Legal Blog

Credit

Credit is not only an invention that is a wonderful convenience; it is often a necessity to conduct one’s life. Without credit, there is, for example, no ability to lease a place of residence, no ability to rent a car, and no ability to purchase anything on the Internet or telephone.

Often, credit will be denied based on the report of a credit-reporting agency. However, what happens if the credit-reporting agency is wrong? The consumer can hit his or her head against the wall or can sue the credit-reporting agency for damages. Alternatively, a truly disgruntled consumer can not only sue the credit-reporting agency for damages, but can commence the action as a class action on behalf of 80,000 other creditors per year. It was the latter course of action that the Ontario Court of Appeal dealt with in its 2003 decision in Haskett v. Equifax Canada Inc.

Sue Everyone 

Mr. Haskett had fallen on hard times due to the recession in the early 1990s. He had to assign into bankruptcy when others defaulted on their obligations to him. He was discharged from bankruptcy in 1996. However, he was unable to obtain credit because his credit report still showed his pre-bankruptcy debts and interest accruing on them. These debts would be reported for at least 7 years.

Haskett claimed that the credit-reporting agencies were negligent because they reported debts that were extinguished under the Bankruptcy and Insolvency Act, thus ensuring that financial institutions would deny Haskett credit. This credit was denied to Haskett even though, since his bankruptcy, he had built up substantial assets, always paid his debts as they fell due, and earned $75,000 per year.

Haskett sued the two main consumer credit-reporting agencies in Canada and, for good measure, also sued their American parents, claiming that the parents had set the policy and were therefore also liable.

Response 

We can safely assume that this action has scared the agencies witless. If the action is successful, there is a prospect of almost debilitating damages against them.

Accordingly, the agencies attacked aggressively. They brought a motion to have the action struck as disclosing no cause of action, even before the plaintiff’s motion to certify the class. For purposes only of the agencies’ motion, all allegations in the statement of claim were deemed to be correct. If there was no cause of action, even upon assuming the correctness of the allegations, there would be no action to certify; the plaintiff would lose; and the agencies could continue to report as they had been doing.

The plaintiff claimed for economic damages. Had there been a contract, this claim would have been entirely appropriate. Economic damages are normally an offshoot of a claim for breach of contract.

The plaintiff, however, claimed that the agencies had negligently reported on his information. In addition to the normal test for negligence (i.e. a breach of duty that will foreseeably result in damages), if there is a claim for economic damages (i.e. the damages do not arise from a personal injury), there are additional hurdles to overcome before the action can continue.

The Supreme Court of Canada has set out a two-stage test to determine whether there is a cause of action for economic damages in negligence. The first stage has three sub-tests:

a)   Is there a proximate relationship between the parties such that the damages are reasonably foreseeable;

b)   Ought the law to recognize the relationship as one of proximity; and

c)   Is the cause of action one of, or analogous to one of, the causes of action – there are seven of them – in which the test has already been passed and, if not, should the court create a new cause of action?

If the first stage of the test has been satisfied, the court then must move to the second stage and ask itself the following question: are there broad societal reasons to negative that duty?

The motions judge held the parties had a sufficiently close relationship that there was a proximate relationship for which damages were foreseeable. However, the third subtest of the first stage had not been satisfied because the cause of action was not part of the seven recognized groups and the judge did not wish to create a new cause of action. Accordingly, the plaintiff could not pass the first stage. The judge went further and held that even if the first stage had been passed, he would have dismissed the action pursuant to the second stage of the test. He felt that there was a potential indeterminate liability in time, amount, and class and that this indeterminate liability negatived any duty of care.

The plaintiff appealed.

On Appeal

The court first decided the issues under the first stage.

a)   Proximity 

Given that the actions of the agencies would cause creditors to advance or not to advance credit, it was foreseeable that if the agencies reported inaccurately, they could cause damage to the plaintiff. A relationship of proximity existed.

b)   Policy – Specific 

The use of credit is pervasive. The Consumer Reporting Act and the Human Rights Code each prescribe rules to protect consumers and, accordingly, the legislature implicitly supports a decision to recognize a relationship of proximity and a duty of care for reporting agencies.

c)   Recognized Category 

This was not a case of negligent misrepresentation, which is one of the seven categories, because the alleged misrepresentation was made to third parties and not to the plaintiff. However, it was analogous to negligent misrepresentation and that was sufficient for the court. Regardless, the court held that if it were not analogous to an actual category, the court would have created a new one.

Stage 2 

The court then had to review whether there were any general policy reasons that would negative the duty that existed under stage 1.

The court decided that there is not indeterminate liability. The class of plaintiffs is wholly known and within the control of the agencies. The timing of the liability is not indeterminate; all the agencies have to do is change their reporting policies. Finally, the fact that the Consumer Reporting Act sets out a procedure in which a reporting agency can be forced to change a person’s records is not an alternative remedy because it does not provide for damages and, in particular, for punitive damages.

The court therefore allowed the appeal of the plaintiff against the two Canadian agencies. The action will now move to the next stage at which time the plaintiff will move to certify the action as a class action. If this certification is allowed, as it probably will be, and if the agencies are unsuccessful on the merits of the case, the agencies will be in deep trouble.

Parents

A parent corporation is liable for the debts of its subsidiaries in unusual circumstances only. There must be “complete control so that the subsidiary does not function independently and the subsidiary must be incorporated for a fraudulent or improper activity.” The statement of claim of the plaintiff fell far short of these allegations and, accordingly, the court dismissed the action against the two U.S. parent corporations.

Opinion 

We do not understand why the credit-reporting agencies feel that they must list debts incurred before a bankruptcy. We suggest, however, that it would be perfectly proper for an agency to note that the person had assigned into bankruptcy on a particular date. It should also be able to report on the details of the bankruptcy. Financial institutions can then determine their own policies on whether they wish to grant credit under those circumstances.