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Hemminger v. Davies, 2019 BCPC 206 (CanLII)

Date:
2019-09-05
File number:
C9363
Citation:
Hemminger v. Davies, 2019 BCPC 206 (CanLII), <https://canlii.ca/t/j2bp9>, retrieved on 2024-03-29

Citation:

Hemminger v. Davies

 

2019 BCPC 206

Date:

20190905

File No:

C9363

Registry:

Chilliwack

 

 

IN THE PROVINCIAL COURT OF BRITISH COLUMBIA

 

 

 

 

BETWEEN:

GARRY LAWRENCE HEMMINGER

CLAIMANT

 

 

AND:

ADRIAN DAVIES and TRACY DAVIES

dba PIONEER TRADING POST

DEFENDANT

 

 

 

 

 

 

 

 

 

 

 

REASONS FOR JUDGMENT

OF THE

HONOURABLE JUDGE K. MUNDSTOCK



 

Appearing in person:

G. Hemminger

Appearing in person:

A. Davies and T. Davies

Place of Hearing:

Chilliwack, B.C.

Date of Hearing:

July 3 and July 31, 2019

Date of Judgment:

September 5, 2019


1. Introduction

[1]           This is a claim involving the pawn of a musical instrument. Garry Lawrence Hemminger, the claimant, brought his 1978 Excelsior accordion to the Pioneer Trading Post in Agassiz, BC, which operates as a pawn shop. The defendants, Adrian Davies and Tracy Davies, are the operators of the Pioneer Trading Post. Originally the claim was advanced against another defendant, Sarah E. Kirklin, who is the former spouse of the claimant. The claimant filed a Notice of Withdrawal of the claim against Ms. Kirklin.

2. Facts

[2]           On May 11, 2017, the claimant brought his accordion to the Pioneer Trading Post as security for a loan. The defendants advanced $500 to the claimant and charged him a $1.50 service fee for electronically transferring the money. Tracy Davies wrote the terms of the pawn agreement on an invoice and the claimant signed the invoice. The claimant agreed to pay 25% per month in interest for three months on the principal amount of $501.50. The interest payments would be made monthly on the anniversary date of the pawn agreement. The first interest instalment was calculated at $125.38 and was due on June 11, 2017. If the balance outstanding was not paid in three months, August 11, 2017, the Pioneer Trading Post would own the accordion.

[3]           On August 12, 2017, one day after the expiry of the three months, the claimant went to the Pioneer Trading Post and asked Tracy Davies if she would extend the term of the pawn agreement. The claimant offered to pay $1,300 to $1,500 for the accordion if she would extend the time to repay. Tracy Davies refused and told the claimant the accordion had been sold. Tracy Davies acknowledges she had not in fact sold the accordion but she was tired of dealing with the claimant and wanted to be finished with him.

[4]           The claimant acknowledges he did not pay any money to the defendants on the pawn agreement. He also acknowledges that on August 12, 2017, when he asked for the extension of time, he did not have any money to pay towards the pawn agreement.

[5]           After August 11, 2017, the defendants advertised the accordion for sale on various websites. The claimant was aware of some of the advertising. Tracy Davies stated the accordion was sold to a third party in September or October of 2017.

[6]           The essential facts are not in dispute. The facts stated above are the facts I find to be relevant to this proceeding.

3. Relief Sought and Position of the Parties

[7]           The claimant seeks the return of the accordion, or damages in lieu of $6,000, and an additional $1,000 as damages for breach of promise, duress, collusion and unethical business practices.

[8]           The claimant argues the defendants took advantage of him. He also argues the rate of interest charged by the defendants is criminal and the pawn agreement should be void from the beginning.

[9]           The defendants argue the terms of the pawn agreement were clear and the claimant breached the agreement. They state the claimant entered in to the pawn agreement voluntarily and he was not under duress. The pawn agreement clearly states that if he did not pay the loan in full within three months, the accordion becomes their property. The claimant did not make any payments and therefore they were entitled to sell the accordion.

4. Duress, Breach of Promise, Collusion and Unethical Business Practices

[10]        The claimant states he felt pressure from his former spouse, Ms. Kirklin. He states he needed to move and in order to move his belongings he needed cash. He states he had no money because he was a house husband for several years and his relationship with Ms. Kriklin was ending. He needed $500 for moving expenses so he would not lose all of his belongings. Ms. Kirklin insisted he pawn his accordion. The claimant also states Ms. Kirklin had promised to come up with the money to get his accordion back but she reneged on this promise. The claimant has elected not to proceed against Ms. Kirklin.

[11]        I do not find the defendants coerced or otherwise subjected the claimant to duress at the time of entering into the pawn agreement. The claimant came to the defendants willingly to pawn his accordion. He accepted the terms of the pawn. He may have been desperate for money and under pressure from his former spouse at that time, but there was no evidence tendered before me to support the contention that the defendants placed the claimant under duress.

[12]        The claimant has alleged a breach of promise. Breach of promise is a cause of action that is no longer valid at law but it relates to damages arising when a man breaks an engagement with a woman. The claimant may be referring to a breach of the pawn agreement and if so, this claim is subsumed in his claim regarding the pawn agreement and is not a separate claim for damages.

[13]        The claimant testified he saw a Facebook posting by the Agassiz Trading Post which listed the accordion for sale. The Facebook posting is entered as Exhibit 3 at the trial. Exhibit 3 indicates Sarah Kirklin liked the post. The claimant testified he believes Ms. Kirklin and the defendants colluded to deprive him of his accordion and profit from its sale. The evidence is not sufficient to support a claim of collusion.

[14]        The issue of the business practices of the defendants is subsumed within the issue of the enforceability of the pawn agreement which I will discuss below.

[15]        For the above reasons, the claim for damages for duress, breach of promise, collusion and unethical business practices is dismissed.

5. The Pawn Agreement

a. Section 347 of the Criminal Code of Canada

[16]        Section 347 of the Criminal Code of Canada provides that anyone who enters in to an agreement to receive interest at a criminal rate or receives a payment or partial payment of interest at a criminal rate is guilty of a criminal offence. The criminal rate of interest is defined as an effective annual rate of interest that exceeds 60%. The applicable provisions of the s. 347 are as follows:

 (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 and liable to imprisonment for a term not exceeding five years; or

(b)  guilty of an offence punishable on summary conviction and liable to a fine not exceeding $25,000 or to imprisonment for a term not exceeding six months or to both.

(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…

[17]        The central issue in this case is the validity of the pawn agreement. The rate of interest charged by the defendants is 300% per annum. This is because the defendants charged 25% on the principal each and every month. At some time after the three months had expired, the defendants gave the claimant a copy of the pawn invoice on which the defendants had calculated the amount of interest due. The pawn invoice is marked Exhibit 1 and it indicates the total interest due was $376 at the end of three months on the principal amount of $500.

[18]        I find the defendants entered in to an agreement to receive interest at a criminal rate because they charged an effective annual interest rate of 300%.

b. Remedies Applicable to Contractual Illegality

[19]        Historically, if a contract was found to contain illegal terms, the contract was deemed by the court to be void from the beginning. The court would not assist the parties in performing or enforcing an illegal act. Over time, the law evolved such that in some cases the contract was not deemed void from the beginning, the illegal terms in the contract were severed and the remaining terms were enforced. This principle is considered in Transport North American Express Inc. v. New Solutions Financial Corp., 2004 SCC 7 at paragraphs 21 and 22:

The historical common law approach to contractual illegality is reflected in the following passage of Parke B. in Cope v. Rowlands (1836), 2 M. & W. 149, 150 E.R. 707 (Ex. Ct.), at p. 710:

[W]here the contract which the plaintiff seeks to enforce, be it express or implied, is expressly or by implication forbidden by the common or statute law, no court will lend its assistance to give it effect. It is equally clear that a contract is void if prohibited by a statute, though the state inflicts a penalty only, because such a penalty implied a prohibition.

...

The historical common law approach that contracts illegal under statute are void ab initio has been applied by this Court….However, some time ago Canadian courts began to develop a more flexible approach to statutory illegality in contract, often severing the illegal provisions and enforcing the remainder.

[20]        In cases where the applicable interest rate exceeds the maximum allowable rate of 60%, the court will not enforce the illegal agreement. In such cases there are a number of possible remedies available to the court as described in Transport North American Express Inc., supra. The court ought to look at the context of the loan agreement in order to determine the proper remedy available to the claimant. At one end of the spectrum, if the agreement is so objectionable that the illegality (i.e. the interest rate) would taint the entire agreement, as for example in cases of exploitive loan sharking and contracts that have a criminal object, the loan agreement may be set aside as void from the beginning. At the other end of the spectrum are agreements that do contravene s. 347 of the Criminal Code but are not otherwise objectionable. In those cases, the court may decide to sever the interest rate entirely by striking out the interest clause or severing the amount of interest above 60% such that the borrower is obliged to pay the principal and interest determined by the severance.

[21]        The court in Transport North American Express Inc., supra, set out four considerations to apply in determining whether public policy ought to allow an otherwise illegal agreement to be partially enforced rather than declared void from the beginning:

1.            Whether the purpose or the policy of s. 347 of the Criminal Code would be subverted by severance;

2.            Whether the parties entered into the agreement for an illegal purpose or with an evil intention;

3.            The relative bargaining positions of the parties and their conduct in reaching the agreement;

4.            The potential for the debtor to enjoy an unjustified windfall.

[22]        The four considerations in Transport North American Express Inc., supra, were applied in Kotello v. Dimerman, 2006 MBCA 77. Mr. Kotello brought two guitars to Mr. Dimerman’s pawnshop and was issued a pawn ticket. He was charged 20% interest each month. Mr. Kotello made some payments of interest but ultimately could not continue to make the payments. The guitars were then sold by Mr. Dimerman. Mr. Kotello sued for the replacement value of the guitars arguing the pawnbroker had charged a criminal rate of interest which rendered the contract illegal, invalid and unenforceable. The trial judge severed the interest portion of the contract but then decided that because the guitars had been sold and took no action for several years, the claim had to be dismissed.

[23]        The court of appeal reversed the decision of the trial judge. The court found the interest rate charged by the pawnbroker was criminal and the contract was illegal and therefore unenforceable. After reviewing the four considerations outlined in Transport North American Express, supra, the court found the interest rate of 240% per annum placed the contract within the type which is so objectionable that its illegality taints the entire contract. The court also considered the fact that the defendant, Mr. Dimerman, was previously criminally convicted on 5 counts of breaching s. 347 of the Criminal Code. He was therefore aware of the existence of s. 347 and had not modified his business practices following his convictions. The court also found the parties were of unequal bargaining power and Mr. Dimmerman, over 29 years in the pawn broking business, had far more power than Mr. Kotello.

[24]        The court of appeal ordered the contract could not be severed and ordered the contract must be set aside as void from the beginning. The pawnbroker therefore had no right to sell the guitars and the court awarded damages to Mr. Kotello for the value of the guitars.

[25]        The claimant relies on a case called Eha v. Genge, 2006 BCSC 1249 in which a lender sued the borrower for unpaid loans with an interest rate of 20% per month. The trial judge found the loan transaction involved a criminal rate of interest and determined the loan agreement was void from the beginning as against public policy and therefore unenforceable. The decision was overturned on appeal.

[26]        The BC Court of Appeal in Eha v. Genge, 2007 BCCA 258 referred to both the Kotello, supra, and Transport North American, supra, cases. The court, while agreeing the loan agreement was illegal in the sense it contained a criminal rate of interest, decided the appropriate remedy was to sever the interest from the agreement. The court found that to order the loan agreement void from the beginning would be a windfall to Mr. Genge. Further, the loan agreement was not entered in to for an illegal purpose or with an evil intention. The court ordered Mr. Genge to repay the principal of the loan, less the payments made, plus interest under the Court Order Interest Act.

6. Analysis and Decision

[27]        In this case the interest rate charged was 25% per month which is equal to 300% per annum. The pawn agreement is objectionable in that regard.

[28]        The claimant and the defendants did not enter into this pawn agreement for an illegal purpose or with an evil intention. This was not a classic loan-sharking transaction. When a person pawns an article, the article is kept as security for the debt owed. It is the case though that s. 347 of the Criminal Code is intended to apply to pawn shops because it applies to any one charging an effective annual rate of interest in excess of 60%. I did not hear any evidence to confirm the defendants were aware the rate of interest charged was criminal. In fact, the defendants mistakenly believed that because the agreement was only in effect for three months, the interest rate was acceptable.

[29]        The bargaining power between the claimant and the defendants at the time of the loan was unbalanced. The claimant was in desperate need of money according to his evidence. The defendant, Tracy Davies, testified she was unaware of the pressure Ms. Kirklin was placing upon the claimant. However, she was aware the claimant needed a place to live. Tracy Davies stated she assisted the claimant in finding a place to live. The defendants also paid the claimant cash for a set of speakers he had in their shop under consignment because she knew the claimant was in need of money. While the bargaining power was unbalanced, I do not find the defendants intended to take advantage of the claimant. The defendants advanced a loan to the claimant at a time when the claimant, by his own evidence, was unable to borrow money from conventional lenders.

[30]        There is potential for the claimant to enjoy a windfall in this situation if the pawn agreement is void from the beginning. The claimant received cash of $500 and did not make any payments at all.

[31]        As indicated, I find the pawn agreement does contain an illegal rate of interest. After reviewing the four considerations as required in Transport North American and the evidence as a whole, I find the pawn agreement is such that it would be appropriate to sever the interest. The interest rate is criminal and therefore objectionable. However, I do not find the intention of the parties was to enter into an agreement for an illegal purpose or evil intention. The bargaining position of the parties was unbalanced but not so unbalanced as to make the transaction void as against public policy. The claimant needed money so he could move his belongings. He could not borrow money from conventional lenders. The defendants advanced the money and the claimant was able to ensure his belongings were saved. The claimant therefore received a benefit from this transaction. To allow the pawn agreement to be set aside entirely would give the claimant a windfall.

[32]        I do not find this is a situation where it would be appropriate for the court to impose an interest rate upon the transaction. In exercising my discretion to determine an appropriate remedy, I find that because the interest rate pursuant to the pawn agreement was so incredibly high and the bargaining power between the parties was unbalanced, to impose an interest rate through notional severance would be unfair to the claimant in all the circumstances. The defendants are businesspersons. I recognize pawnshops are legitimate businesses and serve a purpose in our society by giving options to persons who do not qualify for conventional borrowing. For that reason, I agree the defendants are entitled to some interest on the principal but I will order interest payable pursuant to the Court Order Interest Act.

[33]        The claimant has sought the return of the accordion. The accordion was sold by the defendants to a third party, so the remedy sought by the claimant is not available. The claimant is entitled to monetary damages.

[34]        The parties were not represented by counsel at this hearing so the evidence regarding the particulars of the sale of the accordion was not satisfactory. The claimant did not introduce expert evidence of the value of the accordion. I did not hear evidence about the ultimate sale price by the defendants. The only evidence is the accordion was last listed for sale at a price of $3,900 in September of 2017. Tracy Davies refused to disclose the identity of the person to whom the accordion was sold. I did not force Mrs. Davies to answer that question because ultimately, the answer would have no impact on my decision. Mrs. Davies stated the accordion was sold in September or October, 2017. I will proceed with the best evidence that I have.

[35]        I determine the value of the accordion is $3,900. For the purposes of calculating interest payable by the claimant on the pawn agreement, I will use the date of September 30, 2017 which is the mid-point between the estimated sale dates provided by Mrs. Davies in her testimony.

[36]        The claimant will have judgement against the defendants, Adrian Davies and Tracy Davies, in the sum of $3,397.13 ($3,900 less the principal amount of the loan of $500, the electronic transfer fee of $1.50 and interest under the Court Order Interest Act from May 11, 2017 to September 30, 2017 in the sum of $1.37). The claimant shall also have the service fee of $50 and interest under the Court Order Interest Act from the date of this judgment.

7. Summary of Orders

[37]        The defendants will pay to the claimant:

a) damages in the sum of $3,397.13;

b) service fee of $50;

c) post judgment interest under the Court Order Interest Act.

[38]        The claim for damages for duress, breach of promise, collusion and unethical business practices is dismissed.

 

 

_____________________________

The Honourable Judge K. Mundstock

Provincial Court of British Columbia