interest rate. Such an interpretation is only logical. This is especially so since s. 347 defines “interest” as being “the aggregate of all charges and expenses….” [31] As an aside, I note that while the Plaintiff has claimed a rate of only 60%, it claims this rate over a term far longer than that set out in the agreement. Consequently, the total interest claimed is greater than would be the case if the Plaintiff were only claiming 60% interest based on the term of repayment set out in the agreement. [32] I also note that in each case the additional costs and expenditures claimed by the Plaintiff result in an even higher interest rate than the annualized rate I have calculated for the purposes of my analysis. These fees appear to be captured by the definition of “interest” set out in s. 347(2). I have nothing before me to indicate that they fall within the exceptions which are set out in the subsection. Rather, the claimed expenditures and charges are unexplained. [33] For example, if in the case of the Defendant, Ms. Marie, these charges were added to the 5% per month (60% per year) interest rate calculated over 231 days, as claimed by the Plaintiff in its Statement of Claim, the total amount of “interest” on the principal amount loaned ($100), equals $438.17 ($38.17 + $400.00). When expressed as an annual rate the interest rate amounts to 692.3% per year. It is clear that the actual interest claimed in the Plaintiff’s Statement of Claim remains grossly excessive, notwithstanding the “reduced” rate. CONCLUSION [34] The interest rate, set out in the agreements between the Plaintiff and each of the Defendants, exceeded 60% per annum. Therefore each of the loan agreements violates s. 347 of the Criminal Code. It follows that the entirety of each of the agreements is illegal. For that reason, this court has refused to enforce them. Robert D. Gorin J.T.C. Dated at Yellowknife, Northwest Territories, this 21st day of August, 2009. 2009 NWTTC 15 File Numbers: T-01-CV-2009000015 T-01-CV-2009000051 T-01-CV-2009000064 IN THE TERRITORIAL COURT OF THE NORTHWEST TERRITORIES BETWEEN: 5752 NWT LTD. carrying on business as DIAMOND PLACEMENT AND FINANCIAL SERVICES Plaintiff v. JIM DARCY BIGGS Defendant -AND- 5752 NWT LTD. carrying on business as DIAMOND PLACEMENT AND FINANCIAL SERVICES Plaintiff v. LESLIE ALLAN MARIE Defendant -AND- 5752 NWT LTD. carrying on business as DIAMOND PLACEMENT AND FINANCIAL SERVICES Plaintiff v. DERRICK BRIGGS Defendant REASONS FOR JUDGMENT OF THE HONOURABLE JUDGE ROBERT D. GORIN
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